Expansion of First Time Homebuyer Credit & Allowing Losses on Primary Residence

On September 24, 2009 Representatives Childers and Kratovil introduced a bill which was referred to the Ways and Means Committee to make certain changes to the First Time Homebuyer credit.  Major changes introduced include:

• Allowing the credit for anybody "who purchases a principal residence"
• One year extension of the credit to December 1, 2010
• Will be effective on the date signed by the President

Aaron's Take: While I could see that an extension could possibly (but I doubt will) pass, I don't think that this is the one that will succeed.  The dramatic expansion to all taxpayers who purchase a principal residence will simply cause a churning of the current home inventory.  Opening this up to all taxpayers will create as much inventory as it is clearing, as current homeowners look to sell their own houses to move up into better homes, or move out of their depressed communities.

Additionally, the bill includes a provision to allow for a limited deduction on the loss of a primary residence.  Currently, no lossess are allowed when selling anything that qualified under personal use.  This bill would allow a deduction for a loss on a principal residence that has been used for more than two years.  The loss would be limited to $6,000 ($12,000 joint) and no more than $2,000 could be claimed in each year. 

Aaron's Take: I don't see how this bill will pass in its current form.  While it seems nice, a $2,000 deduction on the loss of a home would make a maximum difference of $700 for the wealthies taxpayers, and a $300 difference for most middle clas taxpayers.  Besides for the fact that the cost of implementation and enforcement would far exceed the benefit, this bill is too little too late.  Most of the losess have already occurred. 

Vice President - Central Arizona Chapter of Enrolled Agents

I just thought that I'd share with you all (though I don't know who is out there yet anyway) that I was elected, by the board of directors, to the position of Vice President for the Central Arizona Chapter of Enrolled Agents.  Our president, Leslie Gustafson, E.A., has bee put into a difficult position, taking over for someone who was taking over for someone else, and the two of us are going to do our best to tame the bronco that keeps bucking off our executive leadership. 

This is a great opportunity to put our best foot forward as flagbearers for the practitioner community.  I look forward to the future!

DISCLAIMER:  This blog is not representative of the opinions of the Central Arizona Chapter, Arizona Society, or National Association of Enrolled Agents.  Nothing in this blog should ever be construed as an official statement, opinion, determination, or statement those organizations.  If you would like an official comment, please address it to the leadership via http://www.aztaxpros.org/.

Jack A. & Lettie G. Wheeler v. Commissioner., U.S. Tax Court, T.C. Summary Opinion 2009-151, (Sept. 28, 2009)

In this tax case, a salesman was denied deductions for his vehicle expenses for lack of adequate substantiation.  The taxpayer did not have a log or other contemporanious substantiation that would be required in order to allow for the reconstruction of his mileage log.

The IRS dictates that a taxpayer must substantiate the amount of expense, time and place of business use of the vehicle, and the business purpose of the travel.  This is the minimum allowable proof to show business purpose and use of a vehicle.  In this Tax Court case, the court admitted that:

the taxpayer has adequately explained and corroborated the business purposes of his calls on customers during 2005.  He has not, however, adequately substantiated th etime or date and number of trips taken.  His reconstruction is based on estimates and averages ..."

Two things could have been done to alleviate this taxpayer's situation.  First, he could have settled with appeals, using the same estimates and averages.  Appeals has a much stronger ability to settle on an issue than an initial auditor, or tax court.  Each of the latter must apply, strictly, the Internal Revenue Code to the taxpayer's situation.  Appeals, however, has added flexibility. 

Secondly, he could have kept a calendar.  Most recreations are allowed from keeping an appropriate, and timely, calendar.  This calendar would show where he went on which days.  So long as it was contemporaneous, there is a good chance the IRS our court would have been able to look to this as backup for the taxpayer's claims.

Aaron's Tip of the Day:  If you cannot bear to keep an appropriate mileage log, keep and maintain a calendar.  If your calendar is digital, be sure to keep a proper archive, or printout your activity and keep it in a safe place.  This printout is just as valuable as your bank statements and receipts. 

UBS Bows to IRS Pressure - Is your name on the list?

Probably not ... and if it is, you might not be a client of mine for much longer.  The Treasury Department requires taxpayers to file annual reports declaring their interest in foreign bank, investment, and trust accounts.  Failure to file these reports causes you to be exposed to a potential penalty of $10,000 to $100,000. 

If you have appropriately reported the income generated by these overseas funds, than you may be eligible for amnesty from these penalties.  If you didn't, you will be required to amend your tax returns (back to 2002), file, and pay the taxes, interest and penalties that arise from the amendments.  You can file the forms late, and may be eligible for amnesty. 

Why do I bring this up?  UBS has announced that it will be soon informing 4,450 account holders that it has released their information to the US Department of the Treasury.  Claiming privacy, UBS (who already turned the information over to the IRS) was refusing to notify its clients if they were included. Two accountholders sued in Swiss Court which sided with the accountholders. 

The IRS will likely see any failure to comply with this amnesty program as means to begin criminal tax evasion proceedings.  If you're in this situation, it would behoove you to find an attorney.

Don't Burn Bridges

There are many examples that I come across that indicate the importance of maintining quality professional relationships in life.  There are times when that relationship can be strained, and a client and our firm may separate from working with each other.  Many times this occurs because of a conflict in communication style or a misunderstanding of who is responsible for what. 

The important thing about ending a relationship is to do it professionally and introspectively.  I know that I cannot be the best accountant to every single person on the face of this earth.  There are going to be clients that I will not be able to satisfy, and I am ok with that.  As long as we walk away respecting each other, than you can be successful in the long run.  This allows for relationships to continue for years, even though money is not changing hands. 

A few examples:

• I have a referral source who is a realtor.  He worked with my father over 20 years ago.  When we started meeting as part of our professional group, it was a funny coincidence.  He and Alan separated with respect, and that allows us to work together 20 years later.
• A long time client separated from us about 5 years ago because of a fee issue.  He thought we ere billing too much.  He came back 2 years ago (when I rejoined the firm) because he realize that the work we do for him is actually worth it.  If we had not respected his concerns in the past, we would have lost him forever.
• Finally, the story that spurred this post.  We volunteer for the Service Corps of Retired Executives (SCORE) providing QuickBooks training for their Phoenix chapter.  He mentioned that they are working on doing more social networking training, and I said "You should call my friend ..."  He had already spoken to her in the past, and she was an integral part of the project.  Someone always knows someone that knows you.  If you make them mad, your name will be smeared for those other generations. 

Taxpayer Advocay Panel Reports on IRS Customer Service

CCH Federal Tax Weekly (Issue 35) reported on the TAP 2008 Annual Report. The TAP is a group of 101 volunteer community members appointed by the Department of the Treasury and makes recommendations for improvements.

 

Major recommendations include:

• Preparer registration: TAP endorsed the regulation of taxpayers, pointing to Oregon and California showing improvements in tax preparation.
• Installment Agreements: Recommended rasing the cap on streamlined agreements to $30,000 from $25,000 and to 72 months from 60 months.  
• Return Processing:  Recommended that the IRS move to automated screening (scanning?) and data entry technology for processing tax returns.  The IRS still keypunches every paper-filed tax return. 

I'm not sure that expanding the streamlined IA agreements is going to help.  The IRS reported this August that most IAs default somewhere between the 12th and 24th month.  They have new measures in place to allow for a missed payment without defaulting the agreements, but it will take time to see if it will be effective. 

Do Taxes Make You Sick?

It's been a rough week for me. I went home early on Wednesday and Thursday due to a feeling of exhaustion. The September 15th filing deadline sure took a lot out of me! I am, however, enjoying doing some tax blogging.

Not too much interesting stuff today, but there are some new buzz coming out about expanding, extending, or modifying the First Time Homebuyer Credit. The Congress is worried about individuals who have purchase contracts currently but may not close due to the long due dilligence process currently required by banks.

Many homebuyers are also involved in purchasing short sales, which require bank authorization prior to the acceptance of the purchase offer. This often takes two to three months, and is entirely out of the hands of the purchasor and seller. The Congress does not want to punish well-intentioned buyers for the lack of staffing and coordination of the banks.

Regardless of the potential for an extension or modification, the current law is clear that the deadline for purchasing a home (closing papers signed and purchase recorded) is November 30, 2009. I'll do my best to keep you informed if something changes.

Jon Stewart on the ACORN Tax Scandal

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
The Audacity of Hos
www.thedailyshow.com
Daily Show Full Episodes Political Humor Healthcare Protests

Jon Stewart on the ACORN Tax Scandal

Shared via AddThis

White House Weighing New Homebuyer Tax Credit Extension

CCH News, a provider of news and research services for tax professionals, is reporting that the White House may extend the first-time homebuyer credit.  The information was proposed by the Council of Economic Advisers Chairperson in an interview at the White House on September 11th.  Currently, more than 20 House and Senate bills have been introduced to expand, extend, or modify the credit, which expires on November 30, 2009.

CCH comments that many taxpayers hoping to tax advantage of the credit are currently stuck in a due-dilligence cycle with their banks.  This could delay the closing of their house to past the November 30th deadline, at no fault of their own.  Congress is looking to relieve the pressure on these potential purchasors. 

FedEx in big trouble for classifing workers incorrectly

The IRS has a list of 20 factors in considering workers as employees or independent contractors.  Employers would rather classifiy workers as contractors because it relieves them from liability for workers compensation, unemployment tax, withholding and remitting employment taxes, as well as wage and hour laws, anti-discrimination laws, and OSHA regulations. 

Unfortunately, there are many situations when classifying a worker as an independent contractor is inappropriate.  Factors that the IRS considers include (list is not comprehensive)

• Behavioral control - when and how to do work, what tools and equipment to use, what sequence to follow, training provided to the worker. 
• Financial control - worker's out of pocket expenses, worker's investment in their own activities, extent to which the worker makes services available to others, method of payment (fixed vs. hourly)
• Relationship of Parties - presence of written contracts, employee style fringe benefits, defined length of relationship, workers other sources of funds

Prostitution is not an a medical expense

A 77 year old man recently went to Tax Court in an attempt to deduct over $100k for prostitution and pornography as medical expenses. 

During 2004 and 2005 petitioner frequented prostitutes in New York. Petitioner did not visit these prostitutes as part of a course of therapy prescribed by his doctor, nor did petitioner ask his doctor to prescribe any sort of sex therapy. Petitioner kept track of these visits in a journal. ...

During 2004 and 2005 petitioner purchased pornography and books and magazines on sex therapy. Petitioner also recorded the dates and amounts of the purchases in his journal. ...

The $73,934 disallowed by respondent for 2004 included: (1) $2,368 for medical books, magazines, videos, and pornographic material; [and] (2) $65,934 for prostitutes ... The $47,024 disallowed for 2005 included: (1) $5,005 for books, magazines, videos, and pornographic materials; and (2) $42,152 for prostitutes. ...

The issue for decision is whether petitioner is entitled to deduct amounts paid to prostitutes and for medical texts and pornographic materials. Respondent argues that petitioner is not entitled to deduct amounts paid to prostitutes because such payments were illegal and petitioner has not provided substantiation as required by section 1.213-1(h), Income Tax Regs. Respondent argues that petitioner is not entitled to a deduction for amounts paid for books on sex therapy and pornographic material because those amounts were incurred for petitioner’s general welfare, not pursuant to a doctor’s prescription or for a specific medical condition. ...

We agree with respondent that petitioner is not entitled to deduct the amounts at issue. Patronizing a prostitute is illegal in the State of New York. ...

Petitioner is likewise not entitled to deductions for amounts paid for books and magazines on sex therapy and pornography. The purchases were not for the treatment of a medical condition but were instead personal items. ...

Petitioner did not have reasonable cause or a reasonable basis for claiming the deductions at issue. Petitioner has been an attorney for 40 years and specialized in tax law. Petitioner should have known that his visits to prostitutes in New York were illegal and that section 213, the regulations thereunder, and caselaw do not support his claimed deductions. Accordingly, petitioner is liable for the section 6662 penalty.

Taxation of Celebrity and Presenter Gifts

My wife and I stayed up late tonight to watch MTV's Video Music Awards.  I got to thinking about some articles that I read a few years back about all the swag that tpresenters get for participating.  All of their swag is considered taxable, though it is difficult to gauge the value. (More after the cut).

Arizona Employee Pay Rules

I participate in a professional listserv and also a webboard where practitioners ask each other questions to questions they don't know.  Many times, the answer is common knowledge, but sometimes people will respond with actual IRS code or Arizona Revised Statutes. 

Last night, a practitioner posted about Arizona's employee pay rules.  I am familiar with the pay rules for employees that are fired (must be paid within 3 days after the firing), but this post had to do with the actual payment rules. 

According to ARS 23-351 (this summary does not apply to school district employees or union employees):

• Employers must designate two pay periods per month not more than sixteen days apart as fixed paydays (Out of state employers may have a single payday per month)
• Wages other than overtime for up to five days of labor may be withheld (allows for a one workweek delay in payment - pay period ending on Friday #1 paid on Friday #2)
• Employers can satisfy their requirements by personally delivering the wages or mailing no later than 5 days from the end of the pay period, or, for employers that have payroll systems outside of Arizona,  Personally delivering the check no later than 10 days from the end of the pay period.
• If the wages are direct deposited, the employer is required to deliver a statement of earnings and withholding. 
• Violators of this provision are guilty of a petty offense. 

If you have any questions on this, please let us know.  You can e-mail monica@blauassoc.com for more information if you believe you or your employer is in voilation of this statute. 

Press Releases result in Press!

While on the phone with the IRS this week dealing with a client's issues, I generated a press release that has gotten me into today's (Saturday 12, 2009) Arizona Republic business section.  Page D4 announces:

"Aaron Blau of Alan Blau & Associates in Tempe earned the Fellows designation from the National Association of Enrolled Agents for completing the National Tax Practice Institute."

Substantially shorter than what I wrote, but any free pub is good pub!  I also sent to Arizona Capital Times, Arizona Business Journal, Phoenix Jewish News, and a few others.  We'll see if those come through!

Wall Street Journal "Lion's Share"

A colleage recently shared some statistics provided by the Wall Street Journal which showed the percentage of federal income tax paid by the nation's top earners.  The graphic shows the top 1% of earners paying nearly 40% of all taxes, and the top 5% paying over 50% of the total tax.  While this is probably true, it can be slightly misleading.  The superwealthy (top .1%) and wealthy (top 1%) also have the lions share of national income as shown here:

Based on 2007 Data (Compiled by Tax Foundation):

Top .1% of Earners (About 140k people) earn 11.93% of nationwide income
Top 1% of Earners (About 1.4 million) earn 22.83% of income (the highest income since at least 1980)
Top 10% of Earners (About 14 million) earn 46.44% of income (the highest income since at least 1980).
The bottom 50% of Earners make 12.26% of nationwide income.

Interestingly, the top .1% have an average tax rate of 21.46% while the folks between the top .1% and 1% have an average rate of 23.54% (ten percent higher!).  From there, the average income tax rate drops to 12.66% with the top 50% averaging 14.03% and the bottom 50% paying only 2.99%. 

Random Facts

Lee Eisenberg (lee@ablefinancialgroup.com) and Adam Brooks send me great e-mails with interesting financial facts every month.  As many of them are market related, so I can't repeat them without a license, but here are a few good ones that catch my eye:

A LOT OF MONEY - Outlays for the mandatory government programs of Social Security, Medicare and Medicaid during fiscal year 2009 (i.e., the 12 months that end 9/30/09 or later this month) are expected to total $1.36 trillion. A stack of $100 bills 923 miles high is equal to $1.36 trillion. The distance between Chicago and New Orleans is 923 miles (source: Office of Management and Budget).

BUNDLE OF JOY/DOLLARS - A family with before-tax income of at least $100,000 that had a newborn in 2008 will spend $367,000 (in 2008 dollars) to raise that child through age 17 (i.e., not including the cost of college). After factoring in the impact of inflation, the 17-year cost rises to $484,000 (source: Department of Agriculture).

GETTING BETTER - Nearly half of Americans surveyed (46%) believe the US economy is going to improve in the upcoming 12 months, double the percentage (22%) that believe the economy will get worse (source: Harris Poll).

Confessions of a Former Client

My office manager ran across a former client a few days ago.  We separated from the client because he has a belief that our fees were higher than they should be.  He expressed extreme regret for leaving, as his new firm has charged him substantially more than we did, took longer than we did, and didn't communicate as well as we did. 

Its nice to have positive feedback every once in a while. 

Lawyer and CPA Indcited

The Arizona Republic reports that Steven W. Allen, a lawyer, and Allen P. Goodmansen, CPA have been indicted for preparing foreign trusts for the sole purpose of avoiding Federal taxes.  Goodmanson prepared false tax returns attempting to indicate that the taxpayer did not live in the United States. 

This is reprehensible behavior by licensed individuals that put themselves out as "professionals."  Allen had a website which purported to have "Secrets of Wealth Preservation."  I guess one of the secrets is not to pay your taxes ....

Goodmansen is a principal of SPG Network Financial, a company that purports to find "creative" solutions to meet a client's objectives.  Apparently that objective must have been breaking the law.  Anyone working with SPG Network FInancial, or Goodmansen's associates Lonnie Hawkins or Michael McLaughlin might want to start asking some questions.

http://www.azcentral.com/community/mesa/articles/2009/09/10/20090910abrk-indictment.html