BIDaWIZ Blog » TAX ISSUES

What If My Client Doesn’t Disclose A Foreign Financial Account?

The BIDaWIZ Team — Fri, 27 Mar 2015 20:33:41 +0000

If your client holds foreign financial accounts with a value exceeding $10,000, it most likely needs to be reported on the report of Foreign Banks and Financial Accounts (FBAR) FinCEN 114. Unfortunately, sometimes clients do not disclose this information to their accountant even if the client questionnaire requests it. What should you do if your client does not report this account until after the filing deadline passes?

What if a client does not disclose their foreign accounts?
First, it is important to note that the FinCEN 114 is due on June 30th of the following calendar year and is filed via the BSA E-Filing System. If this reporting will be filed late, the client needs to include a reason for filing late on the cover page of the electronic report or enter a customized explanation using the “Other” option.

Is there a penalty for filing FinCEN 114 late?
The IRS may not impose a penalty for the failure to file the delinquent FinCEN 114 as long as the income from the account has been reported properly and taxes are paid on the US tax return. In addition, the client must not have been previously contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent forms are submitted.

Are there any other forms that need to be filed?
The client may also need to file Form 8938, if the account was $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad). This is filed with the tax return. If this is filed late, the taxpayer may need to amend the tax return and include this form. There are certain exceptions and other considerations to filing though. For instance, is the taxpayer the sole owner of the account or is this a shared interest? Is the taxpayer married? It may be possible that this form doesn’t need to be filed if an exception is met and the taxpayer is below the reporting threshold. Specifically, if the $110,000 is a joint account with a spouse and they file separately, the taxpayer’s interest is actually $55,000 and below the form 8938 threshold.

What if the client doesn’t want to file the FinCEN Form 114?
We would recommend that you explain to the client the risks and penalties for not reporting should an audit reveal the client’s failure to report the account and income. Explain that you’re simply following the rules as per IRS guidance. If you receive further push-back, this may be one of the scenarios when you have to seriously consider giving the client an ultimatum; either they report it correctly or they find another accountant. However, try to first explain the risks and penalties for not doing so. You can even share with them IRS publications and the IRC references.

More Questions? Ask your foreign tax questions or find a tax accountant online.

Offshore Bank Account Holders May Face Higher Penalties Soon

The BIDaWIZ Team — Fri, 04 Jul 2014 15:26:36 +0000

We are now one month away from the August 4th IRS deadline given to taxpayers that intentionally hid money at 10 offshore banks that are currently under investigation. Specifically, the agency recently announced changes to its voluntary disclosure program that will provide a hard deadline for certain taxpayers to disclose their foreign bank accounts in order to avoid higher penalties.

Taxpayers that fail to disclose offshore bank accounts
There are 10 banks that are currently under investigation by the IRS. They are as follows: UBS AG, Credit Suisse AG, Wegelin & Co., Liechtensteinische Landesbank AG, Zuercher Kantonalbank, Swisspartners Investment Network AG, CIBC First Caribbean, Sanford International Bank Ltd., HSBC India & the Bank of N.T. Butterfield & Sons. Taxpayers that have undisclosed offshore accounts held at these banks or other firms under investigation by the IRS will be levied a fine of 50% of the highest account balance as compared to the current penalty of 27.5%. For instance, if you have $250,000 in an offshore bank account that hasn’t been disclosed, the fine for disclosing the account prior to August 4, 2014 would be $68,750 versus $125,000 if caught thereafter or a $56,250 difference.

Other banks and firms may be included in the future
If you hold an undisclosed foreign account with a bank or financial institution not currently on the list, don’t think you’re necessarily off the hook. The IRS can add to the list at any given point. Thus, taxpayers that fail to disclose their offshore accounts remain at high risk. The 50% penalty may actually be considered lenient as the tax law does allow that 50% penalty for each year the account was not disclosed. This means that the penalty could essentially be greater than the account balance.

Rules are derived from July 1 FATCA provisions
The FATCA provisions require foreign firms to provide US customer information for accounts of $50,000 or more. Still, it’s important that US taxpayers with foreign account values that totaled more than $10,000 at any point during the prior year, disclose their accounts by June 30th.

More Questions? Ask your foreign tax questions or find a tax accountant online.

Tags: IRS issues, international tax, personal tax, Ryan Himmel

Your Chances Of Being Audited By The IRS May Have Decreased

The BIDaWIZ Team — Fri, 18 Apr 2014 18:48:53 +0000

Most taxpayers can finally breathe a sigh of relief after filing their returns on time. However, many may still be a bit uneasy as the concern of a future IRS audit can always loom in the future. Rest assured, if you filed properly and have documentation to support the income and expenses claimed, then you have nothing to worry about. Furthermore, recently released data indicates that your chances of being audited by the IRS will decline going forward.

What are your chances of being audited by the IRS?
The IRS recently published its latest figures for fiscal year 2013, which covers the period of October 1, 2012, to September 30, 2013. The data includes information about the type and number of returns filed, taxes collected, enforcement, and the IRS budget, among other key statistics. As a whole, the IRS audited 0.96% of the 145.8 million individual tax returns filed in fiscal year 2013 vs. 1.03% in FY12. For those interested in more granular data the IRS examined individuals reporting:

Income under $200,000: 0.88% in FY13 vs. 0.94% in FY12

Income of at least $200,000 and under $1 million: 3.26% vs. 3.70% in FY12

Income of $1 million or more: 10.85% vs. 12.14% in FY12

Chances your business will be audited
The trend is similar for businesses as it is for individuals. Whether it’s based on the type of entity or the size of the company, audit rates are declining. However, there’s one exception. Only corporations with assets of $250 million or higher were audited more in FY 2013 at 33.88% vs. 29.41% in FY12. Below is a review of the examination rates for all different types of businesses for FY13.

Schedule C filers: 0.61% in FY13 vs. 0.71% in FY12

Partnerships: 0.42% vs. 0.47% in FY12

S corporations: 0.42% vs. 0.48% in FY12

Small Corporations (assets under $10 million): 0.95% vs. 1.12% in FY12

Large Corporations (assets of $10 million or more): 15.84% vs. 17.78% in FY12

Very Large Corporations (assets of $250 million or more): 33.88% vs. 29.41% in FY12

Why is the IRS auditing less?
Simply stated, they have fewer resources available to them than in the recent past. The total number of revenue officers, agents, and special agents has decreased over the last four years. For fiscal year 2013, the number of agents working for the IRS is listed at 19,531 vs. 20,868 in FY12 and 22,184 in FY11.

What can we expect going forward?
We would expect the number of audits to also decrease going forward. The IRS commissioner, John Koskinen, recently told the Associated Press that he expects the number of audits to decline. He stated that the agency plans to go after the people, “who are the worst of the bad guys.” In addition, he commented that the agency will increasingly rely on technology to identify a suspicious return.

More Tax Questions? Browse Answers or ask your irs audit questions online.

What Increases Your Chances Of Getting Audited?

The BIDaWIZ Team — Fri, 13 Dec 2013 23:39:12 +0000

The two major concerns for taxpayers continues to be saving as much money as possible on taxes as well as making sure they aren’t audited by the IRS. With regards to getting audited, there are certain IRS provided statistics as well as high risk areas that should be noted.

Chances of getting audited
First, we thought it would be helpful to understand what your chances are for getting audited by the IRS. A few months ago, the IRS published its latest figures for fiscal year 2012, which covers the period of October 1, 2011, to September 30, 2012. The data includes information about the type and number of returns filed, taxes collected, enforcement, and the IRS budget, among other key statistics. As a whole, the IRS audited about 1% of all tax returns (business, personal, estates etc.) in fiscal year 2012. The latest figures indicate that the IRS examined about 0.4% of those reporting income under $200,000 who didn’t file a Schedule C, E, F or Schedule 2106, 2.8% of those reporting at least $200,000 and under $1 million, and 12.1% of the 337,477 tax returns reporting income of $1 million or more. It’s important to note that individuals with businesses are not included in these figures as the IRS has a separate process for examining returns with those activities.

What are the high risk areas?
This will vary by taxpayer, but there are general rules to follow. It’s also important to note that the IRS doesn’t publish specific statistics that detail at what point does your return become subject to an audit. Having said that, we can still isolate some of the risk areas and key situations.

Taking large deductions. High deductions in relation to your income can be an immediate red-flag to the IRS. If you have adjusted gross income of $45,000, but write-off $35,000 for mortgage interest and charitable donations, your tax return is likely to be put into the audit bucket. It’s important to note that the IRS assesses your deductions in relation to your income and to similar profiles of other filers. If other filers with comparable earnings have deductions that are far below the amount that you’ve claimed, your audit risk increases. This is not to say that you shouldn’t claim these deductions if you have the support and are entitled to do so. Just be aware of the risk for an audit. In addition, make sure you file all of the necessary forms. For charitable deductions in excess of $500, you need to properly file form 8283.

Failure to report income here and abroad. If you don’t report all of the income that you earned as documented in the W-2, 1099, K-1 & other forms you received after the end of the year, you run the risk of an audit. The IRS will note a mismatch if they receive a 1099 for income that you don’t report on your tax return. This also means that you are required to report foreign income and certain bank accounts. The IRS has cracked down on unreported foreign income by working with overseas governments and banks. As a reminder, you must file FinCEN Form 114 by June 30 to report foreign accounts that total more than $10,000 at any time during the previous year. Taxpayers with substantial assets abroad may also have to attach IRS Form 8938 with their returns.

Claiming your car entirely for business-use. Do you claim that your car expenses are 100% related to business? If so, that’s an immediate red flag for the IRS. Be prepared to provide detailed logs of the miles traveled, locations and other pertinent information to support this deduction.

Home office deduction and rental losses. Many taxpayers in the past have claimed the home office deduction either incorrectly or when they should not have done so. As a result, the IRS has focused on this area due to its audit success rate. If you qualify for the deduction, then by all means take it. Make sure you have your paperwork in order though.

Those taxpayers that own rental property and claim passive losses may also be at risk. The IRS will want to confirm that the taxpayer worked the necessary hours to claim the loss and meet the active participation requirement, especially in the instance that they are not a real estate professional.

If you’ve been audited because of another area, please feel free to comment below.

More Tax Questions? Browse Answers or ask your irs audit questions online.

The IRS Is Enforcing IRA Minimum Required Distribution Rules

The BIDaWIZ Team — Fri, 01 Nov 2013 22:56:40 +0000

Historically, hundreds of thousands of IRA holders that are 70 1/2 or older have failed to comply with the IRS rules. The major causes for the issues seems to be the account holder’s failure to understand the rules and what they are holding in their accounts.

What are required minimum distributions?
These are the minimum amounts that a a traditional IRA (not Roth IRA) or 401(K) holder must withdraw annually, by April 1st of the year after they turn 70 1/2. Subsequent distributions are due by December 31st each year. However, most 401(K) plans allow the account holder to defer their required minimum distributions until the year in which they retire. If the retirement account holder owns 5% of the business sponsoring the IRA, the required minimum distributions must occur when the account holder reaches the age of 70 1/2 regardless of whether or not they’ve retired.

What if I fail to withdraw the required amount?
If the account holder fails to withdraw the minimum amount, then they may face a 50% tax penalty of the required distribution, which doesn’t include federal and state taxes. However, it is possible to try to have the penalty waived by making up for the missed distribution and requesting that the IRS provide relief. The IRS is beginning to crackdown on account holders that have failed to meet the requirement. If you’re wondering how you’ll get caught, it’s important to note that custodians send a report to the IRS and you detailing the amount that should be withdrawn. Thus, we would highly recommend that you correct the situation and make additional payments for years in which you failed to meet the requirement. It’s possible that the IRS will waive any penalty as long as you File IRS Form 5329 and attach a statement with a reasonable explanation.

What if I hold multiple retirement accounts?
The IRS views all of your employer sponsored retirement accounts separately with regard to the RMD. Thus, the individual has to take the minimum amount from each account separately. However, account holders that opened an IRA on their own can take the total RMD amount across other similar accounts by only withdrawing from one account.

More Questions? Browse Answers or ask your ira tax questions online.

What The Government Shutdown Means For Your Refund & Tax Return

The BIDaWIZ Team — Fri, 04 Oct 2013 21:18:03 +0000

This week the government failed to reach an agreement on the federal budget and lingering health care reform concerns. The effects have been widespread as it’s impacting over 800,000 government workers, areas of the economy that rely on certain government functions, and it’s bad overall publicity for the country. One other area that has been impacted is the IRS and certain taxpayers.

The Tax Court is closed
The Tax Court announced that they will close during this government shutdown period. This means that they will not accept any petitions, motions, and other papers, and electronic filings. Taxpayers will still be required to meet deadlines for filing petitions. This closing matters if you’re appealing or in the midst of a case with the Tax Court.

What about the IRS and your refund?
In a surprising turn of events, the IRS announced that they will not issue any tax refunds during the period that the federal government is shutdown. This announcement is in stark contrast to the agency’s backup plan under which 859 employees in its Information Technology Services Enterprise Operations were excepted from the general shutdown furlough to ensure refunds continue to process. This means that if you file for a tax extension for the October 15th deadline and/or are due a tax refund, it’s highly unlikely that you’ll receive those monies anytime soon. If the government resolves its issues, that may change. However, the previous government shutdown lasted three weeks. This time, there’s the Affordable Care Act in question, which may delay the process further. Lastly, it’s important to note that taxpayers are still required to pay any monies due to the IRS and file returns in a timely manner.

More Questions? Ask your tax refund questions or find a cpa online.

The IRS Penalty Waiver That Can Provide Relief To Taxpayers

The BIDaWIZ Team — Fri, 12 Jul 2013 14:49:35 +0000

Over twelve years ago the IRS created the first-time abatement waiver (FTA), yet few taxpayers and businesses that are eligible for it know of the clause. We attempt to solve that problem by explaining who is eligible for the abatement and how to request it.

What is the first-time abatement waiver?
The IRS created the first-time penalty abatement administrative waiver to provide typically compliant individual and business taxpayers the ability to request abatement, or removal, of certain penalties that the IRS has assessed against them for the first time. The IRS introduced the waiver to reward taxpayers in good-standing with a one-time amnesty for potentially significant tax penalty savings. Unfortunately, only 10% of the taxpayers that are eligible for the FTA actually receive an abatement.

Who is eligible for first-time abatement waiver?
An FTA can be obtained for a failure-to-file, failure-to-pay, or failure-to-deposit penalty. However, there are certain requirements that need to be met to obtain an abatement. Specifically, the Internal Revenue Code Section 6651 for individual taxpayers provides relief in the form of a first-time abatement (FTA) if the taxpayer has not been assessed any other penalties of a “significant amount” on the same type of tax return within the past three years and must be in compliance with all filing and payment requirements.

Request a first-time abatement waiver
There are generally three methods to request tax penalty relief. A taxpayer can file a penalty non-assertion request before receiving a penalty notice or they can request an abatement after receiving a penalty notice or they can request a refund after the penalty is paid. For our purposes, let’s focus on the second option or to request an abatement after receiving a penalty notice. When that occurs, the taxpayer has the option of requesting an abatement via phone (866-860-4259) or in writing. Written requests should be sent to the IRS service center where the client files paper returns or Penalty Abatement Coordinator, Department of Treasury, Internal Revenue Service, Cincinnati, OH 45999-0149.

What if the abatement request is for a business?
The process and eligibility requirements for requesting an abatement are different, but the concept is the same. For instance, you may be able to file an abatement request under Rev Proc 84-35 for late filing penalties for your business. The entity would need to show reasonable cause and comply with certain requirements such as the following for a partnership:
1) The Partnership must be a domestic partnership
2) The Partnership must have ten or fewer partners, each of whom is an individual (other than a nonresident alien) or an estate of a deceased partner
3) Each partner’s share of each partnership item is the same as his share of every other partnership item,
4) The partnership, or any of the partners, establishes, if so requested by IRS, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax return.

More Tax Questions? Browse Answers or ask your irs abatement questions online.

Should You Be Worried About The IRS Reading Your Emails?

The BIDaWIZ Team — Fri, 19 Apr 2013 21:56:39 +0000

The IRS has come under fire of late due to recently released documents made public by the American Civil Liberties Union (ACLU). The documents indicate that the IRS does not need a warrant to access a taxpayer’s electronic communications such as emails and text messages. The IRS has since denied those claims. Should you be worried about the IRS reading your personal or company emails?

The IRS recently released documents
The ACLU provided the public with documents clearly indicating that the IRS can review taxpayer emails without notice or a warrant. Specifically, the documents cite that the Fourth Amendment does not protect emails because Internet users “do not have a reasonable expectation of privacy in such communications.”

The IRS’s response
The IRS acting commissioner, Steve Miller, recently released a statement in which he indicated that for criminal investigations, the IRS obtains a search warrant prior to requesting that an internet service provider allow access to the taxpayer’s emails. In addition, he stated that the IRS doesn’t request email information when the case is civil. According to the IRS’s position, the situation would have to be criminal fraud or another type of criminal activity for the IRS to review emails.

Should I be worried?
When the IRS was asked to respond to the documents detailing that agents review electronic communications without warrant, the IRS denied them. In addition, the agency stated that they plan to clarify their procedures in the IRS handbook to explain that they do not review taxpayer emails or text messages without a warrant. We think this is a positive response and likely indicates that the IRS won’t review taxpayer emails unless a warrant is provided. Still, taxpayers should be very careful in what they send and keep in their email accounts as it relates to their finances and taxes.

More Tax Questions? Browse Answers or ask your irs audit questions online.

What Are My Chances Of Being Audited In The Future?

The BIDaWIZ Team — Fri, 29 Mar 2013 10:00:36 +0000

The fear of being audited by the IRS remains one of the biggest concerns of taxpayers. The other major concern of course is paying too much in taxes because of missing certain tax breaks. With regards to getting audited, recently released figures indicate which taxpayers are most likely to face an examination. Are you at risk?

IRS audit statistics
The IRS recently released key figures detailing the number of audits conducted during the period of October 1, 2011, to September 30, 2012. The data includes information about the type and number of returns filed, taxes collected, enforcement, taxpayer assistance and the IRS budget, among other key statistics. As a whole, the IRS audited slightly under 1% of all tax returns (business, personal, estates etc.) in fiscal year 2012. However, certain taxpayers had a greater chance of being audited.

IRS examinations increase for high-income taxpayers
The latest figures indicate that the IRS examined about 12.1% of the 337,477 tax returns reporting income of $1 million or more, compared to 2.8% of those reporting at least $200,000 and under $1 million, and 0.4% of those reporting income under $200,000 who didn’t file a Schedule C, E, F or Schedule 2106. It’s important to note that individuals with businesses are not included in these figures as the IRS has a separate process for examining business returns and schedules that include those activities.

Does an IRS examination mean that I’ll owe more taxes?
Not necessarily. The latest figures indicate that of the 1.5 million individual tax returns examined, nearly 54,000 resulted in additional refunds. Therefore, it’s quite possible that the IRS examination can be beneficial to you.

How many corporate tax returns were examined?
The IRS examined 1.6% of corporation income tax returns, excluding S corporation returns, in fiscal 2012. It should be noted that S Corporations are pass through entities that sometimes are under greater scrutiny when the business owner reports a salary that is below the standards for their industry. As you may be aware, S Corporation owners can receive distributions which are not subject to payroll taxes.

More Tax Questions? Browse Answers or ask your irs audit questions online.

What You Should Know If You Plan To Fight An IRS Bill

The BIDaWIZ Team — Wed, 06 Mar 2013 17:00:35 +0000

Most taxpayers understand that they are taxed on their worldwide income. However, most are too hesitant to fight a tax bill from the IRS that they may receive without merit. The most important aspect to note for fighting an IRS bill is to understand and follow appropriate procedures.

The letters from the IRS
Typically, the IRS will send you a notice with a request to substantiate under-reported income or over-reported expenses. You have two options: 1) sign it and pay the outstanding bill or 2) sign it and indicate that you are contesting the bill. If you fail to respond to the initial notice, then you’ll receive an examination report, which is commonly referred to as the 30 day letter. At this point, you’ll definitely want to respond in a timely fashion and keep records of receipts to verify the mailing.

The IRS appeals process
The information that you send to the IRS will be reviewed and sent to the IRS appeals division if sent in accordance with the deadlines detailed in the initial letters. The IRS appeals division’s goal is to try to obtain the taxes owed and reach a compromise with the taxpayer. The best next step is to hire a tax attorney, enrolled agent, or CPA to act on your behalf in the court case against the IRS. You can represent yourself, but that’s typically less effective. You’ll also need to be very well-versed in the section of the tax code that directly relates to your tax matter. If you’re still not able to reach a resolution with the IRS, you’ll receive a notice of deficiency from the IRS, which effectively means you’ll have 90 days to respond to be heard in front of the tax court. However, you can still request that the IRS transfers your case back to the IRS appeals court.

What if I don’t respond to the IRS notices?
It’s best to still pay the IRS bill as you’ve been delinquent with meeting the deadlines in the notices. However, you can still sue the IRS for the tax refund if they don’t grant you one. This request will of course go to the courts.

More Questions? Browse Answers or ask your irs tax questions online.