Online Tax Registration for New Business | Earned Income Tax Credit | Write Off for Equipment | Now is the Time to Deduct 100% of Health Care Costs | Standard Mileage Rate | Tax Credits for Educational Expenses | Accountant - Client Privilege: Real or Imaginary? | Paper Documents to Support Tax Return Entries | Employee Meals | Alternative Minimum Tax | Business Stock | Per Diem Rates | Reward Offered | Form 941 Filing | Changes to Internal Revenue Code | Annual Dues to Members | Offer in Compromise | FICA Exemptions for Student Workers | SIFL Mileage Rates | | Revised Form W-4 | Survey of 401(k) Plans | Roth IRAs | Single Parent Retirement | Understanding Retirement | Insurance Trust | Family Aggregation Rules
Press Release from Louis Goldstein's Meeting on March 2nd to Introduce This New Online Service deal with parts of the form that don't apply to the user's situation.
Designed to handle up to 200 applications simultaneously, the comptroller's interactive registration process will reduce the need to contact businesses for clarifications, because an incomplete application cannot be submitted.
"This will save us a lot of time and effort and is a greater convenience for the taxpayer," Mr. Goldstein said. "The combined registration process will be one link in the new Business License Information System being constructed by the Department of Business and Economic Development to allow businesses to more easily find out what licenses, permits and registration they need in Maryland.
"Maryland is once again improving life for small business. As accountants, we are fully aware that simplicity is the key to compliance with regulations. By making the registration form easy to use and available to everyone with a computer, the Maryland Comptroller's Office is helping accountants and businesses reduce the burden of paperwork," said Phyllis Burlage, President of the Maryland Society of Accountants.
The comptroller established a one-stop registration service for Maryland businesses in July, 1980, helping new businesses fulfill many tax registration requirements in one application. He later expanded the service by creating a Taxpayer Registration Assistance Center (TRAC) to provide walk-in, one-stop assistance to help new business taxpayers fill out the combined registration application, set up tax accounts and obtain other helpful information. TRAC is located in Room 206 of the State Office Building at 301 West Preston Street in Baltimore.
Taxpayers can also download the combined registration application from the comptroller's website at www.comp. state.md.us or request it by fax from the comptroller's Forms-by-Fax system by calling (410) 974-FAXX (3299). The paper application is also available at any office of a Clerk of the Circuit Court or any of the comptroller's 20 taxpayer service offices.
Maryland is the first state in the nation to allow new businesses to register for tax accounts online using a personal computer, State Comptroller Louis L. Goldstein announced in Baltimore on March 2, 1998. "Thanks to the partnership between our office, Microsoft Corporation and Dynatech Integrated Systems in Columbia, Maryland, we've created an interactive feature on our website at www.comp. state.md.us where new businesses can complete Maryland's combined registration application online any time 24 hours a day, seven days a week - quickly and efficiently," Mr. Goldstein said. "This is the first interactive multiple business tax application in the nation."
The online combined registration application allows businesses to use one application to establish accounts for sales and use tax, employer withholding, unemployment insurance, admissions and amusement tax, tire recycling fees and transient vendor licenses. The Comptroller's Office received 61,000 paper combined registration applications in 1997, or as many as 200 per day.
"As part of Microsoft's continued commitment to advanced technology solutions, we are pleased to partner with the Comptroller of the Treasury to improve public access to information and enhance online services to Marylanders. The interactive combined registration application, built on Microsoft's industry-leading back-office technologies, is the result of the strong partnership between the Comptroller's Office, Microsoft and Dynatech Integrated Systems. We expect this solution to save time for the people of Maryland as well as to reduce costs to the state and to provide a higher level of customer service," said Kim Tubbs, Mid-Atlantic District Account Exec. for Microsoft.
"Presently, all businesses had to fill out a paper form by hand, mail it in or fax it to us, wait for use to review the form, make corrections and sometimes contact the taxpayer. Now all you have to do is visit our website and follow a few brief instructions," Mr. Goldstein said. The interactive application prompts the user with questions and eliminates the need to
The Earned Income Tax Credit is available to taxpayers who meet certain eligibility requirements. Taxpayers with one qualifying child and income less than $25,760, or those with two or more qualifying children and income of less than $29,290 can claim the credit. Also, certain taxpayers earning less than $9,770 can claim the EITC even without a qualifying child.
The IRS offers help to all taxpayers through its toll free taxpayer assistance phone line at (800) 829-1040. Representatives are available 16 hours a day -- from 7:00 a.m. until 11:00 p.m. -- Monday through Saturday.
Here is a reminder that this year, small firms may receive an additional $500 in the write-off of equipment, machinery, computers and some vehicles that are put in service in 1998. The maximum write-off is now $18,500.
(The Kiplinger Tax Letter, Jan. 23, 1998, p. 2)
As a tax professional, if your self-employed clients are having to pay in more for their 1997 taxes than expected, it's time to help them start preparing to save in 1998. By enrolling for a 100% tax deduction of family health care expenses, your self-employed clients will be able to join the 50,000 farmers and small business owners who will save an average of $2,450 in taxes.
This deduction is made possible through little-known Internal Revenue Code Section 105. This code section allows qualifying self-employed farmers and business owners a full deduction of health insurance premiums and non-insured medical, dental and vision care expenses.
To qualify, a farmer or business must be self-employed, have a spouse who participates in the business sand have fewer than three employees. By formally employing the spouse in the business (even on a part-time basis), the business owner may offer the spouse-employee a benefit plan in which the business reimburses the family for medical expenses incurred throughout the year. At tax time, these health care expenses then become fully deductible as a business expense under employee benefits. The result, an additional $1,000, $2,000 or greater in tax savings.
Section 105 plans require strict compliance with guidelines established by the Internal Revenue Service, the Department of Labor and ERISA. To meet these guidelines, small business owners and their tax professionals utilize the services of a third party administrator. For a small annual fee, an administrator performs the documentation and maintenance necessary for the proper use of a Section 105 plan. Some administrators will even back their work with an Audit Guarantee.
One such administrator, mid-western AgriPlan/BizPlan has assisted tax professionals since 1986. AgriPlan/BizPlan will perform the documentation and necessary maintenance for proper use of a Section 105 plan for your clients. As a tax professional, you are able to become an AgriPlan/BizPlan provider and offer these tremendous tax savings to your qualifying clients. For more information on Section 105, call 800-626-2846 to speak with an AgriPlan/BizPlan representative.
The optional standard mileage rates for 1998 for automobile use, in lieu of actual expenses have been announced by the IRS. They are:
The cents per mile method cannot be used with respect to luxury cars, which, for 1998, are vehicles with a value of $15,600 or more. The IRS has also indicated that the standard mileage rate and the "fixed and variable rate allowance" may be used for leased vehicles for 1998. In the past, these were only applicable to purchased vehicles.
(CCH, Taxes on Parade No. 2, Jan. 8, 1998, p. 1; J.K. Lasser's Monthly Tax Letter, Feb. 1998, pp. 1 & 6; The Practical Accountant, Feb. 1998, p. 19; Payroll Practitioner's Monthly, Feb. 1998, pp. 23 & 4, Jan. 1998, pp. 4 & 5; The Kiplinger Tax Letter, Jan. 23, 1998, p. 2; IRS, Int. Rev. Bull. 1997-52, Rev. Proc. 97-58, Dec. 29, 1997, p. 24)
The Taxpayer Relief Act that was passed last year established two new tax credits for educational expenses. To prevent abuses, it also required higher educational institutions that receive payments of credit-eligible expenses to file information returns with the IRS. Businesses that make reimbursements of qualifying educational expenses re also required to file annual information returns with the Agency for each student in whose behalf a payment is made. But now the IRS has thrown in the towel and indicated that it will not require businesses to file the information returns for reimbursements or refunds made in 1998. Furthermore, pending legislation would eliminate the information reporting requirement for most businesses.
(IRS, Notice 97073, Compensation & Benefits Report, Jan. 21, 1988, p. 5)
by Lois D. Bryan, M.Acc., CPA and John E. Smigla, M.S., CPA
Associate Professors of Accounting, Robert Morris College
Upon arriving at the office, you examine your mail and apprehension overwhelms you. Immediately you recognize that dreaded IRS correspondence envelope -- you take a deep breath and think aloud, "What now?" You hastily tear open the letter and begin reading, "We are summoning the audit workpapers of your client..." Your first thoughts may be that this is absurd and does the IRS have this right?
The article will address whether or not the IRS has the right to issue a summons to examine the workpapers of the taxpayer's auditor. Next, the notion of "accountant-client privilege" will be examined to determine whether it is recognized by the tax law and the courts. Finally, a discussion of whether or not the IRS is violating the taxpayer's Fifth Amendment rights against self incrimination will be investigated.
Can the IRS issue a summons in order to examine the workpapers of the taxpayer's auditor?
The Service derives its authority to subpoena information from I.R.C. Section 7602...."(a) authority to summons, etc.--For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary is authorized--
(1) To examine any books, papers, records or other data which may be relevant or material to such inquiry'
(2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry...."
Their authority was expanded in 1982 to inquire into any criminal offense connected with the enforcement of the tax laws. However, the IRS cannot use it summons power after a criminal tax case is referred to the U.S. Department of Justice.
There have been many court cases to test the Service's exercise of this tax law provision. In U.S. v. Powell, 379 U.S. 48, (1964), the president of William Penn Laundry, Powell, was summoned to produce records relating to the corporation's tax return. The president refused because the records had been previously examined and the three year statute of limitations had expired. No deficiency could be assessed unless the Service suspected the taxpayer had committed fraud. In an opinion by Justice Harlan, "the government was not required to make a showing of probable cause to suspect fraud."
An important outcome of U.S. v. Powell was the detailing of four requirements that must be met before the courts will enforce a summons.....
· In U.S. v. Arthur Young & Co., 465 U.S. 805, (1984), the Supreme Court affirmed in part and reversed in part the 1982 Arthur Young 677 F.2d 211, case. Arthur Young & Co. was the auditor for Amerada Hess Corp. During the course of the review of the financial statements Arthur Young reviewed Amerada's contingent tax liability account and prepared extensive workpapers of their review. In 1975 the IRS began an audit of Amerada's corporate tax liability for the years 1972 through 1974. Amerada had made questionable payments from a "special disbursement account". The IRS started a criminal investigation and summoned Arthur Young asking for all Amerada files and its tax accrual workpapers. The Service argued that the workpapers were relevant to the investigation and all the conditions detailed in Powell had been met. The District Court refused to recognize an "accountant-client privilege." The United States Court of Appeals for the Second Circuit agreed that the workpapers were relevant but held that the public interest required the work of independent auditors be protected. The court created a "work-product immunity" doctrine for tax accrual workpapers. The Supreme Court in 1984 reversed in part the 1982 Court of Appeals decision. It ruled that there was not an "accountant-client privilege". This landmark case concluded that workpapers are not privileged communication and must be furnished to the IRS if requested.
In Coopers & Lybrand 550 F.2d 615, the court denied enforcement of a summons. Coopers & Lybrand were the auditors of Johns-Manville. They did not participate in the actual preparation and filing of the federal tax returns. The IRS issued a summons directing Coopers & Lybrand to testify and produce records relative to its examination of Johns-Manville. Coopers & Lybrand produced workpapers and documents but declined to disclose its audit program or the tax pool analysis file. They argued that the information was not relevant and the information was already made available to the IRS. Coopers & Lybrand felt that the Service had not met the requirements of Powell. The court found that the Service failed to show that the Audit Program was relevant. The Tenth Circuit held that the Service could not subpoena the workpapers because they were irrelevant to the actual transactions since Coopers & Lybrand had not participated in the filing of the federal tax return. The Service had attempted to demonstrate that the workpapers were relevant to a taxpayer's tax liability under Section 7602 but failed to convince the Court. One significant difference between the Arthur Young case and the Coopers & Lybrand case is that Coopers & Lybrand did not participate in the preparation of the tax return.
Privilege is determined by Federal not State law. If a conflict exists, Section 7602 will prevail over state law. In U.S. v. Cortese, D.C. Pa.1976, 410 F.Supp. 1380, affirmed 540 F.2d 640, a Pennsylvania statute providing for privileged communications between certified public accountants and their clients did not apply to a federal investigation.
The power of the Service to summon documents is very broad. In Arthur Young the court held that the Service has "broad" and "expansive" powers to investigate.
According to IRM 4022.3:(9) a summons may be issued when;
"1. no records are made available to permit an adequate examination within a reasonable period of time;
2. the records submitted are known or suspected to be incomplete and the examiner believes that additional records containing relevant and material matter may be in the possession of the taxpayer or a third party;
3. the examiner believes that additional relevant details are being withheld because of an adverse impact on the taxpayer or other persons."
According to Code Section 6001, "every person liable for any tax imposed shall keep such records, render such statements, make such returns and comply with such rules and regulations as the Secretary or his delegate may from time to time prescribe." Regulation Sec. 1.6001-1 "(1) In general.....any person required to file a return of information with respect to income, shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information. The Secretary or his delegate is authorized (1) to examine any books, papers, records, or other data which may be relevant or material to such inquiry."
In Figueiredo v. Commissioner of Internal Revenue, 54 T.C. 1508, the taxpayer refused to supply records to support deductions on the basis that it was violating their Fifth Amendment rights against self incrimination. The deductions were disallowed and the court upheld the decision.
In Fisher v. U.S., 425 US 391, the Supreme Court held that the Fifth Amendment does not prevent the Service from obtaining from a taxpayer's attorney documents prepared by their accountants.
The Internal Revenue Service is granted the authority to summon "relevant" and "material" information needed in their examination. This authority is granted in Section 7602 of the Internal Revenue Code. However, the taxpayer should not be subjected to unnecessary examinations that are intended to harass or pressure settlement of a tax dispute.
There is no provision in the tax laws for "accountant client privilege." In 1984, the Supreme Court ruled that "accountant-client privilege" does not apply to workpapers of the independent auditor. Client information in the hands of the auditor is subject to IRS examinations.
Taxpayers are required by law to maintain records to support information reported on federal tax returns. The review of this information is not in violation of their Fifth Amendment rights against self incrimination. The burden of proof falls on the taxpayer. If such supporting information is not provided, the deduction will be disallowed.
The courts, on numerous occasions, have held that the Service has "broad" and "expansive" power to investigate. Those powers have been strengthened through numerous court decisions allowing the review of accountant/auditor workpapers. Many feel that these rulings will cause taxpayers to hesitate to discuss and disclose sensitive information to their auditors. The client-accountant relationship may even become adversarial and result in a deterioration of client-auditor communication. Such a predicament will most likely have a negative impact on the quality of financial reporting and full disclosure.
Starting with 1998, taxpayers who pay interest on qualified education loans for themselves, a spouse or dependents can claim a deduction of up to $1,000 from their interest payments subject to adjusted gross income phaseouts between $60,000 and $75,000 for joint filers and $40,000 and $55,000 for others. This provision in the 1997 Taxpayer Relief Act also requires information reporting by the lender (or collection organization) that receives interest of $600 or more for any calendar year on one or more qualified education loans. The IRS has just announced that for 1998, payees must report interest only with respect to student loans that have a "covered period" ending during or after 1998. For loans other than consolidated loans, collapsed loans and defaulted loans, the covered period begins on the date the loan went into repayment status, or January 1, 1998 if the payee doesn't know the date. The covered period ends on the date 60 months after the date the period starts or, if later, the last day of the month in which the 60-month date occurs. For 1998, payees must complete Form 1098-E, "Student Loan Interest Payments" for all student loan accounts with one or more covered students, and have the option of filing a separate Form 1098-E for each account of the payor, or of filing a single Form 1098-E for all student loan accounts of the payor. The information returns must be provided to the payor by February 1, 1999 and to the IRS by March 1, 1999. For 1998, the Form 1098-E need only include the name, address, and I.D. number of the payee and payor and the interest paid on the loan. But for subsequent years (returns due in 2000), information will also have to be provided on taxpayers who will claim the student as a dependent, because the interest deduction can only be taken by those taxpayers who are not claimed as a dependent on someone else's tax return.
(IRS, Notice 98-7; The Kiplinger Tax Letter, Jan. 23, 1998, p. 4; The Practical Accountant, Feb. 1998, p. 19; CCH, Taxes on Parade No. 2, Jan. 8, 1998, p. 2)
The IRS has released inflation-adjusted figures for 1998. Accordingly:
There will also be increases in the threshold amounts at which taxpayers who use the tax rate schedules will become subject to the 28%, 31%, 36% and 39.6% tax rates.
(The Practical Accountant, Feb. 1998, p. 16; CCH, Taxes on Parade No. 65, Dec. 18, 1997, p.2, No. 48, Sept. 18, 1996, pp. 1-3)
With so many business transactions being handled by computer without any intervening paper documents, it becomes increasingly difficult for taxpayers to provide substantiating paper documents to support tax return entries. The IRS is aware of this, and recently it indicated its willingness to be accommodating by permitting the use of an electronic itinerary to meet substantiation requirements for travel expenses when the airline provided no tickets. Here, employees of a large corporation were required to submit expense reports accompanied by a receipt for any expense above a specified amount. The company's travel agent used a "ticketless" procedure for the air travel, merely generating an electronic record of the reservation which was stored in the airline's data base. The employee received an E-mail or faxed itinerary and receipt document, but no ticket or paper receipts from the travel agent, which was attached to the travel expense report submitted to the employer. Now, the IRS says that its documentary evidence rule which generally requires substantiation with an original document, such as an airline ticket receipt, would be satisfied by the faxed or e-mailed itinerary and receipts provided by the travel agent. The Agency has indicated that a statement sunmitted by an airline in lieu of tickets would also provide adequate travel substantiation. Although the IRS conclusion came in a Letter Ruling, it should be welcome news for business travelers and their employers.
(IRS, Letter Ruling, 9805007; CCH, Taxes on Parade No. 6, Feb. 5, 1998, p. 3)
Many employers offer free or low cost meals to their employees, and there are a variety of tax rules governing the treatment. Thus:
The problem with (2) is that when an employer provides free meals to employees it incurs the cost but usually has no revenue, making it impossible to satisfy the revenue/operating cost test in (e). In that case there is another rule:
For years beginning before 1998, the tax law failed to specify how the excludable meals were to be handled for purposes of the revenue/operating cost test in 2(e), although IRS regulations indicated that employers could disregard the costs and revenue associated with excludable meals. Then, recently, the IRS argued that excludable meals could be disregarded only if the employer actually charged some employees for their meals. All of this added to taxpayer confusion. Now, the new tax law attempts to clarify the treatment of excludable meals for tax years beginning after 1998. It states that in the future, an employee eligible for the exclusion will be treated as having paid an amount for the meal equal to the employer's direct operating costs for the meal. In effect, excludable employee meals will always be a "wash" for purposes of the revenue/operating cost test. Therefore, all employees will be treated as paying for their meals at cost, including those whose meals are excludable. In turn, the company's revenue from the facility will equal its direct operating costs. Then, assuming the company satisfied the other requirements, all of the meals will be treated as a de minimis fringe benefit and will be 100% deductible by the company. If you have an employee cafeteria on your premises for the purposes of providing subsidized meals, review the rules and the provisions of the 1997 tax law to determine the proper tax treatment after this year.
(The Kiplinger Tax Letter, Jan. 9, 1998, p. 4; Accountant's Tax Weekly, Oct. 24, 1997, pp. 5 & 6)
The new tax law has eliminated the corporate Alternative Minimum Tax for small businesses that averaged less than $5 million in gross receipts during the three years beginning in 1994. This is good news, because many small corporations that ordinarily would have little or no ordinary tax liability ended up with a significant tax when accelerated depreciation and other deductions had to be added back to compute the corporate alternative minimum tax. In light of the change in the law, incorporated small business owners need to review tax planning with their professional tax advisors to determine whether new strategies for minimizing tax liability are desirable.
(Bottom Line/Business, Jan. 1998, p. 3)
Investors in "qualified small business stock," stock that was issued after August 10, 1993, or stock that was acquired at its original issue from a domestic "C" corporation that conducts an active trade or business and has assets not exceeding $50 million have gotten additional tax breaks under the Taxpayer Relief Act. Under the former law, investors who sold "qualified small business stock" in the company could exclude 50% of up to $10 million of gain from such sale from income. Under the new law, tax can be avoided entirely on the gain by the investor if it is rolled over within 60 days of the original sale, into the stock of another "qualified small business" and if the original "qualified small business stock" had been held over 6 months before its sale.
(Tax Hotline, Nov. 1997, pp. 1 & 2)
The General Services Administration has released revised listings of maximum per diem rates for reimbursement of expenses for Federal employees within the continental United States (CONUS) for travel after January 1, 1998. Employers, instead of reimbursing actual costs for lodging, meals and incidental expenses for out-of-town business travel, may pay the flat per diem rate regardless of actual expenses, and this rate will be accepted as substantiated by the IRS for an accountable employer plan if the employee turns in a record of the time, place and business purpose of the expenses and returns any excess reimbursement, (However, the employee may not be more than a 10% shareholder or a family member of the employer.) This eliminates considerable recordkeeping and the reimbursement is then automatically tax-free to the employee. For 1998, the standard per diem rate is the same as for 1997, which is $80 ($50 for lodging and $30 for meals and incidentals). However, depending on the locality, the meal and incidental expense component of the per diem rate is either $30, $34, $38 or $42 which is also unchanged from 1997. Alternatively, employers who do not wish to use the CONUS Federal per diem amounts for particular localities may set the business travel reimbursement at one of two rates - a basic rate and a high cost area rate which the IRS announces each year. For 1998 the base rate is $113 for lodgings, meals and incidentals and the high cost rate is $180 for 39 designated high cost areas. Incidentally, self-employed individuals can use the per diem rates only to substantiate meal expenses and have to separately substantiate their lodging costs, thus they cannot use the $113 or $180 substantiation amounts.
(J,K. Lasser's Monthly Tax Letter, Jan. 1998, pp. 5 & 6; The Kiplinger Tax Letter, Jan. 23, 1998, p. 2; CCH, Taxes on Parade No. 1, Dec. 31, 1997, p. 3)
The IRS is encouraging snitching on tax cheats by upping the reward it offers. Those who report people who haven't paid their taxes can now obtain 15% of the taxes recovered as a result of the information provided. Formerly, the reward was limited to 10% of the tax recovery. The maximum reward is $2 million, a sum that the IRS feels is surely sufficient to induce a jealous neighbor, an angry ex-spouse or an avaricious acquaintance to inform the IRS of another party's unreported income. However, if this entices some readers, be aware that only about 10% of the informers ever get any kind of a reward. To get a reward, the IRS must act on the informant's information and recover taxes from the tax cheater, which often requires years of pursuit and litigation. Finally, the IRS must also agree in writing that someone is entitled to a reward.
(Tax Hotline, Jan. 1998, p. 6; Tax Wise Money, Nov. 1997, p. 2)
Small and mid-sized employers can file Form 941 by Touch-Tone telephone beginning with the first quarter 1998 returns. If you are eligible, the IRS should have sent you a Tele Filing Tax Package. (This program is generally restricted to monthly depositors in business over one year.) Users of the system can file their information via an interactive voice-mail program that automatically calculates the employer's tax liability, together with any payments made or taxes owed and issues a "proof of filing" confirmation number. There is no charge for using the system.
(RIA, Payroll Guide No. 3, Jan. 30, 1998, p. 1)
The Taxpayer Relief Act made 824 changes to the Internal Revenue Code, and many of these were minor and highly technical. But there were also a number of major modifications, and these should be at the center of your focus in your tax planning for 1998 and later years. Without going into the details, here are the areas of greatest potential benefit:
The IRS has raised the amount of annual dues that social welfare, agricultural or horticultural organizations may receive from members while still qualifying for the exception under which tax-exempt organizations may be excused from lobbying expense reporting and notice requirements. The new ceiling is $75 for 1998, up from $53 last year, and it will be indexed for inflation. The exception to the notice and reporting requirement now applies if: (1) more than 90% of annual dues are received from persons, families or entities who each pay annual dues of $75 or less, or (2) more than 90% of all annual dues are received from IRC Code section 502(c)(3) organizations, state and local governments whose income is exempt from tax, or from tax-exempt organizations that are automatically excused from the reporting rules.
(IRS, Rev. Proc. 98-19; CCH, Taxes on Parade No, 6, Feb. 6, 1998, pp. 4 & 5)
The IRS has an offer in compromise program whereby it settles the total amount of a taxpayer's liability for a smaller amount. The IRS has just published some data which reveals for how little the Agency will settle. Thus:
The typical small settlement may require a better offer than shown here. Nevertheless, many tax professionals feel that the IRS will accept an offer of compromise for about 25% of the taxes owed when there appear to be no assets available for recovering the debt.
(Tax Hotline, March 1998, p. 4)
The IRS has issued Revenue Procedure 98-16, which establishes new standards for determining who qualifies for the FICA exemption for student workers. The document is directed specifically to colleges and universities, and indicates that the FICA exemption applies to students who work as "non-career" employees at the school while being academically enrolled on at least a half-time basis at the institution. It places no restrictions on the number of hours a student may work per week. Schools and students that erroneously paid taxes may be eligible for refunds that could be significant.
(IRS, Int. Rev. Bull 1998-5, Rev. Proc. 98-16; J.K. Lasser's Monthly Tax Letter, Feb. 1998, p. 4; RIA, Payroll Guide No. 3, Jan. 30, 1998, pp. 1 & 2; CCH, Payroll Management Guide No. 968, Jan. 27, 1998, pp. 2 & 4; Wall St. Journal, Jan. 28, p. A1, Jan. 22, 1998, p. C24)
The Transportation Department has released the applicable terminal charges and standard industry fare level (SIFL) mileage rates for the first half of 1998. They are used by the IRS and employers to determine the value of non-commercial flights on employer provided aircraft. Accordingly, the terminal charge is $31.60, and the SIFL rates are:
(CCH, Payroll Management Guide No. 967, Jan. 13, 1998, p. 4)
The IRS has revised Form W-4 to incorporate the new $400 ($500 in 1999) child tax credit that is available for each dependent under age 17, provided the taxpayer(s) adjusted gross income does not exceed specified limits. The credit begins to be phased out for taxpayers with incomes of more than $75,000 and for marrieds filing jointly, at $110,000. The phaseout is $50 for each $1,000 above these limits. Taxpayers who qualify need to fill out a new Form W-4 so that their withholdings may be adjusted, effectively providing the credit throughout the year. The credit itself is claimed at the end of the year on Form 1040.
(Payroll Practitioner's Monthly, Feb. 1998, pp. 24 & 5; CCH, Taxes on Parade No. 1, Dec. 31, 1997, p. 3)
Buck Consultants Inc., a New Jersey-based consulting firm recently concluded an extensive survey of 401(k) plans to assess characteristics of existing plans. Among the findings:
Have you evaluated your 401(k) arrangements lately to determine that the features are appropriate and that employee options are competitive?
(Best's Review, Life/Health Insurance, Jan. 1998, p. 66)
Unlike other IRAs, Roth IRAs are not required to make payouts to the owner upon attainment of age 70 1/2. However, they must be distributed once the owner dies. The period of distribution will depend on who the beneficiary is, and in any event, the distribution will not be subject to income tax. In general, if the spouse is the sole beneficiary, distributions need not be made until after the surviving spouse dies. Then the heirs must begin taking distributions. Other beneficiaries have two options. They may either withdraw everything over a 5-year period ending on December 31 of the fifth year after the year the Roth IRA owner died, or receive the distributions on the basis of their own life expectancy, provided they start taking distributions no later than December 31 of the year after the Roth account owner died. Here are just some considerations that may be helpful in deciding whether to utilize a Roth IRA or some other IRA account for retirement planning.
(The Kiplinger Tax Letter, Dec. 12, 1997, p. 2)
While virtually everyone needs to engage in estate planning to preserve wealth, single parents, perhaps more than others, have a particularly urgent need and often require specialized help to deal with their unique problems. Among the special requirements we often discuss with single parents are:
Because a single parent is much more vulnerable than a married one, it is particularly important for these parents to give priority to estate planning to protect the children and assure that their needs are provided.
(Estate Planning, Feb. 1997, pp. 77-81)
Many people do not understand the impact of retiring early, or of deferring social security benefits. Therefore, a brief explanation would be informative.
Early retirement - Age 65 is the normal retirement age for workers this year. Those who decide to retire early and draw social security benefits lose 5/9 of 1% for each month earlier for which they decide to apply for benefits. This results in someone who has just reached age 62 (the earliest age for retirement benefits) receiving 80% of the monthly benefit of a retiree whose benefits begin at age 65. Because the normal retirement age is being extended starting in the year 2000, workers who retire early will lose a greater amount. For example, in 2005 normal retirement age will rise to age 66, and in 2022 it will reach age 67. Thus, a worker who retires then at age 62 will experience a loss in social security benefits of 5/9 of 1% times 60 months, resulting in a loss of one-third of the normal social security benefit.
Late retirement - The rules here are more complicated. For example, a worker who reaches age 65 this year and decides not to apply for social security benefits will receive an additional 5.5% per year (11/24 of 1% per month) in benefits for each year the application is delayed beyond age 65. Thus, someone delaying benefits to age 70 (the mandatory age when benefits must start) will receive 127.5% of the annual retirement benefit that someone would receive at age 65. Workers who reached age 65 in 1996 or 1997 and delayed benefits receive a 5% per year credit (5/12 of 1% per month) and those who reached age 65 earlier and delayed taking benefits receive an even smaller credit. For workers who reach age 65 in the year 2000 or later and defer benefits, the credit increases by 1/2% every other year, till it reaches 8% per year by 2008. Unfortunately, because of the increase in the normal retirement to age 67, there will eventually only be a three-year gap, till age 70, over which benefits can be deferred, so that the maximum annual retirement benefit will only be 124% of that received by someone retiring at age 67 at the time, who decides to take benefits immediately.
As you can see, the rules are very complicated and your decisions can have a significant impact on your overall retirement income. When you provide pension and estate planning you help clients with these matters and also deal with such other social security related issues as the proper determination of monthly social security benefits, the effect of claiming benefits based on the earnings of a spouse, the availability of benefits for family members, such as children or parents, the effect of part-time work on benefits, and the taxation of social security benefits.
(Estate Planning, Feb. 1998, pp. 90-96)
When the owner of a family business dies, the company is likely to be the major asset in the estate, and there may be relatively little cash to pay estate taxes. In the worst situation, business continuity may be jeopardized because the firm may have to be sold to raise sufficient capital to pay the estate taxes. In general, with some planning, this kind of scenario is totally avoidable. The business owner can establish a life insurance trust, with children as beneficiaries, which owns insurance policies on the owner's life. If the insured gives up all "incidents of ownership" in the policies the proceeds will bypass the estate and be available to cover the estate taxes without jeopardizing the business. If existing insurance policies are used to fund the trust, if the owner dies within three years of establishing the trust, the insurance will revert back to his or her estate. Therefore, it is better to provide cash to the trust and let it purchase the policies. The trust must also have a "Crummey power," which is an annual withdrawal right for the beneficiaries to withdraw contributions paid into the trust. An individual can make gifts of $10,000 a year to the trust without gift tax. This enables the business owner to fund the annual insurance premiums without tax consequences. Of course, the use of life insurance trusts in estate planning is not limited to business owners. Business managers, executives and other taxpayers with accumulated wealth may also benefit.
(Estate Planning, feb. 1998, pp. 51-59; Tax Hotline, May 1997, p. 10; Tax News & Comments, Jan. 1997, pp. 1 & 3)
Prior to the new tax law, aggregation rules treated all family member employees of a business as a single person for purposes of computing the maximum salary ($160,000) on which retirement benefits could be based. The new tax law revokes the family aggregation rules with respect to a married couple, so that the pension benefit can be based on $320,000 of salary. To utilize the higher limit, increase income deferral and avoid unnecessary taxes, pension plans have to be amended to take advantage of the higher limits.
(Tax Hotline, Feb. 1998, p. 1)
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