Financial

In Private Letter Ruling 201432032 (PDF), the IRS denies late IRA rollover relief. The taxpayer wanted to invest IRA funds into a limited partnership (LP) and the taxpayer’s IRA custodian would not go along with it. This should have been the first red flag for the taxpayer but he went right past this warning. Instead he asked his financial advisor, also a CPA, how he could accomplish his goal. His financial advisor told taxpayer to title the LP investment in the IRA’s name and the taxpayer did so.

In 2012, over 2 years after the investment, the financial advisor realized titling the LP investment in the IRA’s name did not work because the investment was not held by a qualified custodian. The taxpayer requested that IRS waive the 60 day rollover requirement as he had relied upon professional advice but IRS said that excuse did not meet the requirements of Revenue Procedure 2003-16. The IRS stated that the taxpayer “chose to use the proceeds from IRA B to fund a business venture rather than attempt to roll the proceeds over into an IRA account for retirement purposes.”

What can we learn from this PLR? First, a financial advisor, even a CPA, can have his or her opinion influenced by the commission or fees earned from the investment. Perhaps this was a case of a subconscious influence but it still could have influenced the outcome. Second, reliance on professional advice is not always a cure for bad tax outcomes. Third, if one advisor (the original IRA custodian) will not go along with the deal, the taxpayer should proceed with extreme caution. Finally, we can learn that investing in a business through an IRA is a tricky thing. The penalties and taxes can be quite significant if all the “I’s” are not dotted and all the “T’s” are not crossed.

While it took a long time, IRS has finalized rules allowing truncated Social Security Numbers, Employer Identification Numbers, and Adoption Identification Numbers on many payee statements and other forms. The IRS started a pilot program in 2009. I wonder how many people consider 5 years a fast turnaround on this common sense change? Perhaps a bigger question is why it took until 2009 for the IRS to begin the pilot program.

Of course IRS had to come up with a new name and acronym TTINs standing for truncated taxpayer identification numbers.

Some eligible forms are:

• Various forms 1099, examples
  • interest income (1099-INT)
  • dividends (1099-DIV)
  • sales of capital assets (e.g. stocks and mutual funds) (1099-B)
  • sales of real estate (1099-S)
  • retirement, annuity, and IRA distributions (1099-R)
  • forgiveness of debt (1099-C)
  • payments to independent contractors, etc. (1099-MISC)
• Various forms 1098, examples
  • Mortgage interest (1098)
  • Tuition (1098-T)

The truncated number can only be used on the recipient’s copy. The copy going to IRS still shows the full number. The bulk of forms are transmitted electronically to the IRS thus eliminating the chance of waylaid mail.

Your W-2 still has to show your full Social Security Number.

Sources: Fighting Identity Theft, IRS Issues Final Rules on Truncated Identification Numbers , AICPA and Treasury Document 9675 (PDF).

The Social Security Board of Trustees released their annual projection of when the Disability and Social Security Trust Funds will be emptied. This year, things did not get worse. Not great news but not as bad as in some past years.

The Disability Trust fund is in real trouble as it will be emptied by 2016. If Congress does nothing, people on Social Security Disability will still get about 81% of what they were promised. This is better than nothing but not good.

The Combined Trust Fund (old-age and disability) will last until 2033. Again, assuming Congress does nothing, people will still get about 77% of what they were promised.

OK, now that you have all those “other” resolutions made how about some financial resolutions for 2014? Suggestions:

• I will review my investment allocations. Do I need to rebalance my portfolio?
• I will plan before making a significant financial move instead of after. History cannot be changed, only our recollections change but not the facts.
• I will keep a questioning mind when I hear something that sounds too good (or too bad) to be true. I realize that many times they are not true.
• I will put more away for my retirement, especially via my retirement plan.
• I will review my employer’s benefit plans to make sure I am taking advantage of all available and appropriate tax savings.
• I will work towards paying off all my personal debts such as credit cards, car loans, and lines of credit.
• I will not borrow against my home equity except in a real emergency as I could lose my house if I have financial difficulties later. The interest is also often not deductible.
• I will keep taxable income, such as operating businesses and many partnerships, out of my IRA. I do not want my IRA to pay income taxes.
• I will keep charitable receipts for all contributions over $249 and bank records for those below. I will not wait until April 2015 to get these receipts at the last second as I know I must have them on hand when I file my return.
• I will remember that my hair dresser/barber is not a tax expert and will run tax savings ideas by a professional before I implement them.
• I will remember that I only owe income taxes because I am fortunate enough to have a decent income.

photo credit: Pepe Martin