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Tax Season in the Era of the Coronavirus

CoronavirusWe have all been negatively impacted by the COVID-19 pandemic and resulting stay at home orders. I am reaching out to you share some information as a result. I understand that completion of your tax return is very important to you. You expect quality work done in a timely manner, and it is always my goal to provide that to you. There has been a lot of discussion about taxes and deadlines in the media, some of which is not fully explained. This letter will help you better understand the circumstances under which we are operating with regards to your 2019 taxes.

For your convenience, I had a vertical package slot added to the left side of my entry door. Please place any information inside an envelope before dropping it through the slot. Someone is here at some point most days as we are considered an essential business under NC’s stay-at-home declaration.

Due Dates

  • IRS has postponed the due date for 2019 individual returns to July 15, 2020. As far as the federal government is concerned, for individual income tax purposes, April 15th is no different than April 12th, March 3rd, and so on. The first filing deadline is July 15, 2020. No black mark will go on your record if you file or pay by that date. Yes, if you go to the IRS website you will see the IRS refers to it as extended to July 15th but if you read the actual notice, which controls, the due date is postponed.
  • Filing before July 15 does not mean you have to pay when you file. The payment due date is still July 15th.
    • If you were supposed to pay estimated income taxes for 2019 and did not pay them, then paying today will reduce the underpayment of estimated tax penalty but that is different than a late payment of the tax penalty. If you underpaid your 2019 taxes either by not having enough withheld or by not making the appropriate estimated payments, you will likely owe an underpayment penalty; paying sooner rather than later will help to reduce that penalty. This is the case regardless of the date of the filing deadline and is not the same as a late filing penalty.
  • NC also has postponed the individual filing due date for 2019 returns until July 15, 2020. However, current NC law does not allow the Department of Revenue to waive interest on payments that are made after the April 15th due date. If you do not owe tax, you will not owe interest. NC’s leaders have pledged to waive the interest and you can read their statement here:
    http://speakermoore.com/north-carolina-leaders-announce-shared-support-deferring-interest-income-tax-july-15/
  • Generally, other states are following the IRS in delaying the due date for their returns, but some are stuck with the same situation as NC (i.e. legislation must be changed) and some have chosen their own path. This is a rapidly changing area.
  • For those who pay estimated income taxes, the first quarter 2020 IRS estimate is due July 15, 2020. The second IRS estimate is now also due July 15, 2020. Again, NC law does not allow the NC Department of Revenue to postpone estimated tax deadlines. NC’s leaders have pledged also to waive this requirement.

Tax and SBA changes

  • Congress passed and the President signed on March 18th the 43-page Families First Coronavirus Response Act to provide coronavirus funding and some tax relief.
  • Congress passed and the President signed on March 27th the 880-page CARES Act providing expanded unemployment benefits, various small business loan programs, tax law changes and relief, recovery rebates ($1,200 single $2,400 joint, with limitations), and various other provisions.
  • Another bill is already under discussion.
  • Before these laws passed, various other proposals were floated that did not end up in the law, but they generated a lot of questions from clients.
  • Keeping up with the adopted changes, potential changes, and responding to questions has taken time from my day that would normally have been dedicated to completing returns. I am still dedicating time to studying these laws and keeping up with the new guidance that is issued almost daily. This allows me to be of better service to you and allows you to take advantage of the various relief components that apply to your individual circumstances.

Other circumstances

  • Staff availability has been limited by school closures, requiring me to complete more of the business bookkeeping required to complete tax returns for business clients. This too reduces my availability to complete individual returns.
  • Many businesses, even those deemed essential, are suffering economically. They need my help applying for the Paycheck Protection Program (PPP) Loans/Grants and the Economic Injury Disaster Loans (EIDL) to put them in the best position possible to keep their businesses solvent Again, this pulls me away from completing individual returns at this time.

                                                      

In addition to the work priorities described previously,  there are clients who need to promptly file 2019 returns because they are now unexpectedly unemployed. While it may seem unfair, I am prioritizing clients based on these needs and I am asking those of you that are less negatively impacted to understand.   

I am asking for your patience in this difficult time. While I wish I could get everyone’s returns done now, it is not physically possible. Thank you for your understanding.

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Foreign financial filing due (FinCen 114)

Form FinCen 114 is due June 30, 2016. No extensions are available! Failure to timely file can result in severe penalties as much as 50% of the highest account value and possible criminal charges that can carry a prison sentence.

This is why I ask each year if you have an interest in a foreign financial accounts.

What is a foreign financial account?

As with most things to do with the government, the definition is complex. Generally, a foreign account is any financial asset held at a foreign branch of a financial institution. Some examples:

  • Life insurance
  • Annuities
  • Pensions and other retirement accounts
  • Bank accounts
  • Brokerage accounts
  • Investment accounts

Owning a foreign stock held at a U.S. branch of a financial institution is not a foreign financial account. Nor is a mutual fund that holds foreign stocks when the mutual fund is held at a U.S. branch. (There are other filing requirements if you own a significant amount of any particular foreign company but those rules are beyond the scope of this post.)

When do you have a financial interest?

If you own, have signature authority over or can direct the use of the account then you have an interest in the account.

  1. Owning an account should be easy to understand – titled in your name either jointly or solely then it is owned by you for these purposes.
  2. Signature authority – you can sign a check or initiate a transfer or payment.
  3. Direct the use – if the account is titled in another entity’s (person, company, partnership, etc.) name and you are not listed as a signatory but the owner or signatory will follow your directions, then you have a financial interest. For example, you give your brother $12,000 to deposit into his Bank of Somewhere Other than the U.S. account. Your understanding is he will give the money to you when you visit, then you have a financial interest in that account and must report it.

Conclusion

File now or pay a severe penalty later. The U.S. Treasury requires online filing here. Some tax software companies also provide software for filing purposes.

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NC extensions denied in error

The NC Department of Revenue has started sending out notices denying extensions that were timely filed. The notices demand the income tax return be filed within 30 days and threaten penalties and interest if tax is due. If you are due a refund, then there will be no penalty or interest due. Of course, there should be no late filing penalty for the extensions denied even if the taxpayer owes as long as the taxpayer or preparer has proof of timely mailing. There can still be interest and late payment penalties but that is because the extra tax was not paid with the extension.

Reason NC extensions denied

The NC Association of CPAs is reporting that several trays of certified mail were delayed in the Raleigh Post Office. Once the mail finally made it to the Department of Revenue they were so late that NC assumed they were mailed after the deadline. NC should have looked at the postmarks and determined which were filed timely. NC is working to correct their records.

What should taxpayers do?

If you filed on or before April 18, 2016, then this will not affect you.

If you filed an extension and do not receive a notice, then just wait. There is nothing to do except file your return timely.

If you filed an extension and receive a notice denying it, you need to reply. NC should fix this but you need to protect yourself by sending a response via certified or registered mail along with proof you filed your NC extension timely. Your proof of timely filing will be one of three things:

  1. If you filed the extension on NC’s website, then you should have proof showing timely filing.
  2. Certified Mail receipt addressed to the proper address for NC extensions and marked by the Post Office as received by the Post Office on or before April 18, 2016. If I filed your NC extension, this is the proof I have. Please send me the notice so I can get NC to update their records.
  3. Registered Mail receipt addressed to the proper address for NC extensions and marked by the Post Office as received by the Post Office on or before April 18, 2016.

If you put a stamp on the extension, you are at the NC Department of Revenue’s mercy. They do not have to prove you did not file timely, you have to prove you did file the extension timely. Unfortunately, your word is not usually enough.

What we learned

Taxpayers need to send important tax documents Certified or Registered Mail or by means of an approved electronic method.

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Forms 1099 due by 03/31/2016!

Forms 1099 due!

In 2015, Congress decided to raise the penalties for late filing of forms 1099. The forms are generally due to be sent to the taxpayer by January 31st though some forms have other due dates. If filed electronically, the forms 1099 are due to IRS by March 31st. Paper filings, if allowed, are generally due by the end of February. Generally, if you have to file a lot of forms then you must file electronically.

When 1099 Before 2016 After 2015
sent Normal Small business Normal Small business
Per form Limit Per form Limit Per form Limit Per form Limit
30 days or less late $30 $250,000 $30 $75,000 $50 $500,000 $50 $175000
Before Aug. 2 $60 $500,000 $60 $200,000 $100 $1,500,000 $100 $500,000
After Aug. 1 $100 $1,500,000 $100 $500,000 $250 $3,000,000 $250 $1,000,000
Intentional Failure * $250 No limit $250 No limit $500 No limit $500 No limit

* Some forms have higher penalties if failure to file is intentional.

Penalties

The per form penalties apply to the form sent to the recipient and to the form due to IRS. So failing to send one form 1099 to the recipient and a duplicate to IRS before August 2 results in a total penalty of $500. Intentionally not filing one form with IRS and not sending a copy to the recipient is $1,000. As an example, XYZ company decides to not file any of the 10 forms 1099-MISC it should file. The penalty for not sending the forms to the recipients is 10 times $500 plus for not sending to IRS is 10 times $500, total penalty is $10,000.

Mighty expensive penalty for not filing out 10 relatively simple forms in a timely manner.

Exceptions

IRS is allowed to waive the penalties for reasonable cause. I just did not feel like it is not a reasonable cause. I did not know is pretty weak as all the major income tax forms for businesses now ask if you had to file a Form 1099 and then ask if you did.

What to do now

Paper filing is out since they are already late. Big businesses should already have in-house filing software or have contracted with a third-party for the service. Smaller businesses, landlords, and others required to file should use one of the online services before the deadline. Sure you may still owe the late fee for sending the recipient copy late but at least you can avoid the penalty for late filing with IRS. The online services typically send a copy to the recipient so that makes the $5 or so cost more acceptable – nor form to buy, no envelope to buy, and no extra cost for postage.

Here are a couple of options:

Yearli by Greatland

Eagle View

And another Track 1099

If you use a payroll service, most of them also offer 1099 filing for an additional fee.

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Valuing noncash contributions

Brad K., Goodwill, under Creative Commons license, on Flickr

So you are preparing your income taxes or getting your information ready for your tax preparer and you are wondering what value to place upon that load of household items, clothing and furniture you gave to charity. Valuing noncash contributions is a common problem. Your tax preparer should not value them as the preparer has not seen the items, does not know the brands and is seldom an expert on the value of used property.

Options for valuing noncash contributions

  • Go into a local thrift shop such as The Dorcas Shop, Goodwill or Salvation Army and look at the prices they charge for items similar to what you are giving to them. Often they will have a price list posted and you can start with that.
  • Try Fun With Taxes valuation table, remember your donation is based on local values which is why they show a range
  • Salvation Army Valuation guide, again remember you need the value in your area
  • Check online used prices at places such as eBay
  • Try local consignment shops
  • Intuit offers an online calculator called ItsDeductible (TM ). Intuit even has a mobile app for Apple.

What not to do

  • Do not include any value for items that are not in good or better condition. Actually, just throw those items out as most charities do not want things in bad condition. You can include items that are not in good used condition if you have a qualified appraisal and the value is more than $500. A qualified appraiser is generally licensed and charges for her appraisal. Uncle Joe’s opinion does not count.
  • Do not use the original cost as a guideline for the current value. There is a bad rule of thumb that used clothing, furniture and household items are worth a third of original cost. If your two men’s suits that costs $3,000 total are worth a $1,000 then why are you not selling them? Salvation Army has $60 as the high range for the value of used men’s suits.
  • Make sure the organization you donate to is really a qualified charity. Some for profit companies put out clothing drop boxes. Contributions to them are not deductible.

What to do

  • Use a reliable valuation method such as one of those mentioned above
  • Make sure your receipt is complete – Charity name, address, date, and a list of what was given. Three bags of clothes is not enough detail.
  • Prepare a list before you go showing what is in each bag or box. If you can, get the charity to sign and date your itemized list indicating they received the items. The higher the value, the more important a detailed list and acknowledgement of that detailed list by the charity.
  • Make sure your receipt is in hand and in acceptable form before you file your return. You can find more about the requirements for receipts from my post here.
  • If the total value of similar items will exceed $5,000 for the year, get an appraisal from a qualified appraiser before you make each donation.

Conclusion

Noncash contributions provide a lot of money to charities, the charities provide shops for people to purchase affordable used items, and the charities provide local jobs at their collection centers and shops. Beyond that, a contribution of good or better quality used items reduces the waste stream by recycling the items. Just be careful valuing noncash contributions.

Do you have any tips or web sites for valuation? Please add them in the comments.

 

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Does the EITC discourage work?

As a followup to my February 17th post, entitled NC EITC is not the answer, I thought I would expand on my reasoning on why I do not favor the earned income tax credit (EITC). Beyond the improper or fraudulent payments amounting to almost one-quarter of credits paid, the EITC discourages many workers from working more or pursuing a higher paying job.

EITC summary

Briefly, the EITC is a credit to encourage the poor to work. If someone has no earned income (generally wages or self-employment income), they get no EITC. As they earn more and have more children, the credit gradually increases to a maximum of $6,242 in 2015 for a married couple filing a joint return with three or more qualifying children. For each dollar earned over $23,649, the married couple loses some EITC until it is all gone once they have income above $53,266. The amounts are different for single taxpayers and those without fewer then three children.

I think we can all agree that at some point people make enough they do not need a tax credit to encourage them to work. Where is the magic number where they no longer need the government’s encouragement? It varies based on living costs and on each persons view of what is enough to live on. I would hope we can all agree someone making $1 million does not need the EITC to encourage them to work.

Encourages work

A married couple with at least three qualifying children making zero gets no EITC credit. If one or both spouses goes to work and earns at least $13,850 but less than $23,649, they get an EITC of $6,242. Earning the minimum means the federal government gives them $6,242 or almost 46% of their wages. A pretty good incentive for one of them to find a job. Adding an NC credit at 10% like Progressive Pulse recommended results in an additional $624 in EITC for a total of $6,866 or almost a 50% tax-free raise beyond the $13,850 in wages.

An aside

Lets be realistic, who can support themselves, their spouse and three or more children on income of $20,280 after taxes? (Gross wages of $13,850 + federal EITC $6,242 + proposed NC EITC $624 – Social Security & Medicare tax of $1,060). Rent and some food take care of all of that, rent might take care of all of it and more. That seems to be the reason Congress left the maximum at $6,242 until the family makes more than $23,649. Even at $23,649 the net after income and payroll tax is only about $28,706. Still extremely difficult to take care of a family of five. Note I am ignoring the child credits and any other credits since this post is about the EITC.

Discourages work

So what does Congress do to help the family of five try to cover their expenses beyond $28,706 net of taxes? Congress punishes them for earning more. Yes, punishes them by taking away some of the EITC credit. Lets say our example family of five starts making $33,850. A raise of about $20,000 versus $13,850. That is good, right? Our family now owes $126 of federal income tax and $1,084 of NC income tax. They also owe $1,530 more in Social Security and Medicare taxes.

Look at this chart:

Marginal income tax rates for every $1,000 of income from $1,000 to $75,000. No other credits considered, for example the child credit is omitted. Excludes state taxes and payroll taxes.

See the peak? An effective marginal income tax rate of over 36% for the next $1,000 earned above $52,000. In 2015, the 35% bracket starts at $411,500 for a married couple filing a joint return. The next $1,000 the couple makes above $411,500 causes an extra $350 of income tax. But a couple making the next $1,000 above $52,000 will pay $361 of tax on that next $1,000. That is not right! Oh, but yes it is right. The EITC causes the marginal income tax rate the EITC middle class to pay a higher marginal rate than a couple making as much as $464,850 (the top of the 35% bracket).

So if a married couple with three or more qualifying children qualifies for the EITC, they are strongly encouraged to work from zero to about $25,000. Then the way the EITC phases out as income increase, they are being discouraged from earning more as their marginal tax rate goes to 21%. It only gets worse until about $54,000 when their marginal tax rate finally falls back to 15%. Interestingly, for 2015 the federal poverty income for a family of five is $28,410. So the EITC is designed to raise taxes on some people making less than the federal poverty level income.

Conclusion

There has to be a better way than wasting at least $14.5 billion (in 2013) on improper EITC payments and then adding insult to injury by charging high marginal income tax rates on people trying to lift themselves out of poverty. I will leave it to others to come up with a better plan. My feeling is the tax law is the wrong place to try to provide incentives and assistance to the working poor.