PILLA TALKS TAXES - Prior Featured Article
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AVOIDING PENALTIES UNDER OBAMACARE

 Exceptions and Exemptions to the "Individual Mandate"

by Daniel J Pilla  


Article originally found in Feb 2014 issue of Pilla Talks Taxes Newsletter*

 

As we all know by now, federal law requires all persons in the United States to maintain “minimum essential health care coverage” for themselves and their dependents beginning this year. See code §5000A. Failure to purchase such care will subject the individual to an annual penalty, which the statute refers to as a “shared responsibility payment.” Code §5000A(b). 

This provision of the Patient Protection and Affordable Care Act (Obamacare) is referred to as the “individual mandate” in that Congress has mandated that individual citizens purchase an insurance product that meets federal guidelines. Such a mandate is unprecedented in American law. There is no other example in U.S. history where the government required a person, as a matter of law, to purchase a specific product or service or risk civil penalties. 

The penalty is equal to the greater of:
     • $695 per person per year, up to a maximum of $2,085 per family, or

 

     • 2.5 percent of “household income.” Code §5000A(c). 

The percentage increase is phased-in over three years. Beginning in 2014, the percentage is 1 percent. Beginning in 2015, the percentage is 2 percent. For years after 2015, the percentage jumps to 2.5 percent. The gross applicable penalty is pro rated to apply on a monthly basis “for any month during which any failure” to have adequate coverage exists. Code §5000A(c)(2). The penalty amount must be computed by the taxpayer and reported on his tax return. 

In my Special Report I published on Obamacare, entitled “IMPLEMENTING NATIONAL HEALTH CARE: Taxpayers and IRS to be Challenged as Never Before,” (PTT, July 2012), I discussed this penalty and explained that the law contains both “exceptions” and “exemptions” to the penalty. Now that the IRS has issued regulations on this element of the law, it is time to elaborate on the “exceptions” and “exemptions” that allow one to avoid the penalty. Let’s us discuss each of them individually. 

1. Religious conscience exemption – §5000A(d)(2)(A). This provision holds that any member of a recognized religious group that has historically been exempt from Social Security taxes may also be exempt under Obamacare. Tax code §1402(g)(1) defines who is exempt for purposes of Social Security taxes and that definition applies to the penalty under Obamacare. 

Code §1402(g)(1) provides that a person can be exempted from Social Security taxes if he: 

a. Is a member of a recognized religious sect or organization, 

b. Is an adherent to the established tenets, teachings or beliefs of that sect or organization, and 

c. By reason of those beliefs, he is conscientiously opposed to accepting benefits under any private or public insurance policy that would make payments in the event of death, disability, old-age or retirement or makes payments toward the cost of, or provides services for, medical care. 

The exemption is honored only if it is established that the organization to which the person belongs actually has established teachings or tenets regarding the provision of insurance, that the organization has a long standing practice of providing for the needs of their members, and that the religious organization has been in existence at all times since December 31, 1950. Code §1402(g)(1)(C)-(E). 

To establish this exemption, you must provide a certification to the health care Exchange that proves you meet all of the above elements. See: Rev. Reg. §1.5000A-3(a)(2). The Exchange is then required to issue the certificate of exemption. For more on the Exchanges, see my report, “IMPLEMENTING NATIONAL HEALTH CARE.” 

A family with minor children that meets the requirements for exemption may also exempt their minor children. However, once a child turns age twenty-one, to maintain the religious conscience exemption, the child must reapply for the exemption and attest to membership individually. See: Treasury Decision 9632, §III.A.

 

2. Persons involved in a “health care sharing ministry” – §5000A(d)(2)(B). A health care sharing ministry (HCSM) provides a health care cost sharing arrangement among persons of similar and sincerely held beliefs. An HCSM is founded on the Biblical mandate of believers to share each other’s needs. The goal is to share the health care needs of others in order to meet the rising costs of health care. 

HCSMs are non-profit religious organizations acting as a clearinghouse for those who have medical expenses and those who wish to share the burden of those medical expenses. HCSMs receive no funding or grants from government sources. HCSMs are not insurance companies. HCSM do not assume any risk or guarantee the payment of any medical bill. Twenty-five states have explicitly recognized this structure and specifically exempt HCSMs from their insurance codes. According to the Alliance of Health Care Sharing Ministries, there are now over 210,000 people participating in these ministries in all fifty states.
Examples: See  www.healthcaresharing.org   or  Medi-Share    

Section 5000A(d)(2)(B)(ii) provides that an HCSM: 

a. Must be an established 501(c)(3) tax-exempt organization,  

b. Members must share a common set of “ethical or religious beliefs” and “share medical expenses among members” in accordance with those beliefs and without regard to where the member lives or works, 

c. Must have been in existence since at least December 31, 1999, 

d. The medical expenses of its members must have been shared “continuously and without interruption” since December 31, 1999, and 

e. Must undergo an annual audit by “an independent public accounting firm” and the results of the audit must be “made available to the public upon request.” 

The regulations require that a person establish his eligibility for the exemption on a monthly basis. That is, this appears not to be an annual exemption, but must be verified “for every month of that taxable year for which they seek exemption.” See: Treasury Decision 9632, §III.B; Rev. Reg. §5000A-3(b)(2).  

It seems that the IRS has put provisions in place to make the process for achieving exemption under this provision as arduous as possible. 

3. Persons not lawfully present in the United States – §5000A(d)(3). A person who does not have lawful immigration status is not obligated to have health insurance under the law. A person falls under this exemption if he either is: a) a nonresident alien, or b) is not lawfully present in the U.S. See: Rev. Reg. §1.5000A-3(c)(2). Thus, all the illegal aliens currently in the country have no duty under the law to have insurance. But how do they claim the exemption? The regulations provide no mechanism for doing so. I suppose they will do so that the same way they currently file their tax returns: not at all. Further IRS guidance will be issued on the topic in the future. 

4. Persons who are incarcerated – §5000A(d)(4). This section provides that an individual is exempt for a month when the individual is incarcerated (other than incarceration pending the disposition of charges). The regulations provide that an individual confined for at least one day in a jail, prison, or similar penal institution or correctional facility after the disposition of charges is exempt for the month that includes the day of confinement. 

5. Those who cannot afford coverage – §5000A(e)(1). The law exempts those who cannot afford minimum essential coverage. The exemption applies only on a month-to-month basis. That is, if a person cannot afford coverage for two of twelve months, his exemption applies only to those two months. 

Insurance is considered unafforable if the premium exceeds 8 percent of “household income.” Rev. Reg. §1.5000A-3(e)(2). This amount is indexed for inflation so is likely to increase annually after 2014. The amount of increase is determined by the Department of Health and Human Services based upon a ratio between income growth and insurance costs. 

In determining the “household income” for purposes of the 8 percent cap, you are required to include in your income any amounts withheld under a salary reduction agreement, or cafeteria plan provided by an employer. While these benefits are considered not taxable for federal income tax purposes, they are included in the calculation of “household income” for purposes of determining whether your insurance coverage is “affordable.” 

What is “household income?” The phrase “household income” is defined by Rev. Reg. §1.36B-1(e)(1). Generally, the phrase means the sum of: 

a. The taxpayer’s modified adjusted gross income (discussed below); plus 

b. The aggregate modified adjusted gross income of all other individuals who— 

1. Are included in the taxpayer’s family (as discussed below), and 

2. Are required by law to file a federal income tax return under code §6012. Generally, the requirement to file a tax return is tripped by the receipt of income in excess of the filing requirements expressed in §6012. 

 Now we have to define “modified adjusted gross income.” That phrase is held to constitute adjusted gross income plus: 

            a. Tax exempt interest the taxpayer “receives or accrues” during the tax year, 

            b. Any foreign earned income that otherwise would be excluded under code §911, and 

            c. Social Security benefits that were not otherwise includable in income under code §86. 

Finally, we have to define “family” for purposes of this discussion. The term “family” is defined in Rev. Reg. §1.36B-1(d) as follows: 

A taxpayer’s family means the individuals for whom a taxpayer properly claims a deduction for a personal exemption under section 151 for the taxable year. Family size means the number of individuals in the family. Family and family size may include individuals who are not subject to or are exempt from the penalty under section 5000A for failing to maintain minimum essential coverage. 

Thus, “household income” includes not only the taxpayer’s wage or business income, but it includes his tax-exempt interest, non-taxable Social Security benefits and non-taxable foreign earned income, plus all of the same income items of every person in his household for whom he claims a dependent exemption. That can include all children up to 24 years of age or a disabled child of any age, any relative that lives with you such as a parent or grandparent, brother, sister, etc., provided they qualify as your dependent exemption on your tax return. 

The 8 percent premium cap is figured on the basis of this “household income.” In many cases, it will be substantially more than the income reported on your tax return for the period in question. My question is who made the decision that the income of other persons is available to you to pay medical expenses? The 8 percent cap is based upon all the income of the household while it is probably the case that the income of third parties is just not available to cover medical bills. For example, if your seventeen year old son makes $4,800, that will raise your “household income.” However, none of his money is available to you because he spent it all on his car and girlfriend. 

6. Those with incomes below the tax return filing requirement – §5000A(e)(2). This section provides that a person is exempt if his “household income” for the year is less than the return filing requirement under code §6012(a). The problem here is that the filing thresholds under §6012 have nothing to do with “household income.” The filing thresholds are based solely (as they most certainly should be) on individual income, since the liability for return filing and tax payment is based solely on one’s individual income. 

Even in the case of a husband and wife, the requirement to file a tax return (assuming both had income) is an individual responsibility. Married couples have the option to file a joint income tax return, but that is a voluntary election that must be made by both spouses on the return itself. Only then can one spouse be held liable for the tax owed by the other spouse. Under no circumstances can the IRS force a married couple to file a joint income tax return. 

The regulations shed no light on how this discrepancy is to be reconciled. Rev. Reg. §1.5000A-3(f)(2)(ii) simply states: 

The applicable filing threshold for an individual who is properly claimed as a dependent by another taxpayer is equal to the other taxpayer’s applicable filing threshold. 

I’m sorry to say I don’t know what that means. As near as I can tell, the determination of a filing requirement is based upon the income of all family members, added together, then applied to the code §6012 threshold amounts. Thus, a person may not have a filing requirement based solely on his personal income. But he may have a “filing requirement” when his “household income” is calculated. And while that “household income” may not then actually trip a tax return filing requirement, it would kick that person out of the exemption provision of this section. Anyway, that’s my guess. God help us. 

7. Members of an Indian tribe – sec 5000A(e)(3). Any person who is a member of an Indian tribe is exempt during the period of his membership.     

8. Those with “short coverage gaps” – sec 5000A(e)(4). A “short coverage gap” is defined as: 

…a continuous period of less than three months in which the individual is not covered under minimum essential coverage. If the individual does not have minimum essential coverage for a continuous period of three or more months, none of the months included in the continuous period are treated as included in a short coverage gap. Rev. Reg. §1.5000A-3(j)(2)(i). 

Thus, your coverage gap must be less than three months during the year. There is no partial exemption if your coverage gap exceeds two months. Moreover, the coverage gap “is determined without regard to a calendar year in which months included in that gap occur.” Rev. Reg. §1.5000A-3(j)(2)(iii). Thus, if you have a coverage cap in December of 2014 and January – February of 2015, you have three months of gap in coverage and may be subject to the penalty. 

9. Those with a hardship waiver – §5000A(e)(5). A “hardship” waiver certificate is issued by the Exchange to the individual and certifies that the person “has suffered a hardship affecting the capability to obtain minimum essential coverage.” Rev. Reg. §1.5000A-3(h)(2). The term “hardship” for this purpose is not defined in the Internal Revenue Code. Rather, it’s in the heath care regulations, at 45 CFR §155.605(g). 

The application for a hardship waiver must be made to the Exchange based upon the forms and procedures offered by the Exchange. The hardship waiver applies if the Exchange determines that the individual: 

a. Experienced financial or domestic circumstances, including an unexpected natural or human-caused event, such that he had a significant, unexpected increase in essential expenses that prevented purchasing coverage under a qualified health plan, 

b. Would have experienced serious deprivation of food, shelter, clothing or other necessities due to the expense of purchasing a qualified health plan, or 

c. Experienced other circumstances that prevented purchasing coverage under a qualified health plan. 45 CFR §155.105(g)(1)(i) - (iii).

 The hardship waiver is determined by the Exchange based upon the individual’s “projected annual household income.” Moreover, the individual’s eligibility for an employer-sponsored plan is also considered. Ibid, at §(g)(2). 

As discussed in more detail in the following article, there have been many delays in implementing and enforcing Obamacare. Both the employer mandate and individual mandates have been pushed back. Thus, the penalties are not currently being enforced. Because this issue continues to be in a state of massive flux, I will stay on top of it as necessary.

 

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 March 2017 Update:

            Link to Affrodable Care Act Instructions for  Form 8965 (2016)  

Article taken from February 2014 T  issue of "Pilla Talks Taxes."  

*Portions modified  March 2017

      

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PILLA TALKS TAXES - Featured Article
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FIVE THINGS EVERY CITIZEN NEEDS TO KNOW ABOUT IRS CONTACTS

 Simple Signs That You May be Targeted by Scammers 

It is for your defense and protection that I offer the Five Things Every Citizen Needs to Know About IRS Contacts. If you know and understand these five rules about how the IRS deals with the public, you will never be victimized by a phone call, e-mail or text message scam. Pay close attention to what I say here. 

In its interactions with the public, the IRS will NEVER  

1. Use e-mail or text messages for any reason. This is true whether the IRS is gathering needed information to process your return, to notify you of a tax audit, or to follow through with the collection of a delinquent tax. Even in cases where you have an ongoing relationship with a given IRS official, such as occurs in tax audit cases that might take many months to resolve, they will not do business through e-mail or text messages. The IRS will allow you to fax information to them (in which case a fax number will be provided either in writing or verbally from the agent personally) but the IRS will not interact through e-mails and text messages. If you think you owe the IRS money but are not sure, obtain your IRS transcripts directly from the agency. You can call the IRS’s Automated Collection Service directly at 800-829-1040 to do so, or consult counsel who can do so. That way, you’ll know precisely what you owe, if anything, and for which years. 

2. Call a person in the first instance while in the act of collecting taxes. In most cases, the calls made by scammers purporting to collect taxes are the first form of contact or notice that a person allegedly owes taxes. This will NEVER happen. If the IRS decides that you owe taxes without first conducting an audit (which is very possible and happens often), the agency will notify you in writing in the form of some kind of correction notice. See: The IRS Problem Solver. You have the right to respond and object to any such notice. If you are engaged in an audit, the case must be finalized before theres any assessment of tax liability. In that situation, you will discuss the matter with the auditor and potentially his manager and even an Appeals Officer if you decide to challenge the preliminary decision. See: How to Win Your Tax Audit. All of this happens well before any demand for payment is ever made. It is possible to deal with a tax collector, known as a Revenue Officer, via the phone. But even in that situation, such phone contact occurs only after a series of written notices and letters have been sent. Any letter sent by a Revenue Officer will give you his name and contact information, including a fax phone number. And the Revenue Officer will be based in a local IRS office, not some place in Washington because “the case was transferred.” In NO CASE will you be contacted by phone in the first instance by an actual IRS employee demanding payment in forceful and intimidating terms. 

3. Threaten to file a lawsuit if taxes arent paid today. If you have been delinquent on your taxes for more than a decade, AND if you have failed to respond to all the IRSs collection notices, AND if youve been working with specific tax collectors for years but have failed to pay, make arrangements to pay, or otherwise manage your tax delinquency, AND you have substantial equity in assets, it is POSSIBLE (though not LIKELY) that the IRS will sue you to obtain a judgment. This is a so-called section 7403 action, which I discuss in my book, TaxpayersDefense Manual. In such a suit, the IRS seeks to reduce its assessment to a judgment and then execute that judgment against your property. Chiefly, the IRS uses this tool to reach the equity in your personal residence because the agency is not allowed to seize your main home through administrative collection action. See: How to Get Tax Amnesty for my discussion of all assets and income that are exempt from IRS levy. Having said that, the IRS will NEVER call you on the phone (especially in the first instance; see point 2 above) to threaten a lawsuit. Even in cases where you have done one or more of the things I list in the first sentence of this paragraph, the IRS will NEVER call you to say that unless you pay x amount today, they will file a suit. Such discussions may possibly (but not likely) come up in your conversations with the Revenue Officer, but again, this will NEVER come in the form of a phone call from somebody youve never had contact with in the past. 

4. Demand that taxes be paid in a certain way. Even if you do owe taxes, and even if you are dealing with a Revenue Officer, and even if youve been interacting with that officer for some time, the IRS will NEVER demand that you pay taxes in a certain manner or by using a specific procedure—and most certainly will not take payment in the form of gift cards or PayPal credits! Moreover, the IRS will NEVER ask for debit or credit card numbers over the phone. For example, the IRS will not state that you must pay by debit card or wire transfer, and then ask you for the debit card number. You have the right to pay your taxes in any manner that you want, and at any IRS office thats convenient to you, including using the IRSs electronic payment system (EFTPS) on its web site. A sure sign of an absolute scam is a demand that you go to your bank “right now” to wire-transfer money, or to purchase a gift card. In fact, the IRS cant even take a payment via credit or debit card over the phone. To make a payment in such a fashion, you must go online to the agencys EFTPS system. Even in the case of a Direct Debit Installment Agreement (where the money is taken in monthly payments automatically from your bank account), this must be set up either with a Revenue Officer, Appeals settlement officer (through a Collection Due Process appeal), or the IRSs ACS toll-free phone numbers. The very fact that youre being asked to pay in a certain way right now—today—over the phone—is absolute proof of a scam. 

5. Threaten to arrest you if dont pay taxes today. People are naturally frightened by the IRS and are quite frightened by the idea of going to jail. And while it is certainly true that some people will end up in jail over their dealings with the IRS, the fact is, you have a better chance of being eaten by a shark than you do of going to jail for a tax crime. Thats why I have an entire chapter in my book, How to Get Tax Amnesty, entitled, “Am I Going to Jail?” In that chapter I make it perfectly clear exactly what kind of person runs the risk of going to jail and why. And even if you fit the profile described there of a person at risk of going to jail, the IRS will NEVER call you on the phone (especially in the first instance) and tell you that if you do not pay a certain amount of taxes right now, using a certain method of payment (see paragraphs 2 and 4 above), they will send a sheriff or the police out to arrest you immediately. If you are targeted for a criminal investigation, the IRS will contact you in person, in the form of a visit from two (not one) Special Agents. These are the IRSs criminal investigators. They will read you your “Miranda” rights, explaining that you have the right to counsel and that anything you say will be used against you. That is absolutely not going to happen over the phone. 

 

Keep these five rules in mind, and you will never be robbed by IRS impersonators. 

Article taken from February 2017 THE TAX SCAM Special Report  issue of "Pilla Talks Taxes."

      

LOOKING TO STAY CURRENT ON THE LATEST TAX CHANGES?

Dan Pilla' monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS, exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!

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ARTICLES FOUND IN THE
February 2017 PILLA TALKS TAXES ISSUE: 

 

SPECIAL REPORT: THE TAX SCAM ISSUE 

 

IRS RELEASES NEW FORM FOR ID THEFT VICTIMS

Procedure May Help Clean Up the Mess

 

TAX PROS TARGETED BY E-MAIL SCHEMES

The Latest Wave of Cyber-theft Pointed at Accountants and Tax Preparers

 

IDENTIFYING CURRENT TAX SCAMS

Summary of the Most Recent Schemes Afoot

 

FIVE THINGS EVERY CITIZEN NEEDS TO KNOW ABOUT IRS CONTACTS

Simple Signs That You May be Targeted by Scammers

 

 

 

 

 

PILLA TALKS TAXES - Featured Article
_________________________________________ 

END OF YEAR TAX PLANNING

9 Simple Steps That Can Cut Taxes and Pain

With the end of the year fast approaching, you’re probably wondering what you might do to cut your taxes. If you wait until April to start thinking about this, it’s just too late. Here are some ideas to get you moving in the right direction now. 

1. Pay state income taxes before December 31.

Many people wait until April 15 to pay their state income taxes, since that’s when they file their state tax returns. However, if you pay your state income taxes in 2018, you can’t claim the deduction for those taxes until you file your 2018 income tax return in 2019. Thus, you have to wait an entire year before getting the tax benefit of the expense. By paying your state taxes now, you get a deduction for those taxes in 2017, one year sooner than you’d otherwise realize. 

2. Review your wage withholding or estimated payments.

Eighty-five percent of all taxpayers get a tax refund when they file their tax returns. The average refund is about $3,000. If you get a tax refund, it doesn’t mean the government got religion and decided to give you free money. It means you paid more than you owe. If you got a refund in 2017, you need to examine your withholding situation going into 2018 to make sure you don’t overpay. 

Whether you’re an employee or a self-employed person, sit down now and do some preliminary calculations on your tax liability. Figure out if you’ve overpaid. If so, you need to adjust Form W-4 (for wage earners) or your estimated payments (for self-employed people). 

Keep in mind that no law requires you to pay more taxes than you owe. For withholding purposes, you avoid under-withholding penalties if you pay either 100 of last year’s tax (2016) or 90 percent of this year’s tax (2017), whichever is less. Use that yardstick to guide you in adjusting your withholding for 2018. 

3. Count your money now.

Each year, millions of people are blindsided come April 15 with surprise tax liabilities they can’t pay. Don’t wait until March or April to start figuring your tax, especially if 2017 was a particularly good year. 

It is important to sit down now and examine your 2017 financial situation. If there were substantial changes to your economic condition, that may increase your tax burden. If you don’t have the money to cover the tax, you’ll wind up as one of the millions facing enforced tax collection. 

Get a good handle on what you’re going to owe. If you figure it out now, you have four and a half months to put a plan together to pay the tax. If you don’t, you could be hit over the head in April. In my experience, it’s that kind of shock that causes people to start making critical mistakes in how they handle their tax burdens. Often, it leads to years of hassle and harassment from the IRS. 

4. Review your financial portfolio.

One of the biggest problems with our tax system is the unfair treatment it affords to investment gains and losses. If you win with your investment, the IRS stands next to you with its hand out to get its “share” of your success. If you lose, you are, for the most part, on your own. 

The reason is that capital gains are subject to tax in their entirety in the year realized. However, capital losses are subject to a $3,000 cap in a given year. For example, if you lose $15,000 in an investment, you can only deduct $3,000 at time. At that, it takes five years to fully write off your loss. 

This is true unless you have both capital gains and capital losses in the same year. In that case, you offset your gains against your losses, plus you can take an extra $3,000 of loss. Suppose you have $10,000 of capital gains and $12,000 of losses. The first $10,000 of losses are offset against the gains. Then, you get the additional $2,000 of losses as a deduction that can offset other income. 

In order to best utilize this rule, you should consider selling investments that are down in 2017 so that you can offset the loss against any investments that made money during 2017. This allows you to effectively increase the allowable capital loss deduction, thereby recovering your losses much faster than you otherwise would. Talk to your investment advisor about the merits of this strategy in your case. 

5. Consider making equipment purchases.

If you own a small business, now is the time to consider purchasing any equipment you might need. A special tax code section creates an advantage for such investments. 

Code §179 allows you to claim a full deduction for the cost of business tools and equipment placed in service in the year purchased. Ordinarily, such cost must be depreciated over its useful life. For example, if you purchase a copier for $5,000, you would have to depreciate it over three years. In that case, you get a deduction of $1,667 for each of three years. But under §179, you can fully expense up to $510,000 of equipment in 2017. 

Now is the time to take advantage of this deduction, especially if your income was unusually high in 2017. The best way to offset that income for tax purposes but still get the benefit of the money is buy equipment you need for your business. 

6. Fund a Health Savings Account.

One of the best-kept secrets in tax planning is the Health Savings Account. This allows you to set aside money earmarked to pay medical expenses not covered by insurance (other than the insurance policy itself). By placing the money in a specially designated savings account, the contribution to the account is tax deductible, up to certain limits. 

It works much like an IRA or 401(k), except that you don’t have to pay taxes on the money when it’s distributed, provided you use it for medical expenses that are not covered by insurance. You can fund this account right up to December 31, 2017, and get a deduction for the money you put in, even if it’s not used for medical expenses in 2017. What’s more, any amounts left in the account at the end of the year carryover to 2018 and remain in your account, under your control. You don’t lose the money. It’s always available to you. 

7. Fund a retirement account.

An IRA, 401(k) or other retirement account can be funded anytime during 2017, and you get a deduction for the contribution (within limits) in 2017. In fact, for most retirement accounts, you have up to April 15 of the following year to contribute. You can get a deduction for the prior year simply by designating the contribution to apply to the prior year. That means a contribution made in 2018 can still apply to and be deductible in 2017. 

8. Consider restructuring your business.

There are millions of people operating small businesses in the form of sole proprietorships. And while this is probably the best way to start a new business, it may not be the best way to continue an existing business. Various forms of business entities are available, including a small business corporation or partnership. Depending on the nature of your business and non-tax considerations, one or more of the available entities might be a better idea than continuing as a sole proprietorship. January 1 is generally the most convenient time to change the structure of an existing business.

 9. Catch up on your charitable contributions.

If you make it a practice to give generously, make another contribution before December 31. This gives you further opportunity to cut taxable income and help those in need at the same time. 

Note that you must have a contemporaneous acknowledgement from the donee organization for contributions of $250 or more. This applies to one-time contributions, not a total of contributions to a given organization over the year. If you don’t have the proper acknowledgement in hand by the time you file your tax return, the deduction is not allowed, even if you have your canceled check and even you get the statement later. That’s why they call it a “contemporaneous acknowledgement.”

 

How to Get More Help 

 

If you need more help with end-of-the-year tax planning, you must consult one of the professional members of my Tax Freedom Institute. Click Here for a list of the current consulting members.

 

This is  an article taken from November December 2017  issue of "Pilla Talks Taxes."  
Newsletter subscribers can read and download the entire issue by logging in at 
http://taxhelponline.com/subscriber-login.html

      

LOOKING TO STAY CURRENT ON THE LATEST TAX CHANGES?

Dan Pilla' monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS, exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!

An email address is needed to recieve this newsletter.  MORE INFO

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ARTICLES FOUND IN THE LATEST 

PILLA TALKS TAXES ISSUE:

 

TAX REFORM UPDATE
       Senate Passes the Tax Bill 

 

END OF YEAR TAX PLANNING
       9 Simple Steps That Can Cut Taxes and Pain

 

THE HOME OFFICE DEDUCTION
      Understanding the Basic Rules
-by MacKenzie C. Hesselroth,EA 

  

 

 

 

Missed a prior featured article?

Here are links to some of the favorites:

FIVE THINGS EVERY CITIZEN
NEEDS TO KNOW ABOUT IRS CONTACTS

 

LEVY OF SOCIAL SECURITY BENEFITS

 

HOW LONG DO I KEEP TAX RECORDS?

 

CHANGE IN POLICY ON
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Laws Pertaining to Moving Your Money
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WHAT EVERY CITIZEN NEEDS TO KNOW 
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The Tax Consequences of Taking Your 401(k) or IRA  

 

"I'M FROM THE IRS... -And You're Going to Jail!"

 

PASSPORTS AND THE IRS
  They Have More in Common Than You Might Think

 

AVOIDING PENALTIES UNDER OBAMACARE

 



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The tax audit environment has changed considerably in the past ten years. That’s why it’s time for a book that talks about audit defense strategy in the modern world. My new book does just that. It’s called, How to Win Your Tax Audit, an Insider’s Guide to Successfully Negotiating with the IRS.

What follows where is an excerpt from the book, which deals with the assessment statute of limitations. This except is taken from chapter 8 of the book, which is entitled “Understanding Essential Tax Audit Rights.” What you see here is just a small taste of the mountain of hard, timely and effective information you’ll get from How to Win Your Tax Audit. This is vital information every taxpayer and tax pro needs to know.  

 

PILLA TALKS TAXES - August 2014  Featured Article

ESSENTIAL TAX AUDIT RIGHTS

The Assessment Statute of Limitations  

The assessment statute of limitations may be suspended if both you and the IRS agree in writing to a suspension. The agreement is formalized on Form 872, Consent to Extend Time to Assess Tax, otherwise known as an assessment statute waiver. Once executed, the waiver extends the assessment statute until the date shown on the form.

It is common for the IRS to ask a person to sign Form 872 while an audit is pending in order for the agency to have more time to assess the tax. The statements agents make when asking for this waiver are almost always wrong and intended to mislead. Let me give you some background.

Suppose you are under audit for tax year 2011. The return was filed on time in April 2012 so the IRS has until April 15, 2015 (three years from the due date) to complete the audit and make an assessment. At some point during the fall of 2014, the agent asks you sign an assessment statute waiver, Form 872. The agent states that the IRS needs at least ninety days to process a closed audit case and since the statute is coming up in April 2015 and the audit is still not complete, they need more time. A signed Form 872 gives them the time needed.

This statement is accurate so far as it goes. The IRS does require a window of time for a completed audit to be reviewed and all the closing paperwork to be processed. The ninety-day timeframe for doing so is common. However, it is the next part of the agent’s presentation that is false and misleading.

In order to pressure you to sign Form 872, the agent tells you that unless you sign it, the IRS must: 1) make its decision based upon the information already in the file, 2) that you will have no further opportunity to present information and arguments, and 3) you will lose your appeal rights. Each element of this statement is flat wrong. Let me explain why.

As to the claim that you lose your appeal rights, the fact is the IRS cannot assess any additional tax without first mailing a Notice of Deficiency. I discussed this earlier, explaining that an NOD is required before any income tax assessment can be made and that the NOD gives you the opportunity to appeal your case to the Tax Court. The Tax Court, not some auditor, then makes the determination as to what you owe, if anything.

Upon filing a petition with the Tax Court, the IRS then involves the Office of Appeals in an attempt to resolve the case without the need of a trial. In 100 percent of the audit cases before the Tax Court, the file is sent back to Appeals with instructions to work with the taxpayer to negotiate a settlement. Moreover, while your case is in Tax Court, you have every right to provide whatever additional information, documents, evidence and arguments are necessary to support your case. There is no limitation on your right to do so. The reality is that 97 percent of all Tax Court audit appeals are settled without a trial. So it is flat not true that you will lose your rights to appeal and to provide more information if you do not sign the assessment statue waiver.

What is true (but not explained) is that the audit appeal path changes if you do not sign the waiver. The usual appeal path is this: IRS issues the final audit determination. You then have thirty days to appeal by filing a protest letter, which causes the case to be sent to the Office of Appeals. If you reach agreement there, the case is closed. If not, the Appeals Office mails a Notice of Deficiency, which then gives you ninety days to file a Tax Court Petition. By filing the petition, the case is resolved through the Tax Court process. Signing Form 872 at the audit level means this appeals path will be followed.

But if you do not sign the Form 872 at the audit level, the IRS will simply mail the Notice of Deficiency to keep the statute of limitations from expiring. Thus, there is no thirty-day letter and there is no intermediate trip to the Appeals Office. However, by timely filing a petition with the Tax Court, your case is sent back to Appeals for full consideration and settlement negotiations, and as stated above, the likely full settlement of the case. While working with the Appeals Office, you have every right to provide all the information, documents, evidence and arguments necessary to support your case. There is simply no restriction on this. Thus, you get an appeal but follow a different route to get there.

So question becomes, “Do I sign Form 872 or not?” I am asked this regularly. The answer is, “It depends.” I have put together a list of factors to consider in determining whether to sign the waiver or not. Let me discuss them here.

Consider signing the waiver if:

  • Your auditor is reasonable, understanding, appears to be—or in fact is— willing to work with you to arrive at the correct tax liability in your case, rather than simply trying to get more money;
  • You are dealing with simple issues and you have solid evidence to support your case. In that situation, you can expect to resolve the case without having to go to Tax Court or even the Office of Appeals. If you can avoid both of these steps, you considerably shorten the time it takes to ultimately resolve the problem; or
  • You are under audit for multiple years but the IRS wants a wavier on just the earliest year. In that case, you might want to maintain continuity of the audit so that one tax year is not following a different path from the other tax years.
  • Even if you decide to sign a waiver, understand the difference between Form 872 and Form 872-A. Form 872 is a fixed date waiver. It expires on the date expressed in the form itself. Form 872-A is an open-ended waiver. It remains in effect until you revoke it by submitting Form 872-T, Notice of Termination of Special Consent to Extend Time to Assess Tax. Form 872-A has an advantage in that you can terminate it at any time, whereas Form 872 is good until the date stated in the form.
  • Signing a waiver does not have to be a “take-it-or-leave-it” proposition. You might consider negotiating the terms of the waiver. For example, suppose there is one year left on the assessment statute and the IRS asks for a waiver. At that point, I would suggest to the agent that we work hard for the next six months to get the audit completed so there would be no need for either a waiver or an appeal. Point out that you are willing to provide whatever documents, etc., are necessary to get the matter resolved. If, after six months, the matter is still not resolved, you will consider signing a waiver at that time. As another example, suppose the IRS asks for a one-year waiver at a time when there are just four months left on the statute. You might suggest that you waive the statue for just six months because you do not want the matter to linger for another year. You want to get it resolved. You can also suggest using Form 872-A rather than Form 872. Recall that with an 872-A, you have the right to terminate the waiver at any time.

Consider not signing the waiver if:

  • The assessment statute expiration date is very close. If there are fewer than six months left on the statute, it is possible the IRS simply cannot get the paperwork done in time to beat the expiration date. And if even they do beat it, you still have your appeal rights as explained above;
  • You are dealing with an auditor that is unreasonable, does not know the law, repeatedly demands documents already provided, or otherwise makes it clear that she is just working to get more money. By not signing a waiver, the case will be taken from the auditor when you file your Tax Court petition
  • You wish to pressure the IRS to settle the case. Most people cringe at the idea of filing a case with the Tax Court, believing that the IRS will go harder on them for filing an appeal then otherwise might be the case. The opposite is true. In the typical audit scenario, the more you fight, the better deal you will likely make for yourself. Once the case is in Tax Court, the pressure is on the IRS to settle. Because there are tens of thousands of cases filed with the Tax Court each year, the IRS simply cannot litigate each one fully through the trial process. They have to settle these cases and they work hard to do it;
  • You wish to speed up the process. Often, the IRS asks for at least an additional year on an assessment statute waiver. By not signing, the case will end up in Tax Court. It is then assigned to an Appeals Officer who must make the case a priority precisely because it is a Tax Court case. This can often speed the process of settlement because you bypass the one-year extension the IRS asks for, the additional time spent with the auditor, and you skip the intermediate appeals step.

Want more information on this book?   CLICK HERE

 


 

ALSO FOUND IN August 2014 ISSUE OF PILLA TALKS TAXES:

THE TEN MOST IMPORTANT TAX CASES
(In My Humble Opinion)
by Paul R. Tom

ASK THE EXPERT
Dan Pilla Answers Readers Questions

     

 

Dan Pilla' monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS, exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!

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PILLA TALKS TAXES - Special Tax Time  Article

FIVE THINGS TO DO BEFORE APRIL 15

Strategies to Cut Taxes and Avoid Hassle

 

 To help reduce the pain of tax filing season, I’ve marshaled a list of five critical things to keep in mind as the day of reckoning bears down. Let’s just go down the list.

 

1. Get the proper records for your charitable contributions.


For years, people have been getting blindsided by a little-known recordkeeping requirement for charitable contributions. This hitch could cost you thousands of dollars in lost deductions if you don’t have the proper paperwork. What you need is simple but often overlooked.

The law requires that you have a “contemporaneous acknowledgment” of your contributions in hand before the due date of the return claiming the contributions. The acknowledgment must be in writing and must come from the charitable organization to which you gave money. The acknowledgement must state:

·  The amount of your gift,

·  The date of the gift and most importantly,

·   Whether you received anything of value in return for your gift. If so, the value of the item received must be declared.

If nothing was received in exchange for the gift, the statement must show that you received only an “intangible religious benefit.” 

This rule applies to one-time contributions in excess of $250 to any one organization. It DOES NOT apply to the total of contributions made over the year. The idea behind the law is that you cannot claim a deduction for the value of any tangible benefit you receive in exchange for a gift. 

For example, suppose you contribute $250 to your church and in exchange, you get four $25 tickets to the annual benefit dinner. You gave $250 but got back tangible benefits worth $100. In that case, you can only deduct $150 (250 – 100 = 150), not the entire $250 gift. 

The real key to this rule—and where many people get tripped up—is that the acknowledgment must be in hand before the due date of your tax return. It is NOT good enough to obtain an acknowledgement later. Even if you show canceled checks to prove every nickel of your deduction and even if you manage to come up with an after-the-fact acknowledgment, your deduction will be disallowed if the acknowledgement does not predate the return’s due date.

 

2. Contribute to a new or existing IRA.
You have until April 15 to contribute to a new or existing IRA.

 

If you contribute before April 15, you can designate it to 2014’s tax return. This way, you still have the opportunity to lower last year’s taxes even though 2014 is long gone.

This is significant for those facing a bill this April 15 because the contribution can cut your taxes substantially. For example, single persons and those married filing separate returns can contribute up to $5,000 to a traditional IRA (there is no deduction for Roth IRA contributions) and get a deduction ($6,000 for a person 50 years of age or older). In the case of married filing jointly, each spouse can contribute up to $5,000, for a total of $10,000 (or $6,000 each if both are 50 or older). Now look what happens when you balance the tax deduction for the contribution against a looming tax debt.

Suppose you’re married filing jointly. Suppose further your combined federal and state effective tax rate is 35 percent. If you contribute the maximum of $10,000, this move saves you $3,500 in taxes.

To determine exactly how this strategy might benefit you, just take your combined federal and state tax rates (I used 35 percent as an example) and multiply that percentage by the amount of your contribution. In my example: $10,000 x .35 = $3,500. The product ($3,500 in my example) is the amount of tax reduction realized.

The best part of it is while you have to cough up cash to make the deal, the money is still yours. Unlike paying taxes, your IRA money is not down the tubes (assuming it’s invested correctly!).

 

3. Take steps to audit-proof your tax return. 

 

For years, I’ve recommended that people audit-proof their tax returns. This is even more important now as the IRS’s audit machine moves into high gear. A critical step in the audit-proofing process is to use affidavits to prove what I call the “intangible elements” of certain deductions.

An affidavit is nothing more than a detailed letter of explanation that you have notarized. It sets forth specific facts relative to a situation. The facts form the foundation of proof necessary to sustain a deduction. An affidavit is critical when a deduction requires proof of something for which there is no paperwork. Let me give you some common examples.

·        Home office - The home office deduction requires proof of two issues that can only be proved with an affidavit. The first is the “regular and exclusive use” test. To claim a home office deduction, you must use the space in your home “regularly and exclusively” for business purposes. Next, you must show that tasks most important to the success of your business are performed there, or, that you meet regularly with customers, clients or patients in your home office. Because of the nature of these facts, you’ll never have a receipt or canceled check to prove them. Only your testimony can prove them.

·        Business miles - To be deductible, the miles you travel in your auto must be related to business. You should keep a mileage log describing the date and distance of your travel, the name of the person visited and the business purpose of the trip. There is never a receipt showing the business purpose for your meeting. Your testimony through an affidavit is the only way to fill this gap.

·        Non-cash charitable contributions – For all non-cash charitable contributions, you must prove the fair market value of the item contributed. Your deduction is based on the item’s fair market value at the time of the gift. Many people give children’s clothing, toys, used furniture, etc. Because it is virtually impossible to obtain a reliable appraisal of such items, the only way to prove fair market value is through an affidavit. Your affidavit must show a description of the item, its original price, its current condition, replacement cost, etc., and your reasonable estimate of fair market value.

By having your affidavits notarized before filing your return, you fix in time the fact that these contributions occurred during the year you claimed them. This gives you an airtight document package to prove your deductions if challenged later. For more details on creating affidavits and the audit-proofing process in general, please see my books, How to Win Your Tax Audit and The IRS Problem Solver.

 

4. Pay the taxes you owe on time. 

 

While this might seem simple, many people fall into a hidden trap. Each year, millions of citizens who cannot pay on time file Form 4868, Automatic Extension of Time to File Form 1040. That form gives you six additional months to file your tax return. However, it does not apply to the payment of taxes.

Even though Form 4868 pushes your filing deadline to October 15, you still have to pay what you owe by April 15. If you do not pay by April 15, the IRS will charge the late payment penalty and interest, regardless of the filing extension. That penalty can be up to 25 percent of the delinquent tax, plus the IRS will charge interest on both the tax and penalty.

If you can’t pay the tax on time, don’t use Form 4868. However, the next section of this article will help you.

 

5. Use the proper extension form if you can’t pay on time. 

 

If you can’t pay on time, there are two alternatives to help you. Use either or both, depending on your situation. In any event, file your tax return on time to avoid the additional failure to file penalty.

·        IRS Form 1127 - This is one of the IRS’s best-kept secrets. It is the Application for Extension of Time Pay Income Taxes. This is not a filing extension. It is a payment extension. However, it is not automatic. To have it approved, you must show that you took reasonably prudent steps to provide for the payment of your taxes but due to circumstances beyond your control, you cannot pay on time. Once approved, you can get up to six additional months to pay the tax—without penalties (but interest on the unpaid amount continues).

·        IRS Form 9465 - This form is the monthly installment agreement request. Use it if you cannot pay what you owe within six months. The form asks for the monthly installment payment you propose. This process is not automatic either. However, if you: 1) owe less than $50,000, 2) can pay the bill in full within 72 months, and 3) had no prior installment agreements, you qualify for the streamlined installment agreement rules. This means the IRS accepts just about any terms that will full pay within 72 months. For more details on this process, please review my book, How to Get Tax Amnesty. 

By using either strategy, you avoid the horrors of enforced collection. By doing nothing, you invite liens, levies and seizures of property.

 

If you need help preparing your  income tax return or want professional assistance with tax planning for next year, I strongly urge you to contact the Tax Freedom Institute member nearest you. Click below for information on a guide to hiring a tax professional and a list of members and their contact information.


                                                                  Tax Freedom Institute Contact List

 


      

 

Dan Pilla' monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS, exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!

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ENDS OF YEAR TAX PLANNING
     9 Simple Steps That Can
Cut Taxes and Pain
    Read More 

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ARTICLES FOUND IN THE LATEST 
PILLA TALKS TAXES ISSUE:

TAX REFORM UPDATE
       Senate Passes the Tax Bill 

END OF YEAR TAX PLANNING
       9 Simple Steps That Can Cut Taxes and Pain 

THE HOME OFFICE DEDUCTION 
Understanding the Basic Rules
       -by MacKenzie C. Hesselroth, EA


 

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