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Archive for October, 2012

IRS Gives Additional Time to Taxpayers and Preparers Affected by Hurricane Sandy; File and Pay by Nov. 7

October 31st, 2012

WASHINGTON — The Internal Revenue Service today announced it is granting taxpayers and tax preparers affected by Hurricane Sandy until Nov. 7 to file returns and accompanying payments normally due today.

The relief applies to taxpayers and tax preparers in an area affected by Hurricane Sandy or otherwise impacted by the storm that hit the Mid-Atlantic and Northeastern United States this week.

This relief primarily applies to businesses whose payroll and excise tax returns and payments are normally due today. No action is required by the taxpayer; this relief is automatic. Regular federal tax deposits are due according to current rules. However, the IRS notes that if taxpayers or tax practitioners receive a penalty notice for this period, they can contact the IRS at the number on the notice to request penalty abatement due to reasonable cause on account of the storm.

IRS expects to grant additional filing and payment relief as qualifying disaster declarations are issued by the Federal Emergency Management Agency (FEMA). Details will be posted on the Tax Relief in Disaster Situations page on IRS.gov.

Tax Issues in Regard to Divorce Settlements

October 30th, 2012

Attorneys and accountants should recognize the common tax issues that occur in a divorce. These issues include filing status and dependency matters, alimony and child support, and property settlements. Each of these issues impact how a settlement is reached in each individual case.

Filing Status

It is imperative that parties to a divorce have a clear and concise understanding of what filing status is available to them during the divorce and after they divorce. Filing status for tax purposes is determined on the last day of a tax year, gener­ally December 31. During the divorce proceed­ings, a couple – although they may be living in separate households – for tax purposes may still be considered married at year end.

There are four filing statuses an individual may use while going through a divorce. Married individuals may choose between married filing jointly, married filing separately or head of house­hold if the requirements to choose this status are met. Divorced individuals have a choice between single or head of household. In making the fil­ing status choice, it will be determined based on whether the divorcing couple is still married on the last day of the year.

A marriage is considered terminated for tax purposes when a final decree of divorce has been issued by a family court or if the family court has issued a final decree constituting a legal separa­tion under state law. Therefore, if a legal decree has not been issued, a taxpayer may file either married filing jointly or separately.

Married filing jointly generally produces the lowest tax burden; however, it will be crucial that both parties cooperate in providing information to provide a complete and accurate tax return. If there is underreporting of income, the Internal Revenue Service could assess underpayment penalties and interest in addition to tax. In addition, if a divorce is finalized toward year end, both parties should review whether it may make sense to have the divorce become final in January so they can file a return using the married filing jointly status, as it may be advantageous to both parties.

After the divorce, an individual who has cus­tody of a child may qualify to use the head of household filing status. To qualify to use head of household status, the taxpayer must meet the following requirements:

Be unmarried for tax purposes;

a. Maintain a home for an unmarried

b. qualifying child for more than half of the year. That home must be the child’s principal home; and

c. Pay more than half of the cost of main­taining the home

In addition, to qualify for head of household status, the custodial parent does not have to claim a dependency exemption for the child.

A planning tip for practitioners to consider, if there is more than one child from the marriage, is to include language in the divorce agreement that suggests each spouse is the custodial parent of one child so both parties can qualify to use head of household status.

Child-Related Deductions and Exemptions

When children are part of a dissolving marriage, there are a few issues that need to be considered and addressed. The following is a list of custody decisions:

a. Dependency exemptions for custodial and non-custodial parents

b. Child care credits

c. Child tax credits

d. Medical deductions for dependent children

e. Education tax credits – Hope and Life­ time Learning credits

There are certain tests that need to be satisfied to have a child qualify for a dependent. The fol­lowing requirements must be met:

a. Residency

b. Relationship

c. Age

d. Self-support

Custody is determined by the parent who has physical custody of the child for the greater por­tion of the year. In some cases, it may be more advantageous to allow the spouse with a higher income tax rate to claim a child as a dependent if they meet the other income limitations to claim the child as a dependent.

Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents) may need to be included in a non-custodial parent’s return. However, a tax law change in the Work­ing Families Tax Relief Act of 2004 no longer requires Form 8332 if the non-custodial parent is entitled to the child exemption

Many of the above exemptions, deductions and credits have income limitations associ­ated with them. Each individual’s tax situation should be carefully analyzed to produce the best tax result.
Property Settlements

A divorcing couple have to decide how to divide property. Many factors are involved with this decision. First, ownership needs to be determined, as assets are accumulated before and during the marriage. Property settlements incident to a divorce are tax free transfers under Internal Revenue Code 1041. Therefore, no gain or loss occurs that triggers a taxable event. Basis of the property is important, as well as whether any liability is attached to an asset when a di­vorce occurs. In the event property received in a divorce is sold following the divorce, a taxable event could occur if a gain is recognized. A spouse who receives an asset with a low cost basis compared to its fair market value (for example, shares of stock that have appreciated) needs to be informed of the tax liability that they assume by receiving this type of asset.

Planning for the Marital Home

A personal residence frequently is one of the most valuable assets of a couple. Careful consid­eration should be exercised when deciding who receives this asset. As real estate prices have increased, some couples may have a gain on the sale of their home. While a law change in 1997 helped ease this burden, it should be considered in the property divisions. Married couples who sell their personal residence do not recognize a gain on the sale if the gain is under $500,000, as long as the residence was their principal residence in two of the prior five years. However, single individuals or those filing married filing separately can defer only $250,000 of the gain. There is no step up in the cost basis of the home at the time of the divorce.

Alimony

Another consideration in a divorce is whether alimony may occur. The spouse who receives alimony has taxable income. The spouse who pays the alimony receives a deduction. Child support is not included in income, nor is a deduction al­lowed for its payment. The spouse who receives alimony may qualify to contribute to an IRA (individual retirement account). An allocation between alimony and child support will need to be evaluated in each individual situation.

Taxes and Tax Carry Forwards

A well-written decree should clearly state each spouse’s responsibility in regard to the tax liabil­ity, and a clause should be included in regard to indemnifying each spouse to the other spouse’s tax liability. In addition, the decree should include the division of how the couple should handle income, capital gains or losses, mortgage interest, real estate and property tax, and charitable contribu­tions in the year the divorce is finalized so they may use it for their tax returns. Also, if there are any tax carry forwards – for example, a capital loss carry forward, a charitable contribution carry forward, a net operation loss carry forward or a minimum tax carry forward – these tax attributes must also be considered. In the event a couple owned passive income producing property, there could also be suspended passive activity losses that could be carried forward to another year. Generally, a tax carry forward is awarded to the party who received the property. Many planning opportunities arise in regard to property settle­ments regarding this type of property.

As a reader, one can see that there are many tax-related issues that arise from a divorce. It is important that any couple who goes through a divorce seek qualified advisors who can inter­pret these issues and provide the best and most equitable settlements to both parties.

Courtesy of http://www.mobar.org

NACBA: COSTLY DEBT SETTLEMENT SCHEMES PREY ON THE MOST DEBT-BURDENED CONSUMERS STRUGGLING TO RECOVER FROM ECONOMIC DOWNTURN

October 26th, 2012

What a Half Million Unwary Consumers Don’t Know:  Schemes Only Work for 1 in 10 Who Pay for Them; Consumer Alert:  Debt Settlement Programs Seen as “#1 Threat to America’s Most Indebted Consumers.”

WASHINGTON, D.C. – October 17, 2012 – As few as one in 10 unwary consumers who are lured into so-called “debt settlement” schemes actually end up debt free in the promised period of time, making the risky schemes the No. 1 threat facing America’s most deeply indebted Americans, according to a major new consumer alert issued today by the nonprofit National Association of Consumer Bankruptcy Attorneys (NACBA). Available online at http://www.nacba.org, the NACBA consumer alert notes:  “Already struggling with home foreclosures, harsh bank and credit card fees, and other major financial challenges, America’s most deeply indebted consumers are now falling victim to a major new threat:   so-called ‘debt settlement’ schemes that promise to make clients ’debt free’ in a relatively short period of time.  Unfortunately, most consumers who pursue debt settlement services find themselves facing not relief but even steeper financial losses. Even the industry acknowledges – though not in its ever-present radio and online advertising – that debt settlement schemes fail to work for about two thirds of clients. Federal and state officials put the debt-settlement success rate even lower – at about one in 10 cases – meaning that the vast majority of unwary and uninformed consumers end up with more red ink, not the promised debt-free outcome.”
The private debt-settlement industry remains robust.  More than 500,000 Americans with approximately $15 billion of debt are currently enrolled in debt settlement programs, according to industry estimates.  And there is room for further growth:   One in 8 U.S. households has more than $10,000 in credit card debt.
Durham, NC bankruptcy attorney Ed Boltz, NACBA Board member and incoming NACBA president, said:   “Based on what bankruptcy attorneys are seeing across the nation, we believe that debt settlement schemes are the number one problem facing America’s most deeply indebted consumers today. Bombarded with slick radio and Web advertising falsely promising a smooth road to being debt free in a short period of time, these companies prey on the most desperate victims of the economic downturn.   These particularly vulnerable consumers usually end up getting sued, stuck with outrageous fees, more deeply in debt, and far worse off in terms of their credit score.”
Earlier this year, NACBA focused national attention on the “student debt bomb,” which then was identified as the fastest growing consumer debt problem being handled by consumer bankruptcy attorneys.
Richard Thompson, a Rialto, California, retiree and victim of a debt settlement scheme, said:    “I was told they could settle my $89,000 in debts for a total of $39,000 if I made payments of $1,800 for 22 months.  I was contacted about a chance to settle $15,000 debt for $6,000 but my debt-settlement company ignored the offer.   In fact, I paid them a total of $25,200 as they kept on ignoring settlement offers from creditors.  I thought they were taking care of me by bringing my debt down, but all they were doing was taking my money.   I ended up with $25,000 more in debt than I started out with.   Before I retired I worked 25 years as a manager, now I have had to go back to work as a part-time security guard to help make ends meet.”
Bankruptcy attorney Trisha Connors, a NACBA member from Glen Rock, New Jersey who has testified before the New Jersey Law Revision Commission on debt settlement abuses, said:   “Over the last three years, I have worked with 12 different for-profit debt settlement companies and over 25 clients who came to me after their debt settlement program failed to serve them.  The results with each client were the same:  exorbitant fees being paid, settlement (at best) of one small credit card debt, and mounting late fees and penalty interest charges on the unsettled debts.  When clients informed the debt settlement companies of their desire to exit the program, the firms kept all or most of the accumulated savings for debt reduction as ‘fees.’  Every person I dealt with who had been current on their debts prior to contacting a debt settlement program told me that the sales representative told him the only way to be successful in the program is to stop paying credit card bills.”
Ellen Harnick, senior policy counsel, Center for Responsible Lending, said:   “Debt settlement companies require clients to default on their debts before they will negotiate.  This adds late fees and penalty interest to their debt and frequently results in the client being sued by creditors.  Since only a tiny proportion of debts are actually settled by these companies, clients are typically left worse off than they were when they started.”
In addition to highlighting the stories of three victims of debt settlement schemes, the NACBA consumer alert notes the following:
•    There is now across-the-board agreement on the danger that debt settlement schemes pose to consumers.  The Better Business Bureau has designated debt settlement as an “inherently problematic business.”  Similarly, the New York City Department of Consumer Affairs called debt settlement “the single greatest consumer fraud of the year.” Across the country, the U.S. Government Accountability Office (GAO),  the Federal Trade Commission, 41 state attorneys general,  consumer and legal services entities, and consumer bankruptcy attorneys have all uncovered substantial evidence of abuses by a wide range of debt settlement companies.
•    Debt settlement schemes encourage consumers to default on their debts.  Because creditors frequently will not negotiate reduced balances with consumers who are still current on their bills, debt settlement companies often instruct their clients to stop making monthly payments, explaining that they will negotiate a settlement with funds the client has paid in lieu of their monthly debt repayments.  Once the client defaults, he or she faces fines, penalties, higher interest rates, and are subjected to increasingly aggressive debt-collection efforts including litigation and wage garnishment. Consequently, consumers often find themselves worse off than when the process of debt settlement began:  They are deeper in debt, with their credit scores severely harmed.
•    “Self help” may be the best answer for smaller debt burdens.   If you have just a single debt that you are having trouble paying (such as a single credit card debt) and you have cash on hand that can be used to settle the debt, you may be able to negotiate favorable settlement terms with the creditor yourself.  Creditors typically require anywhere from 25 to 70 percent on the dollar to settle a debt so you will need that much cash for a successful offer.  Be sure to get an explicit written document from the creditor spelling out the terms of the debt settlement and relieving you of any future liability.  Also be prepared to pay income taxes on any of the forgiven debt.
•    Nonprofit credit counseling agencies can help, but must be vetted carefully.  If, like most people, you owe multiple creditors and do not have the cash on hand to settle those debts, you may want to consult a non-profit credit counseling agency to see if there is a way for you to get out of debt.  But make sure to check it out first: Just because an organization says it’s a “nonprofit” there is no guarantee that its services are free, affordable or even legitimate.  Some credit counseling organizations charge high fees (which may not be obvious initially) or urge consumers to make “voluntary” contributions that may lead to more debt. The federal government maintains a list of government-approved credit counseling organizations, by state, at www.usdoj.gov/ust.  If a credit counseling organization says it is “government approved,” check them out first.
•   Bankruptcy will be an option for some consumers.  Bankruptcy is a legal proceeding that offers a fresh start for people who face financial difficulty and can’t repay their debts.  If you are facing foreclosure, repossession of your car, wage garnishment, utility shut-off or other debt collection activity, bankruptcy may be the only option available for stopping those actions.  There are two primary types of personal bankruptcy:  Chapter 7 and Chapter 13.  Chapter 13 allows people with a stable income to keep property, such as a house or car, which they may otherwise lose through foreclosure or repossession.  In a Chapter 13 proceeding, the bankruptcy court approves a repayment plan that allows you to pay your debts during a three to five year period.  After you have made all the payments under the plan, you receive a discharge of all or most remaining debts.  For tax purposes, a person filing for bankruptcy is considered insolvent and the forgiven debt is not considered income.  Chapter 7 also eliminates most debts without tax consequences, and without any loss of property in over 90 percent of cases.  To learn more about bankruptcy and whether it makes sense for you, go to http://www.nacba.org/Home/AttorneyFinderV2.aspx.
NACBA urges consumers to steer clear of any companies that:
•    Make promises that unsecured debts can be paid off for pennies on the dollar. There is no guarantee that any creditor will accept partial payment of a legitimate debt. Your best bet is to contact the creditor directly as soon as you have problems making payments.
•    Require substantial monthly service fees and demand payment of a percentage of what they’ve supposedly saved you. Most debt settlement companies charge hefty fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee– a percentage of the money you’ve allegedly saved.
•    Tell you to stop making payments or to stop communicating with your creditors. If you stop making payments on a credit card or other debts, expect late fees and interest to be added to the amount you owe each month. If you exceed your credit limit, expect additional fees and charges to be added. Your credit score will also suffer as a result of not making payments.
•    Suggest that there is only a small likelihood that you will be sued by creditors.  In fact, this is a likely outcome.  Signing up with a debt settlement company makes it more likely that creditors will accelerate collection efforts against you.  Creditors have the right to sue you to recover the money you owe. And sometimes when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.
•    State that they can remove accurate negative information from your credit report. No company or person can remove negative information from your credit report that is accurate and timely.
Boltz emphasized:  “Many different kinds of services claim to help people with debt problems.  The truth is that no single solution works in all cases.  Bankruptcy is an option that makes sense for some consumers, but it’s not for everyone.  For example, the National Association of Consumer Bankruptcy Attorneys and its individual consumer bankruptcy attorney members do not encourage every person who looks at bankruptcy to enter into it.   What makes sense for each consumer will depend on their individual circumstances.  We encourage everyone to get the facts and do what makes the most sense in their situation.”

Courtesy of http://www.nacba.org/

Don’t Fall for Phony IRS Websites

October 25th, 2012

The Internal Revenue Service is issuing a warning about a new tax scam that uses a website that mimics the IRS e-Services online registration page.

The actual IRS e-Services page offers web-based products for tax preparers, not the general public. The phony web page looks almost identical to the real one.

The IRS gets many reports of fake websites like this. Criminals use these sites to lure people into providing personal and financial information that may be used to steal the victim’s money or identity.

The address of the official IRS website is www.irs.gov. Don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov.

If you find a suspicious website that claims to be the IRS, send the site’s URL by email to phishing@irs.gov. Use the subject line, ‘Suspicious website’.

Be aware that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

If you get an unsolicited email that appears to be from the IRS, report it by sending it to phishing@irs.gov.

The IRS has information at www.irs.gov that can help you protect yourself from tax scams of all kinds. Search the site using the term “phishing.”