Average Tax refunds in 2011

The IRS not only doled out fewer tax refunds last year, but it also cut smaller checks with the average refund slipping by nearly $100.
Taxpayers received tax refunds averaging $2,913 in 2011, down 3% from the average refund of $3,003 in the prior year, according to the latest filing statistics released by the IRS.
The agency delivered a total of 109.3 million refunds during the year, adding up to a total of $318.5 billion. That's down slightly from 2010, when 109.4 million refunds were given out, totaling $328.4 billion.

However, add to it a smaller majority who are no longer alive, some illegal immigrants who went back with no forwarding addresses, 401(k) plans and in some states, issues with the social security numbers. Their refunds are held on to by the IRS.

Direct deposit was the most popular way for taxpayers to receive refunds last year, with more than 79 million refunds deposited into accounts -- up 6% from 2010.
More than 75% of taxpayers filed returns using the agency's free online e-filing system, an increase of nearly 14% from the previous year. While the majority of e-filers hired tax professionals to submit their taxes, the number of taxpayers preparing their own taxes jumped by 14%.

The Internal Revenue Service owes refunds to approximately 100,000 tax payers for the past year. However, it is holding onto those tens of millions of dollars as it has not been able to deliver the refunds to consumers owing to mailing address errors.

To avoid missing a refund in the mail, the IRS recommends that taxpayers opt for direct deposit of their returns when they file their taxes.

If you did opt to have a refund check mailed to you this year, you can check the status of your refund and resolve delivery issues by using the"Where's My Refund?" tool on the IRS website.

If you don't check the site, you may have no idea that the IRS has been trying to send you your money. The agency does not contact taxpayers by e-mail or phone when it is unable to deliver a refund check.

Source: Blake Ellis, CNN Money

IRS penalties on submission of tax returns & FBAR forms

If you are a US Citizen residing abroad, you should prioritize prompt filing of  both US income tax returns and also FBAR forms every year (reporting non-US bank and financial accounts). US government numbers indicate that several million honest folks around the world have simply not been doing this.

After many years of requests, the IRS have at long last relented and agreed publicly not to charge penalties if there is “reasonable cause” for not sending in all of the forms on time. As with so much of the tax law, reasonable cause is a complicated concept which can only be decided based on the specific facts in each case.

The new IRS rule does mean that every time an FBAR is sent late the IRS is expecting a letter explaining why penalties should not be charged. This letter is a document that needs extremely detailed and careful drafting. Getting just a few words wrong could truly lead to huge penalties - in some cases even running into the millions of dollars.

Tips:
1. Ensure every FBAR has been filed for the last 6 years
2. If anything “irregular” shows up, file these late FBARs within the next few weeks, together with a reasonable cause request
3. Always – without fail – get a professional opinion on the reasonable cause wording because the risk is just too big for anyone to ever try to do this without help.

When should you file for Social Security?

Although Social Security has been around for more than seven decades, most Americans admit they really don’t have a basic understanding about the rules that affect the size of their retirement benefit.

Social Security is pretty straightforward provided you’ve never been married and accumulate at least 40 quarters working in jobs where federal employment tax (FICA) was deducted from your paycheck. When you reach your “full retirement age” (FRA) you will receive a benefit based upon the amount you paid into the system.(2) If you begin receiving Social Security benefits prior to your FRA, your benefit will be reduced. (3) For every year (starting with your FRA year) that you postpone the start of Social Security, you will receive “delayed retirement credit” (DRC). Your annual benefit will be increased 8% each year plus each year’s cost of living increase (COLA)- until you reach age 70.

However, things get complicated very quickly when you are married- especially if both spouses have worked and qualify for Social Security. While most couples simply want to know how they can maximize the total Social Security income that they receive, this is easier said than done. For one thing, not only can you file for Social Security based on your own work history, you can also file for a benefit based on what your spouse earned. (If you’re divorced, you may be eligible for a benefit based on your ex-spouse’s record.)(4)

With Social Security, timing is everything. Should both members of a couple file for benefits in the same year, or would it make more sense for one spouse to start before the other? Which one? If Spouse ‘A’ begins before his/her FRA, how might this affect the benefit that Spouse ‘B’ is eligible to receive? What if Spouse ‘A’ waited to file until s/he reached FRA? Although getting a bigger monthly check sounds good, postponing the start of Social Security until you reach age 70 means you’ll collect benefits for fewer years. Nonetheless, why should certain married individuals consider this option?

And that’s just the tip of the iceberg. Here’s the problem: If you make the wrong choices, they affect the amount of Social Security income you will receive for the rest of your life.

Take this couple, we’ll call them Wilma and Fred. Here are the important facts:

Current Age: Wilma, 62

Full Retirement Age (FRA): 66

Benefit at FRA: $800/month

Current Age: Fred, 65

Full Retirement Age (FRA): 66

Benefit at FRA: $2,000/month

A few things to keep in mind:

-The maximum “spousal” benefit you can receive is 50% of what your partner is entitled to at her/his FRA. In this example, Wilma’s maximum spousal benefit is $1,000–half the amount Fred would receive if he filed for Social Security at age 66. However, if Wilma files for her own and/or a spousal benefit before she has reach her FRA (66), the amount will be reduced. Likewise, Fred’s maximum spousal benefit is $400/month.

-If you file for a spousal benefit before reaching your FRA, you are deemed to be filing for a benefit based on your own record, as well. That is, prior to your FRA, you cannot apply for just a spousal benefit in order to allow your own to earn DRCs. However, once you reach your FRA, you can.

-You cannot apply for a spousal benefit until your spouse has filed to begin receiving Social Security.

Wilma and Fred are planning to retire next year. They’ll need some extra monthly income, so they’re thinking of having Wilma apply for Social Security. Fred would postpone filing for benefits until he is 70 because this would result in substantially more income. (Assuming the COLA is 3% for each of the next four years, by age 70 Fred’s benefit would increase to $3,036/month- 50% more than what he would receive at his FRA.)

Scenario No. 1:

Next year Wilma files for Social Security based on her own record. Since she is 63 years old, her benefit will be 20% less than what she would receive if she waited until reaching her FRA. (3)

She is not eligible for a spousal benefit because Fred hasn’t filed yet.

Total Social Security income as a couple: $640/month.

Option No.1: “File-and-Suspend.” Social Security created this strategy specifically for this situation. Here’s how it works: Now that Fred has reached his FRA, he files for Social Security benefits to begin and then immediately tells Social Security to stop them. This allows his benefit to earn delayed retirement credits. However, the fact that Fred filed means Wilma is now entitled to a spousal benefit.

Since she is below her FRA, Wilma’s spousal benefit will be reduced to 37.5%- instead of 50%- of Fred’s FRA amount, or $750. She does not get this in addition to her own benefit. Instead, she will receive whichever benefit is higher- the one based on her own work history or her spousal benefit. Thus, Wilma will receive a benefit of $750/month. (Technically, $640 of this is earmarked as coming from the payroll tax Wilma paid herself.)

Total Social Security income as a couple: $750/month.

Four years later:

Fred turns 70 and requests that his Social Security benefits resume. Thanks to DRCs, his monthly check will be $3,036.

Annual COLAs of 3% mean that Wilma’s monthly check will have grown to $844.

Total Social Security income as a couple: $3,880/month.

Next week: An alternate option for Wilma and Fred that would result higher total income.

 1. See www.socialsecurity.gov/

2. See http://www.socialsecurity.gov/pubs/ageincrease.htm

3. See http://www.socialsecurity.gov/retirement/1943.html

4. To determine if you are eligible to file for benefits based on the work record of an ex-spouse, see http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/299/session/L3RpbWUvMTMyNDg2NzI1NS9zaWQvb1dOS3Z3TWs%3D

Source: By Gail Buckner

Reporting Capital Gains and Losses on Schedule D and Form 8949

The IRS has unveiled a new tax form for reporting capital gains and losses from stocks, bonds, mutual funds and similar investments. Starting with the 2011 tax year, investment transactions will be reported on the new Form 8949, Sales and Other Dispositions of Capital Assets. A draft version of Form 8949 is posted at the IRS Web site; instructions for this new form has not yet been posted. The IRS is also revising Schedule D (draft version) and Form 1099-B (draft version).

Back in 2008, Congress passed the Emergency Economic Stabilization Act, which required that brokers begin reporting the cost basis of investment products to investors and to the IRS. In theory, having brokers report cost basis along with sales proceeds will greatly reduce burden on individual taxpayers to maintain extensive records on their investments and could simply the tax reporting process.

Brokerage firms send out a Form 1099-B to report the sale of an investment product, such as a stock or mutual fund. Currently, the 1099-B only reports information about the sale of the investment (such as the date of sale and the sale proceeds). Taxpayers then need to supply the purchase date and purchase price to report the transaction on their Schedule D. Many brokers already provide gain/loss reports as supplemental information. Starting in 2011, cost basis information will be included directly on the 1099-B if the broker is required to supply that information. Whether a broker is required to provide cost basis information depends on whether the investment is a “covered security.” Brokers are required to provide cost basis for stocks acquired during 2011 (or later), for mutual funds and stocks in a dividend reinvestment plan acquired during 2012 (or later), and all other investment products acquired during 2013 (or later).

The IRS has substantially revised Form 1099-B to facilitate this cost basis reporting. The IRS has also substantially revised Schedule D and created a new Form 8949. Starting with 2011, Schedule D now functions as a summary of all capital gains transactions. Individual investment sales are to be detailed on the new Form 8949.

Any particular investment sales transaction will fall into one of three categories:

•Sales of covered securities for which cost basis is provided;

•Sales of non-covered securities for which no cost basis is provided on the 1099-B; or

•Sales of investments assets for which no 1099-B is received.

The new Form 8949 reflects this categorization. A separate Form 8949 is required for each type of transaction, with the appropriate check box indicated at the top of the form. Form 8949 is further divided into two pages, with short-term transactions being listed on page 1 and long-term transaction listed on page 2.

To phrase this a different way, there will be one Form 8949 reporting capital gains and losses where cost basis is provided (check box A), with short-term transactions listed on page 1 and long-term transactions listed on page 2. There will be a separate Form 8949 reporting capital gains and losses with cost basis in not provided (check box B), with short-term transactions shown on page 1 and long-term transactions shown on page 2. And there will be a third Form 8949 reporting capital gains and losses where Form 1099-B was not received (check box C).

Totals from these separate Forms 8949 will be summarized on the newly revised Schedule D.

Taxpayers will also notice that Form 8949 has two columns that are not present on the current (2010) version of Schedule D. New Form 8949 has a column B to report a “Code” and has column G to report “Adjustments to gain or loss.” The IRS has not yet released their instructions for Form 8949, but at the 2010 Nationwide Tax Forum, IRS spokespersons revealed that the codes will be used to indicate whether a transaction is a wash sale, section 1202 gains, small business stock gains, or if the basis reported by the broker is incorrect. Taxpayers will be able to correct the cost basis of a particular transaction by reporting the basis as reported by the broker in column F and then making any adjustments or corrections in column G.

Cost basis reporting by brokers will never fully and completely eliminate the need for taxpayers to maintain their own records. That’s because basis reporting will be phased-in and applies only to newly acquired shares. Stock purchased prior to 2011, mutual fund shares purchased prior to 2012, and bonds purchased before 2013 won’t have basis reported on the 1099-B. That information will likely be found in other reports or data, such as brokerage statements, year-end reports or trade confirmations.

Source : William Perez, about.com

IRS Reopens Offshore Voluntary Disclosure Program

The Internal Revenue Service on January 9, 2012 reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced.

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the terms of the program could change at any time going forward.  For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures.  Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS is currently developing procedures by which dual citizens and others who may be delinquent in filing, but owe no U.S. tax may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

Official announcement on:

http://www.irs.gov/newsroom/article/0,,id=252162,00.html?portlet=108

Small Business - Tips to plan your taxes for 2012

Tax laws are subject to change every year, allowing individuals and small business owners to plan how their tax savings can pan out. For any business, big or small, a diligent approach to tax planning is sure to open up new tax saving avenues, taking advantage of the business deductions for which it qualifies.

This article is an attempt to trigger meaningful discussions between the tax payer and the tax advisor, looking to create awareness about potential benefits of tax planning.

A few aspects which will substantially impact your business are listed below:

1. Follow your tax laws closely | Hire consultants

As long as your tax filing is appropriate, there will be no roadblocks. However, for inappropriate filings, say, incorrect computation of sales tax, payroll tax & income tax, penalties, fines and punitive interest costs will add up. In case you do not have in-house assistance or unable to spend time on tax research to evaluate your business’s financial situation throughout the year, a CPA can help, by reviewing your overall position and providing you with the expert tax planning counsel you need today and in the years ahead. By combining unrivaled education, training and experience with a focus on your financial situation, a CPA can recommend sound strategies designed to make your goals a reality.

2. Make use of deductions | Expense related

Some deductions you should research on and take advantage of are automobile deductions, home office deductions, travel expense and entertainment expense deductions. Utilizing deductions helps to deduct business costs from gross income. Section 179 deductions apply to most tangible personal business property in service during the tax year, such as computers, office furniture, vehicles and machinery. These provide immediate tax relief on newly purchased equipment, helps improve cash flow and increase investment options for small businesses.

3. Classify your business | Different types have varied tax rates & liabilities

Proper classification of your business can help in reduction of your tax rates. You will be best advised to research on various types of businesses and what type your best fit is. Some business classifications are Sole Proprietorship, Partnership, Limited Liability Corporation, S-Corp, C-Corp among others with special tax statuses for some of them.

4. Plan for the future | Beware of tax traps

Ask yourself the following questions, and come up with viable plans for the future:

1. Have I created the most tax efficient type of business?
2. What is the best tax efficient way to save for my retirement?
3. What is considered a reasonable salary by IRS standards?
4. In case I wish to expand my business across states, what are the stipulations on multi-state taxability?
5. Is there a requirement to report my foreign assets? Non-disclosure may lead to onerous penalties from IRS. Take care if you own a bank account, real estate, business or other assets in a foreign country.
6. What is the IRS purview on business succession – most effective way to leave behind a business while avoiding a huge tax bill?

4. Pay out taxes in installments

In case you face difficulties in paying your taxes in full, you can negotiate a deal with the IRS wherein monthly repayment is possible. This will be beneficial especially for small business owners. Choose the right payment plan based on your need and eligibility. However, be wary of interest payments that might harm your business. 

  

Filing Form 8938 Does Not Eliminate FBAR Filing

On December 19, 2011, temporary regulations were published in the Federal Register outlining new filing requirements for “specified persons” having an interest in specified foreign financial accounts (SFFAs).
January 9, 2012 by Janice Eiseman, JD, LLM
Code section 6038D, effective for tax years beginning after March 18, 2010, requires new filing requirements for “specified persons” having an interest in “specified foreign financial accounts.” (SFFAs). On December 19, 2011, Temporary Regulations were published in the Federal Register outlining these new filing requirements. Treasury Decision (T.D.) 9567,  76 F.R. 78594-01. The Internal Revenue Service (IRS) also issued Form 8938 (PDF), the form designed under section 6038D, along with instructions. Filing Form 8938, if applicable, is required for tax years ending after December 19, 2011. Consequently, clients meeting the filing requirements must file Form 8938 with their 2011 tax returns. The instructions provide a detailed summary of the Temporary Regulations. This article provides citations to the temporary regulations and its preamble to help you find information that may not be provided in the instructions.
Note: Filing Form 8938 does not eliminate Report of Foreign Bank and Financial Accounts (FBAR) filing. SFFAs reported on Form 8938 must be reported on an FBAR if required on the FBAR (Preamble, section 6D)). However, duplicative reporting of an SFFA is not required:
If a taxpayer completes information required in Part IV, Form 8938 and Reports an SFFA on timely filed Forms 3520 (PDF), 3520-A (PDF), 8621 (PDF), 5471 (PDF),8865 (PDF) or 8891 (PDF). Temp. Reg. §1.6038D-7T. This exclusion does not eliminate filing Form 8938; it simply eliminates listing SFFAs on Form 8938. These excluded SFFAs are still counted for purposes of calculating threshold reporting amounts. Temp.  Reg. §1.6038-2T(a)(6). Specified Persons
Which clients may have to file Form 8938 with their 2011 returns? The 2011 filing requirement does not apply to domestic entities. Proposed Regulations also published December 19, 2011, contain rules on which domestic partnerships, corporations and trusts will be required to file Form 8938. (Proposed Reg. §1.6038D-6, REG-130302-10, 76 F.R. 78594-01.) Until Proposed Regulation § 1.6038D-6 is issued as a final regulation, no domestic entity is required to file Form 8938. (Preamble, section 5.)
Generally, individual clients who are U.S. citizens and resident aliens, are subject to the filing requirement provided they hold interests in SFFAs meeting the threshold amounts. The list of “specified individuals,” who may have to file Form 8938, is set forth at Temp. Reg. §1.6038D-1T(a)(2). However, specified individuals are not required to file Form 8938 if they are not required to file a return with respect to such taxable year. Temp. Reg. § 1.6038-2T(a)(7).
Specified Foreign Financial Assets
SSFAs are composed of two classes distinguished by whether a foreign financial institution (as defined in code section 1471(d)(4)) is involved:
Financial accounts (defined in code section 1471(d)(2)) maintained by a foreign financial institution are reported on Part I, Form 8938 and, Other foreign financial assets (defined in Temp. Reg. §1.6038D-3T(b)) held for investment and not held in a foreign financial institution account are reported on Part II, Form 8938. Financial assets held in a financial account maintained at a foreign financial institution are not required to be separately listed. Temp. Reg. § 1.6038D-3T(a)(1).
Financial accounts maintained by U.S. payors, defined in Treasury Regulation § 1.6049-5(c)(5)(i), are excluded from the definition of SFFAs. Temp. Reg. §1.6038D-3T(a)(3)(i). Such payors include U.S. branches of foreign financial institutions and foreign branches of U.S. financial institutions. Also excluded are financial accounts for which the specified person uses mark-to-market accounting under section 475 for all of the holdings in the account. Temp. Reg. §1.6038D-3T(a)(3)(ii).
“Other foreign financial assets” listed in Temp. Reg. §1.6038D-3T(b)(1) come within one or more of the following three categories:
Stock or securities issued by a non-US person, A financial instrument or contract that has an issuer or counterparty, which is a non-US person and An interest in a foreign entity with special rules for foreign trusts and estates. A U.S. person is defined in section 7701(a)(30). To be an SFFA, the asset must fit under one of these categories and it must also be held for investment. If an asset is used in a trade or business, it is not an SFFA. Temporary Regulation §§ 1.6038D-3T(b)(4) and (5) set forth rules on determining whether an asset is used in a trade or business. They state that stock can never be considered as used in a trade or business. In Preamble section 2B, the IRS asks for comments on the trade or business provisions and the treatment of stock.
Financial assets are excluded if the specified individual uses mark-to-market accounting under section 475 for the asset. Temp. Treas. Reg. §1.6038B-3T(b)(2). Beneficial interest in a foreign trust or estate is not an SFFA unless the specified person knows or has reason to know based on readily accessible information of the interest. Receipt of a distribution from the foreign trust or estate constitutes actual knowledge. Temp. Reg. §1.6038D-3T(c).
Threshold Levels for Reporting
Your clients are not required to file Form 8938 unless they meet threshold levels set forth in Temp. Reg. §1.6038D-2T(a). Different types of taxpayers have different levels. For example, married taxpayers filing jointly living in the U.S. must file if the aggregate value of all SFFAs in which either individual holds an interest that exceeds $100,000 on the last day of the taxable year or more than $150,000 at any time during the taxable year. Individuals are considered tohold an interest in the SFFAs owned by their disregarded entity. They are considered to hold an interest in the SFFAs held by their grantor trust, except for domestic investment or bankruptcy trusts. They do not hold an interest in SSFAs owned by a partnership, corporation, trust (except for grantor trust rule set forth in prior sentence) or an estate solely because they are a partner, shareholder or beneficiary. Temp. Reg. § 1.6038D-2T(b)(3).
Detailed rules on how to value an SFFA are set forth in Proposed Treasury Regulation § 1.6038D-5T. If the SFFA is valued in a foreign currency, then the currency must be converted to U.S. dollars using the currency exchange rate on the last day of the taxable year even if the asset has been disposed of prior to the last day of the taxable year. Temp. Reg.  §1.6038D-5T(c).
Consequences of Not Filing Form 8938
Failure to file can result in a penalty of $10,000, which can be increased up to $50,000 for failure to file after IRS notification. No penalty will be imposed if the specified person can show the failure is due to reasonable cause and not due to willful neglect. (Temp. Reg. §1.6038D-8T.) There is a 40-percent penalty on an understatement of tax attributable to any undisclosed foreign financial asset, which includes assets with respect to which information is required under section 6038D. I.R.C. § 6662(j).
Failure to file extends the statute of limitations for the tax year until the taxpayer provides the required information. If the failure is due to reasonable cause and not willful neglect, then the statute is extended only with regard to the items relating to the failure rather than the entire tax year (I.R.C. § 6501(c)(8)). Furthermore, the statute is extended to six years after the return is filed if the taxpayer omits $5,000 from gross income attributable to an SFFA without regard to the reporting threshold or any reporting exceptions under section 6038D(h)(1)  (I.R.C. § 6501(e)(1)).