FBAR Filing Deadline Extended for Certain Financial Professionals
- An employee or officer of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the entity (a “controlled person”).
- An employee or officer of a controlled person of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity.
Medicare Vouchers Won’t Reduce Health Spending
The House Republican plan to replace Medicare with vouchers could lower national health spending in only one of two ways: Either seniors would respond to higher out-of-pocket costs by using less—or more efficient–health care, or private insurance companies would ration their care for them. In effect, insurance company bureaucrats would replace those government bureaucrats so disparaged by House Republicans.
If neither happens, the GOP plan will fail to reduce overall health spending. The proposal to give those turning 65 in 2022 a subsidy to buy their own insurance would merely shift those costs from government to the elderly. Unfortunately, there is no evidence that either of these strategies would reduce total medical expenses, at least based on what we know about past experiments.
Today, Medicare beneficiaries pay about one-quarter of the program’s cost. Under the House plan, proposed by Budget Committee Chair Paul Ryan (R-WI), seniors would pay about 60 percent in 2022 and nearly 70 percent by 2030. What would happen if they paid more?
For 30 years, studies have found that when people are required to spend more out of pocket, they not only cut out unnecessary care, but also avoid care they need. And delaying early treatment or prevention can lead to higher long-run costs.
What if insurance companies ration care? The theory sounds great: Insurers that provide the most cost-effective care can lower premiums and attract more buyers. But as we learned in the disastrous HMO experiment of the 1990s, there is a fine line between managing care (a very good thing) and cost-cutting.
Properly coordinating care for seniors with multiple chronic diseases may both save money and improve health outcomes. However, the perception that insurance companies were merely slashing benefits to boost profits inspired a consumer revolt two decades ago. The result: HMOs largely disappeared and little has been done to control the long-term growth of medical expenses.
Despite claims to the contrary, there is no conclusive evidence that less medical spending results in better or equal long-term health outcomes. Research results are all over the place, depending on which patients are studied and for how long. The latest study– by George Mason University researcher Jack Hadley and my Urban Institute colleagues Tim Waidmann, Steve Zuckerman, and Bob Berenson finds there is a small but “statistically significant relationship between medical spending and better health” among Medicare patients.
The House budget not only would replace Medicare with vouchers but also repeal the 2010 health law– which does include some real cost containment. Those provisions are exceedingly modest and many are in the nature of experiments—a good choice given how much we still need to learn about delivering cost-effective care. Most reforms would be designed by hospitals and doctors, with a nudge (or more) from government.
The health law also includes the much-criticized Independent Payment Advisory Board (IPAB), a panel that would recommend Medicare budget savings to Congress and the White House starting in 2014. But the IPAB is barred from proposing cuts in benefits or eligibility. In effect, all it can do is propose to cut payments to providers.
By repealing the health law, the House GOP would also eliminate the two key mechanisms seniors would need to buy insurance on the open market—a requirement that insurance companies not discriminate against those with pre-existing conditions (80 percent of those 65 and older have at least one) and exchanges though which buyers can shop for individual coverage. But even if they could somehow fix those problems, the GOP still needs to show how its plan is going to lower overall medical costs which is, after all, the whole point.
Rolling to Roth
May 31, 2011 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Michelle in the TaxQuips Forum who wants to know. “If someone 68 years old rolls over funds from thrift plan (taxed at 20%) into a Roth IRA, will there be any additional tax due? And is there a specific length of time funds must remain in a Roth IRA before being withdrawn?”
Dear Michelle,
Typically, when you move the funds from a retirement account into a Roth IRA, the only taxes you pay are the taxes due on the funds that were rolled over.
Then, you are not allowed to touch the funds in the Roth IRA for 5 years. If you do, you will pay taxes on the earnings of the funds you draw.
However, if you leave the money alone for the 5 years, you will never pay tax on the earnings at all.
And remember, you can find answers to all kinds of questions about IRAs other tax issues, free. Where? Where else? At www.TaxMama.com.
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Free Tax Web Sites
Here is a partial listing of websites making available excellent resources to do your own federal tax research for free.
• Justia
• TaxAttorney.org
• Tax Links
• Findlaw
• JURIST
• Legalbitstream
• Tax Sites
• Tax Talent
• eTaxJobs
Federal Tax Law
Congress
• Internal Revenue Code
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• Joint Economic Committee
• Senate Finance Committee
• House Ways & Means Com.
• Congressional Budget Office
Executive Branch
• IRS
• Treasury Department
• Office of Tax Policy
• DOJ Tax Division
• Regulations
• Public Rulings
• Private Rulings
… Actions on Decisions
… Appeals Settlement Guidelines
… Chief Counsel Bulletins
… Exempt Org. Field Memoranda
… General Counsel Memoranda
… Information Letters
… Field Service Advisories
… Private Letter Rulings
… Technical Advice Memoranda
• Internal Revenue Manual
• Tax Forms and Publications
Courts
• Tax Court
• GPO Access
US Expatriate Tax Return Extension
US Expats get an automatic extension to file their IRS Form 1040 returns until 6/15/11 for 2010 if they live abroad on 4/15. You can get a further extension until 10/15/11 if you file for one prior to 6/15 using form 4868. We will electronically file that form for you without charge providing you ask us to prepare your expat return. That form also extends the due date of Forms 5471, 8865, 3520 and form 5500EZ.
Though not officially confirmed by the IR S, many articles have appeared in the media stating extending your tax returns does reduce your chances of IRS Audit. We have found that true in our 30 years of experience. Therefore, extending your return even though it might be completed might be an excellent idea.
Keep in mind an extension does not extend the time you must pay any taxes due from the regular 4/15 date. If you do not any taxes due, penalties and interest will accrue until any tax due for 2010 is paid in full.
US Tax Ramifications of Forming a Foreign Corporation to Do Business Abroad
You need to consider the following US IRS reporting and election consequences:
- Controlled foreign corporation rules
- Subpart F income possibilities
- Passive foreign investment company rules.
- Possible Flow Through Election for US tax purposes.
- Subpart F personal holding company rules
- The need to file FBAR forms to report foreign bank accounts
- Transfer Pricing
- Possible Tax on Transferring intangible property and tangible property to a foreign corporation
GAO recommends tax debtors be stopped at the border
In an effort to decrease the widening national debt and tax gap, the General Accounting Office is recommending that Congress and the IRS consider revoking and denying passports to those who owe tax debts to the Federal government.
With the Nation’s debt approaching $14 trillion and the tax gap, in 2001 numbers, at $345 billion annually, the GAO is recommending using trusted debt collection methods to collect on past due tax debts. Currently, the Department of State currently screens passport holders and applicants for past due child support. Since 1998, over $200 million has been collected on overdue child support payments. The GAO thinks the IRS can collect even by setting up a collection function in the international terminal at the airport.
How much can be collected from denying and revoking passports?
The GAO estimates that at least 1% of all passports issued in 2008, or 224,000 Americans, owe back taxes. The total owed: in excess of $5.8 billion. The GAO studied just the 2008 passports issued and suspects that there is substantially more in unpaid taxes from these individuals, especially because those who owed also had significant unassessed liabilities due to unfiled tax returns. The GAO only studied passport activity for one year. They suspect a multi-year investigation would find even more debtors passing through the airport checkpoints.
Other GAO findings
The GAO also selectively looked into several tax debtors/internation passengers to get a clear picture of potential abusive and criminal tax activity. What they found was startling. The GAO found that abusive and criminal tax debtors were passing freely past United States borders, without consequence. Even more alarming was that the IRS was not pursuing several of them for their unpaid taxes. In a selected sample of 25 debtors who were issued passports and owed:
- two had worked under State Department contracts
- six of the 25 were or are under criminal investigation by the IRS
- ten had prior federal indictments or convictions
GAO’s proposal
The GAO recommends that the IRS, Congress and the Executive Branch study the possibility of collecting taxes through the State Department and the Passport Denial Program. The IRS already successfully collects back child support, unpaid social security repayments, and overdue student loans through garnished refunds via the Treasury Offset Program. Why not turn it around and let other agencies collect back taxes. The IRS already levies tax debtors through the Federal Levy Payment Program that collects back taxes through the Social Security Administration and the federal payments system.
The Problem: IRS taxpayer privacy limitations
The IRS is effective in taking information from other governmental agencies. However, under section 6103 of the Internal Revenue Code, it is limited in what it can disclose to others. The GAO points out that taxpayer information cannot be shared with outside agencies, except as allowed by law. Generally, this disclosure has been limited to sharing certain tax information with State taxing authorities for tax administration and child support enforcement. For the most part, the IRS cannot disclose tax information without the consent of the taxpayer.
The GAO pointed out that the IRS could not even disclose sensitive taxpayer information on those tax debtors working for the State Department, even though these individuals may be performing sensitive work requiring security clearances. Two individuals who were studied were actually committing identity theft on deceased individuals. The IRS was even precluded from disclosing these names to the State Department directly.
The Answer
Step #1: Change section 6103 to allow the IRS to share information with the State Department.
Step #2: Engage IRS collections through the Passport Denial Program
The GAO concluded that the IRS, Congress and the Executive Branch should consider overcoming the section 6103 hurdles and start collecting through the State Department. The GAO stated: if Congress is serious on collecting the $330 billion in unpaid federal taxes, change the law that restricts the IRS from collecting on those with passports. Then, use the information to collect through the Passport Denial Program.
What’s next?
This is a realistic proposal from the GAO. With the IRS looking for creative collection alternatives, it is quite likely that they will consider this option. Consider that the IRS has been using several alternatives lately, from pressing former tax havens to share tax information to help with tax administration to requesting outside collection agencies (albeit unsuccessful) to collect for the IRS. The IRS is also getting pressure to use outside information to collect on more government contractors that owe debts.
Clearly, with a growing national debt, collecting tax debt from those getting screened at the airport would be an efficient use of government resources. The government could use existing technology and information systems without much additional cost – a win-win situation.
My prediction: look for legislation soon and for the IRS to start collecting taxes through the Department of State. With more demands to collect taxes and no additional resources in the foreseeable future, the IRS must use current information systems and government programs to close the tax gap.
8 Consumer Tips if you owe Uncle Sam on April 15th
Each year, about 20 million taxpayers owe taxes when they file their tax return. On September 30, 2010, the number of taxpayers with serious tax delinquencies grew to over 10 million.
With the economy only marginally better and unemployment still at recession levels, the trend looks to continue.
What can you do if you owe on April 15th? Here are 8 consumer tips that you should follow to save you money and ensure that you do not become a tax debtor again.
#1: Whatever you do, save up to 25% by filing on time. The absolute worse reaction to finding out you owe on your tax return is to not file your return on time. The penalty is 5% per month, up to 25%, for filing late. If you owe $2,000 on your return, that penalty amounts to $500. If you file on time, you will only be charged a small failure to pay penalty and interest on the accrued balances.
#2: Get a payment plan with the IRS- it’s easy to set up.
- Simple payment plan #1: the “guaranteed installment agreement” – the “GIA” is for those taxpayers who owe less than $10,000, can pay in the full balance in three years, and have a clean compliance history (no payment plans and all tax returns filed for the last 5 years). Over 87% of taxpayers who owe have a balance under $10,000- in fact, 3 out of 4 taxpayers owe less than $3,000. For the person who owes $3,000, that is a payment under $100 a month.
- Simple payment plan #2: the “streamlined installment agreement” – the “SLIA” is for those who owe under $25,000. It allows for the payments to be made over 5 years. The IRS’ minimum monthly payment as the assessed balance divided by 50. This allows for accruals of the failure to pay penalty and interest. For someone who owes $20,000, the payment plan would be a minimum of $400 a month.
The third type of payment plan is a “negotiated payment agreement” based on the amount you owe and your ability to pay. In this case, you would have an amount owed over $25,000 or you would not be able to qualify for a GIA or SLIA. In these rare cases, you will have to provide a financial statement to the IRS and work out payment terms. If you have to go this route, go to a local IRS office and speak with a representative to get your best results. Bring all of your receipts for all of your expenses, bank statements and proof of income for the past three months.
#3: Save money and time and set up a payment plan online. The IRS has made it easy for these taxpayers to get a payment agreement. You can do it by mail via Form 9465 or online using the Online Payment Agreement on the IRS website. Last year, over 61,000 taxpayers set up an online payment arrangement, avoiding the long IRS phone wait times or professional fees in using an accountant if you are tentative about talking to the IRS yourself.
#4: Set up a direct debit payment agreement. It saves $53 and greatly reduces your chances of default. The IRS charges $105 for a payment agreement. However, if you set up a direct debit agreement, the fee drops to $52. Also, because the IRS requires you to pay an amount each month (you cannot prepay next month), you should set up a direct debit agreement to avoid default. Over 40% of all payment agreements are defaulted by the IRS- many due to late arriving payments. Defaults require another IRS contact, intrusive questions, and a $45 reinstatement fee. Avoid all of this mess by setting up a direct debit agreement.
#5: If you cannot pay anything now, ask for 120 days to pay. Sometimes all you need is a few months to pay. The IRS will give you 120 days to pay the amount in full. The cost for a 120 day extension – nothing. If circumstances change within the 120 days, you can always inform the IRS of the change in your finances and set up a GIA or SLIA, with no questions asked. Interest will continue to accrue during this time, but it may give you time to get the funds to pay.
#6: The IRS gives cheap loans- the interest rate is currently 4%. Each quarter the IRS sets the interest rate that they will charge on underpayments. Currently it is 4% and has been that low or lower for over a year. The IRS does charge a failure to pay penalty for all balances due. However, if you get into a payment plan, this penalty is 0.25% per month – or 3% per year. That is an annual interest and penalty rate of 7% – not bad for any consumer loan.
#7: Do not fall for those late night ads for “pennies on the dollar” tax relief. These commercials taught the little-used tax relief program called the “Offer in Compromise” program. To illustrate how little it is used: last year, out of the approximately 20 million taxpayers who filed and had a balance due, only around 14,000 were accepted. Also, the average amount paid in an “Offer” was over $9,000 in 2010. These tax relief firms charge $3,000 or more for what is rarely available. Don’t make matters worse by buying an expensive gamble.
#8: Stop from owing again – change your withholding or start making estimated tax payments. If you owe for the first time or continually find yourself owing each year, change your withholding using a Form W-4 or start making estimated tax payments quarterly to stop the annual cycle of “file and owe.” Next April 15th you will be glad you did.
If you owe Uncle Sam on April 15th, don’t be paralyzed. File on time, pay if you can or make arrangements to pay, and make sure it does not happen next year by changing your withholding. Follow the 8 tips outlined here and save yourself money and time.
Visit your tax servant, Jim, at http://www.irsmind.com/
AARP is in trouble again
AARP is under the fire again over whether is a legitimate tax-exempt organization or just a disguised for-profit company.
Specifically, AARP is under attack for receiving $657 million in royalty revenue from insurance contracts in 2009.
There is a history here. In the last decade, AARP and the IRS disputed the taxability of some of the same proceeds, i.e. was the royalty income received by AARP for such contracts actually related to their “exempt purpose” – i.e. advocating for senior citizens. The IRS settled the case with AARP, who agreed to restructure and move business services to a for-profit subsidiary. In the deal, the IRS agreed that the insurance services were royalty income, which was exempt from “unrelated business income tax” – i.e. the tax paid by tax-exempts for running for-profit businesses.
Tax-exempts can have unrelated business activities. However, it cannot be substantial. If the activity is substantial, the tax-exempt loses its status.
On April 1, 2011, the CEO of AARP, Barry Rand, provided his defense of AARP’s extensive insurance business operations. At a highly contentious joint hearing by the House Ways and Means Health Care and Oversight subcommittees, he stated in defense of AARP that all of the funds used by the royalties go back into the mission and purpose of AARP. While that is true, it is not a very good defense. Mr. Rand is essentially stating that the “destination of the funds” determines whether the activities are tax-exempt. Prior to the Revenue Act of 1950, Mr. Rand would have had a position. Tax exempt organizations could raise income in a for-profit manner as long as it was used for a charitable purpose- i.e. the “destination of funds” test.
However, one can see the absurdity in this rule and eventually Congress changed the rule in 1950. What was born was the concept of “unrelated business income” – i.e. income whose source was not tax-exempt but rather in the form of a for-profit business. However, specifically exempted from the tax was several passive activity income sources such as certain rents and royalties. Removing the “destination of funds” test makes perfect common sense – if not, for-profit businesses would be put at a significant disadvantage to their tax exempt counterparts performing the same for profit activity but have no resulting taxes.
AARP may be exempted from paying taxes on the income, but they still have to explain their primary activities- which is still the test for tax exemption. As my friends at the IRS would say – “just follow the money and it will tell you their purpose.”
That leads us back to Mr. Rand’s testimony today. What is AARP’s primary purpose??? Mr. Rand should be answering that question. When your membership dues increase 32% in 7 years but your royalty income triples, you have some explaining to do about your true activities.
Surely, there are many companies out there who are put at a disadvantage from AARP’s activities. Maybe the two Republicans who started this inquiry got an ear full from them. Today they did not get a good explanation from Mr. Rand. The “ends justify the means” argument will not bear well for your organization’s tax exempt status.
IRS Oversight Board Meets, Releases Fiscal Year 2010 Annual Report to Congress
The IRS Oversight Board released today its Annual Report to Congress 2010. It reports on the IRS’ performance during fiscal year 2010 and its progress in meeting the goals and strategic foundations established in the IRS Strategic Plan 2009-2013.
While the IRS achieved a successful 2010 tax filing season, the Board notes that the agency has been challenged in the past few years to implement and administer many new tax provisions intended to bring relief to taxpayers feeling the effects of troubled economic conditions. “The IRS has responded well to these challenges, but the result has been to stretch the IRS’ resources thin. Every new tax provision added to the internal revenue code requires both service and enforcement resources for successful implementation,” the report states.
The report includes a comprehensive appendix that describes the effect recent legislative changes have had on tax administration during the 2007 through 2010 filing seasons based on reports released by the Government Accountability Office (GAO) and Treasury Inspector General for Tax Administration (TIGTA).
In evaluating the IRS strategic progress, the Board cites two systemic weaknesses that require attention: the tax gap and the IRS’ archaic information technology systems. The report warns that, “Failure to mitigate these weaknesses will cause long-term performance issues for the tax administration system.” These two weaknesses are exacerbated by another concern: an under-appreciation of the importance of tax administration to the nation’s economic well-being as evidenced by a willingness to expand the complexity of the tax code with little regard for the impact on taxpayers or the resources needed by the IRS to administer the code.
The Board believes more attention should be placed on how the tax gap is measured. The current tax gap estimate is based on data from 2001 returns, and although the IRS has a number of efforts underway that promise to have a positive influence on non-compliance, without updated estimates it is impossible to evaluate the overall effect of those programs on voluntary compliance.
Moreover, it is difficult to link changes in voluntary compliance levels with specific IRS enforcement and service programs, and better insight into how specific programs impact compliance is needed. The Oversight Board plans to work with the IRS to develop performance measures to evaluate the effectiveness of IRS programs such as preparer regulation, use of information reports for merchant payment cards and stock basis, and the Compliance Assurance Process (CAP) program. Such measures would provide the Board, the IRS, and other decision-makers the data necessary to make informed management and funding decisions.
The report also emphasizes that a modern information technology system and a highly effective workforce are two strategic foundations that must be in place to ensure future IRS success.
Other challenges that need attention include the need for the IRS to become more effective with less resources, implementing the tax provisions of the Patient Protection and Affordable Care Act, and simplifying an expanding tax code.
The entire report is available at www.irsoversightboard.treas.gov.
Board Discusses IRS FY2013 Budget, Modernization, and New Information Matching Initiatives
In addition to releasing its annual report, the IRS Oversight Board met in Washington, DC on May 5th. The Board discussed IRS budget issues and reviewed the progress of the Customer Account Data Engine 2 program. The IRS reported that achievement of Transition State 1, which will implement a modern data base and provide the capability for daily updating of tax accounts for individual taxpayers, is on schedule and on budget for January 2012.
The Board reviewed the Streamlined Critical Pay program and approved target values for the IRS’ Human Capital strategic measures. In addition, the Board was briefed on the implementation plan for the new information reports that will begin in 2012 for securities basis reporting and payment card and third party network transactions. These information reports are intended to improve voluntary tax compliance by taxpayers and enhance the IRS’ enforcement efforts.
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