2012 Year End Tax Planning Strategies

With less than 30 days left in 2012, there is still time to do some year-end tax planning.  This 2012 tax year is more difficult in that no one knows how the tax laws may change before the end of the year.  With certain tax deductions and credits due to expire at the end of 2012 (sunset provisions) and new higher tax brackets kicking in next year (end of the Bush-era tax cuts), year-end tax planning is harder than ever.

However, income tax planning must go on even in this uncertain tax environment.  As a result, it is essential to know the customary year-end planning techniques that cut income taxes.

It all starts with a tax projection of whether you will be in a higher or lower tax bracket next year. Once your tax brackets for 2012 and 2013 are known, there are two basic income tax considerations.

• Should income be accelerated or deferred?
• Should deductions and credits be accelerated or deferred?

Example: For income taxed at a higher tax bracket next year, accelerating such income to 2012 results in less taxes being paid.  At the same time deductions and tax credits deferred into next year will become more valuable as they offset income taxed at a higher bracket.

However, life is never that simple.  Tax law uncertainty, especially this year, makes for some real guesswork.  As discussed below, when it comes to certain deductions that have tax threshold limitations, bunching of deductions to one year may force the timing into a tax year where the tax bracket is lower than the other tax year in question. Year end tax projections must take into account the maddening alternative minimum tax.

In any event, the following lays out the basic ideas for income acceleration and deduction/credit deferral in a rising income tax bracket environment.

Income Acceleration: 

For taxpayers who think that they will be in a higher tax bracket, here are some targeted forms of income to consider accelerating into 2012.

• Receive bonuses before January 1, 2013.  If your employer allows you the choice, this may create some significant income tax savings.  Also, be aware that certain high income earners will pay an extra 0.9% in social security taxes on earned income above certain thresholds starting in 2013.
• Sell appreciated assets.  With capital gains being taxed at a higher rate in 2013, it may make sense to sell such assets before the end of the year.  For a complete discussion of this issue please see 2012 Year End Tax Planning: Should Taxpayers Sell in 2012 Before Rates Rise?  Important 

Example:  Mr. Appreciation has low basis stock that has appreciated by $200,000 as of December, 2012.  He thinks he will need to liquidate his positions either this year or next. His $200,000 gain will generate $30,000 in federal taxes in 2012 (15% tax).  If Mr. Appreciation waits until 2013, the tax rate may be 25% (or more due to the 2013 higher capital gain rate and 3.8 percent surcharge and itemized deduction limitations) with a tax of $50,000 in 2013.  As a result,  a sale in 2012 may save $20,000.

Note, however, that for an older taxpayer or one in ill-health, this strategy may not make sense since there would be no capital gains (because of the step up in basis rules) if the assets passed through his or her estate.

Planning Note:  The wash sale rules do not apply when selling at a gain, so taxpayers can cash out their gains and then repurchase the securities immediately afterwards.

• Redeem U.S. Savings Bonds.  Be aware that starting in 2013, a new 3.8 percent Medicare tax on unearned income, including interest, dividends and capital gains, will take effect.  So cashing in these bonds may make sense in the proper situation. For more on this read 2013 Sneaky New Tax – Not Too Early to Plan for 3.8 % Medicare Tax on Investment Income.
• Complete Roth conversions.  Taking into income the monies in IRA accounts in a year before your tax bracket is due to rise may make for some significant tax savings.
• Accelerate debt forgiveness income with your lender.
• Maximize retirement distributions.  Remember the minimum required distributions (MRDs) are the amounts distributed each year to avoid the draconian 50% MRD penalty.  However, taxpayers with IRAs can choose to take larger distributions this year to have such income taxed at a lower income tax rate than in 2013.
• Electing out or selling outstanding installment contracts.  Disposing of your installment agreement may bring the deferred income into 2012 at a lower tax rate than anticipated in future years.  It may be helpful to pay tax on the entire gain from an installment sale in 2012 by electing out of installment sale treatment under Section 453(d) of the Internal Revenue Code, rather than deferring tax on the gain to later years.  Conversely, in certain situations installment sale treatment may be a better option since it allows for spreading of income over multiple years which may keep taxpayers below the modified adjusted gross income threshold.
• Accelerate billing and collections.  If you report income on a cash basis method of accounting, immediately sending out bills to increase collections before the end of the year may result in significant tax savings.
• Take corporate liquidation distributions in 2012.  Senior or retiring stockholders contemplating the redemption or sale of their shares of stock in their corporation can save considerable taxes by selling their shares in 2012.

Deductions and Tax Credit Deferrals:

• Bunch itemized deductions into 2013 and take the standard deduction into 2012.  Note, however, the AGI limitation rises to 10% in 2013 from the current 7.5% (except for those over age 65), so this limitation may dictate the opposite strategy in certain taxpayer situations.
• Postpone paying certain tax-deductible bills until 2013.
• Pay last state estimated tax installment in 2013.
• Postpone economic performance until 2013 if you are an accrual basis taxpayer.
• Watch adjusted gross income (“AGI”)  limitations on deductions/credits.  For certain expenses such as elective surgery, dental work, eye exams, it would be better to have it done in the year that you are already above the applicable  AGI  threshold.  However, it may be better to incur these expenses in 2012 where the applicable AGI limit (7.5%) is lower than the 2013 limit (10 % for those under 65).  It all depends on the particular tax situation of each taxpayer.
• As mentioned above, watch the AMT. Missing the impact of the AMT can make certain year-end strategies counterproductive. For example, aligning certain income and deductions to cut regular tax liability may in fact increase AMT liability.  It is very easy to have your tax planning backfire by missing the difference between the regular tax and AMT tax rules.

Example: Do not prepay state and local income taxes or property taxes if subject to the AMT.  It will generate no income tax benefit.

• Watch net investment interest restrictions.
• Match passive activity income and losses.
• Purchase machinery and equipment before the end of 2012.  The very generous current Section 179 deductions decline in 2013 to $25,000 and there is no 50% bonus depreciation in 2013.

Final Thoughts and Warnings:

Remember that these are some of the customary year-end income tax strategies and are not all-encompassing.  Taxpayers must take into account slated tax law changes for next year and last-minute tax laws enacted before year-end.  Accelerating tax payments must take into account the impact on cash flow and the present value of money.  This is why it is essential to “run the numbers” to find the best steps to reduce the impact of these new tax laws.

Also keep in mind that recent tax law changes, like the 3.8 medicare tax that applies to 2013, bear heavily on income tax planning.  For more details please read 2013 Sneaky New Tax – Not Too Early to Plan for 3.8 % Medicare Tax on Investment Income.

Most importantly remember that income tax strategies depend on the specific income or expenses of each taxpayer and their overall income, gift and estate tax setting.  This discussion offers some but not all tax strategies.

As always, it is quite beneficial to have tax counsel look at the details of your particular income tax situation to carve out specific tax strategies to cut taxes owed.

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Hurricane Sandy: Tax Deductions For Casualty Losses

My last post talked about when we can trash tax and other important records. Well, Hurricane Sandy brought a whole new meaning to the concept of trashing records and a whole lot more.  

Experts estimate that Hurricane Sandy has caused $50 billion of damage.  Eqecat Inc., a financial advisory firm out of Oakland, California predicts that insurance will cover $10 to $20 billion of such losses.  Storm victims will be on the hook for the other $30 billion of losses. 

A couple of points to keep in mind before talking about the casualty loss tax implications:

• If your house is damaged from this disaster, contact local building authorities to see if the home is inhabitable,
• Establish an insurance claim, but don’t settle immediately,
• Make temporary repairs and take other remedial action to prevent further damage to homes and belongings, and
• Take photos of the damages.

With so many lives in complete turmoil, many of us on the East coast  crushed by Sandy’s wrath are not thinking of  claiming a casualty loss for tax purposes. However, knowing about how taxpayers can claim tax deductions under casualty loss provisions of the Internal Revenue Code is essential in dealing with insurance companies.  While memories are fresh and evidence is still available, now is the time to develop, document and support such casualty losses.

To aid those affected by this devastation readers should look at my article entitled Casualty Losses For Hurricane Sandy.  This article details  the tax qualification rules for being eligible for casualty losses.  It is a must read for anyone devastated by Sandy.

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Can I Trash It Now? Tax Record Retention Guidelines

Papers, papers and still more papers.  When can I destroy these documents?

There are no hard and fast rules in this area.  The following offers some general guidance to carefully consider when determining any destruction of documents.

Against the urge to purge, remember that maintaining documents and records is often essential if a tax audit by the IRS, state or local taxing authority occurs.  Be aware that it is the burden of the taxpayer to provide sufficient proof and support for any tax position taken on a tax return.  Prematurely disposing of relevant documentation and proof supporting a tax deduction or tax position could have a disastrous tax impact.

Tax rules offer some guidance as to minimum document retention periods. It is imperative to keep records such as receipts, canceled checks, and other documents that support an item of income or a deduction, or a credit appearing on a return until the statute of limitations expires for that return. Here are some of the key statute of limitation rules for federal tax returns:

• For most returns the statute of limitations is 3 years from the date you filed the return. However, the following are some very important exceptions to this 3 year statute of limitation.
• There is no period of limitations to assess tax when a return is fraudulent or when no return is filed.
• If income that you should have reported is not reported, and it is more than 25% of the gross income shown on the return, the time to assess is 6 years from when the return is filed.
• For filing a claim for credit or refund, the period to make the claim generally is 3 years from the date the original return was filed, or 2 years from the date the tax was paid, whichever is later.
• For filing a claim for a loss from worthless securities the time to make the claim is 7 years from the date the return was due.
• If you are an employer, you must keep all of your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.

Additionally, it is often imperative to check state and local statute of limitation rules before destroying files and records.

Keep in mind that documents may need to be retained and preserved for legal reasons other than taxation, such as, insurance claims or facilitating the transfer of  assets in the case of deceased family member.  Documents like death certificates, estate tax closing letters should be kept indefinitely.

For more detailed guidance on how long to keep specific documents and other document retention considerations and safeguards, please read my article Record Retention For Individuals .

For more detailed guidelines for record retention rules and other protective housekeeping measures for businesses see Record Retention Guidance For Business: A Conservative and Basic Approach.

A discussion with your tax attorney and tax accountant may be a prudent and conservative course of action before destroying any documents or files.

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Philadelphia Now Allows A Tax Credit for Hiring Veterans

Philadelphia has recently amended its Business Privilege Tax (business income and receipts tax)  to allow a credit for employment of veterans of the Armed Forces.  This new Philadelphia tax law defines a “veteran” as a person who has received an honorable discharge, served a minimum of six months in active full-time duty within the past 10 years and has met the qualifications under the federal Vow to Hire Heroes Act of 2011. The period of eligibility for hired veterans is between July 1, 2012, and June 30, 2014.

The law requires that the veteran’s compensation is to other employees in the same position or, if a similar position does not exist, at an average hourly rate of at least 150% of the federal minimum wage.

The business will receive a credit of $2,000 for a full-time position, multiplied by the percentage of the tax year that the veteran worked for the business or $1,000 for a part-time position, multiplied by the percentage of the tax year that the veteran worked for the business.

The credit is available for a total of 24 months of employment, and the total amount of credit a business may receive for a full-time employee over all tax years is $4,000. For a part-time employee for the 24 months of employment, the total credit allowable for the business is $2,000.

This new law is the result of Bill No. 120491, City of Philadelphia, effective June 27, 2012

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Risky Business: Playing Fast and Loose with Worker Classification

In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), employers need to consider the benefits and risks of their current classification of employees as independent contractors. This window of opportunity is only available before the IRS or Department of Labor initiates an examination.

Small companies and businesses of many sizes have classified their workers as independent contractors and not employees to gain the following illegal advantages and savings:

• Avoid paying payroll taxes including Social Security, Medicare, Unemployment, and Federal tax withholding.
• Avoid having to pay for medical insurance.
• Avoid making payments of contributions into employer retirement plans.
• Obtaining services at a fixed rate, no matter what the time required to complete the assignment.
• Reducing employee record keeping, clerical and other administrative cost savings.

These tempting advantages have created a tremendous incentive for employers to classify workers as independent contractors when they are truly employees.  The IRS has warned that it is stepping up its policing of this area.  Here are some of the costs and penalties employers face if caught by the IRS:

• Payroll tax liability, plus significant penalties and interest.
• Various civil and criminal sanctions brought by the IRS, including fines and imprisonment.
• Retirement plan disqualification or remediation and penalties.  If these workers were wrongly excluded from coverage under any and all retirement plans, such plans would not meet certain plan qualification tests and could be disqualified.  In the alternative,  the employer would have to go through an IRS plan remediation application and pay various penalties and costs to salvage the plan. For more details on plan remediation see Failing To Update Retirement Plans: Avoid Plan Disqualification & Penalties By Using the VCP Program
• Personal liability for corporate officers of up to 100% of the amount the employer should have withheld from the employee’s compensation in payroll taxes.  Section 6672 imposes personal liability on officers, shareholders and board of directors as “responsible persons.”  For more details read Personal Liability For Corporate Employment Taxes.
• Legal fees, the lost time spent litigating this matter and the related out-of-pocket costs of litigation.  In these cases, payments to accountants and other experts are necessary for the attorney to prepare for the case and for such experts to appear in court. Even if the case avoids full-blown litigation, legal fees and out-of-court settlement fees will result.

A battle with the IRS is only part of the employer’s problem.  Additionally, a disgruntled or vengeful worker can make real trouble for the employer by making the following claims against the employer:

• Medical coverage:  If the employer had medical plans for its other employees, these excluded workers may make claims for lack of coverage.
• Retirement Benefits:  For all the years in which they were erroneously treated as independent contractors, such workers may demand to have contributions made to the employer’s profit-sharing, 401(k), pension or other retirement plan.  This could be a very large liability if the claim involves multiple employees over multiple years.
• Other Fringe Benefits: In addition to retirement plans, workers may demand stock options, disability payments, workers’ compensation and any other fringe benefits being offered by the employer to its other employees.
• Overtime Pay:  These workers would be entitled to overtime pay under the Fair Labor Standards Act if the hours he or she provided to the employer in the past exceeded the standard workweek.
• Unemployment claims.  For those workers erroneously treated as independent, they may assert a claim to collect unemployment for past employment.
• Lawsuits:  Lawsuits brought against the worker may trigger legal action against the employer to hold the employer legally responsible.

Where the worker seeks reclassification and complains to the authorities, the IRS or the Department of Labor may then get involved by auditing the employer  on how it classifies all of its independent contractors. A full-blown audit could result in economic disaster or ruin for an employer.

Bottom Line:  Any employer playing fast and loose in this area needs to look at their employment practices very carefully.  For determining whether a worker is truly independent please read my article Employee or Independent Contractor?  Finally, see Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean for the details and qualification requirements for coming within the IRS’s Voluntary Worker Classification Settlement Program (VCSP).

The key here is to get with your tax attorney to review your situation and take advantage of the VCSP before the IRS comes knocking on your door.

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IRS Slams Taxpayers: Attention to Tax Details Matter

Taxpayers found out the hard way that the documentation rules imposed by the IRS better be followed exactly and to the letter.  In Durden, TC Memo, 2012-140, taxpayers claimed a $22,517 charitable contribution for 2007.  The IRS disallowed this deduction and the United States Tax Court agreed.

The taxpayers had canceled checks and a letter dated January 10, 2008 from the church confirming this contribution.  Seems like that would be enough.  Wrong!

The IRS did not accept the church’s acknowledgement because it lacked certain language as required under IRS rules.  For a charitable contribution deduction, Section 170(f)(8) of the Internal Revenue Code requires that a monetary contribution of $250 or more must be substantiated by:

1. A contemporaneous written acknowledgment,
2. That indicates the amount paid by the taxpayer, and
3. Whether the organization provided any goods and services in consideration (or in exchange) for the contribution, and if so, a good faith estimate of the value of such goods and services.

The problem for the taxpayers was that the church failed to include part 3 in their January 10, 2008 letter to the taxpayers.  They then went back to the church and got a second letter dated January 21, 2009 that revised the first letter by containing the required language under part 3 of this test.

But now the problem was that the revised letter was too late so it could not be considered contemporaneous by the IRS.  To be contemporaneous under Section 170(f)(8)(C) of the Internal Revenue Code it must be obtained by the due date of the tax return (here April 15, 2008) plus any extensions or, if earlier, the date the taxpayer files the return.  So now the taxpayers flunked part 1 of the test!

You might think that this is pretty harsh since the taxpayer’s really came close here.  So did the taxpayers.  The taxpayers argued that since they substantially complied they should still get the deduction.  The substantial compliance test has been successfully argued where a taxpayer can show that despite strict compliance they have met the essential statutory purpose of such requirement.  The court pointed out that the essential statutory purpose of the acknowledgement rules are  two-fold:

1. Assist taxpayers in determining their deduction, and
2. To aid the IRS in processing returns.

The court determined that without a statement from the church that no goods and services were provided,  neither of these two essential statutory purposes can be met.

This is a pretty harsh result for the taxpayers, especially since it was clearly the church that failed to provide the requisite language.  But the object lessons here are clear.

First, when dealing with charitable contributions you better make sure this language is present, especially in cases where large gifts are involved.

Second, when it comes to taxes attention to details is essential.

Third and finally, complying with the various federal, state and local income taxes is complicated.  Having an attention-to-detail minded tax attorney, or tax accountant is greatly recommended and probably essential.  With the loss of this large charitable deduction and the cost to bring this matter before the United States Tax Court, the Durdens definitely found this out the hard way.

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New 2013 Medicare Tax: 3.8% Stealth Tax

The Supreme Court has recently ruled that the new health care act is constitutional.  As a result, on January 1, 2013, as part of this health care law, the new 3.8% medicare tax will start to impact many taxpayers.  It would seem prudent for taxpayers to plan now for this new stealth tax.   Basically, this new extra 3.8% tax applies to the lesser of

1. Net investment income or
2. The excess of modified adjusted gross income (MAGI) over the “threshold amount.”

Threshold Amount: The threshold amounts are dependent on the type of taxpayer.  Here are the threshold amounts for various taxpayers:

1. For married taxpayers filing jointly, the threshold amount is $250,000
2. Married filing separately, the threshold amount is $125,000
3. All other individual taxpayers, the threshold amount is $200,000.
4. For trusts and estates, the threshold amount is $11,650.

This is just a basic overview.  To learn more about this stealth tax please read 2013 SNEAKY NEW TAX:  Not Too Early to Plan For The 3.8 Percent Medicare Tax On Investment Income.  This article provides more details about this tax, its scope, limitations and exclusions.  The article also provides examples of how this tax operates.

With 2013 quickly approaching, it is not too soon to become aware of this new stealth tax and look at methods to possibly lessen the impact of this tax.

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Summer Camp: Tax Breaks For Those Working or Looking For Work

Now that the summer is in full bloom, parents who have sent or considering sending their children to summer camps may not be aware of the tax implications.  Parents who have placed children in camp while they are working or looking for work may be eligible for various tax breaks such as the dependent care credit  and the deduction for medical expenses in certain special situations.  To get a better grasp of the various tax breaks and the special rules and limitations in this area readers should explore Summer Camp: Tax Treatment.

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Quiet Disclosures of Offshore Foreign Accounts

Taxpayers with foreign accounts are in a tight spot now.  They can take advantage of the current voluntary disclosure program  (as discussed Foreign Offshore Accounts: IRS Third Amnesty Program) to minimize their tax exposure and to resolve these looming and unresolved problems.  However this disclosure program brings IRS scrutiny and potential civil penalties, and in the most serious situations criminal penalties. In light of these exposures, some taxpayers with interests in foreign assets have tried to sidestep these issues by employing a strategy called a “quiet disclosure.”

The quiet disclosure is implemented by simply amending a previously filed tax return to show the foreign accounts, report the income associated with the account and paying the tax with the amended return.  The problem with this strategy is that the IRS has made clear that this strategy is not acceptable.  The IRS clearly states in its Questions and Answers of May 6, 2009 that quiet disclosures do not satisfy reporting requirements.  On June 1, 2011, IRS announced that it would be opening up examinations against such taxpayers who have employed this strategy.  They have made clear from Q&A #10 of 2009 and Q&A #15 of 2011 of their disclosure programs that such taxpayers who have made quiet disclosures would be best served to come forward to take advantage of the penalty framework of the voluntary disclosure programs.

Be aware that the civil and criminal penalties for foreign bank accounting reporting (hereinafter referred to as FBAR) violations are in most cases based on the intent of  the taxpayer.   (For more on these reporting requirements see Foreign Bank Account Reporting.) Where a taxpayer is aware of the FBAR requirements and the disclosure programs but knowingly attempts a quiet disclosure, the IRS may argue and a judge or jury may decide that this strategy is indicative of negligent, reckless, or perhaps willful conduct.

Equally important to note is that quiet disclosures may be  lacking in other ways.  Although amended returns (quiet disclosures) report income, taxes, and related interest, they do not show accuracy related penalties.  More importantly the amended return may not show the information required by the FBAR form (Form TD F 90-22.1) .

For taxpayers with foreign accounts they need to seek tax counsel to decide the proper course of action in this messy area.  But it would seem that using the quiet disclosure strategy would only compound the problem.  To take advantage of the IRS current amnesty program and to see the operative rules please read Foreign Offshore Accounts: IRS Third Amnesty Program.

Tax Practitioner Warning:  For those accountants subject to SSTS No.1, Tax Return Positions the following sobering warning should be kept in mind:  Tax advisors should “not take a questionable position based on the probabilities that the client’s return will not be chosen by the IRS for audit.”  Additionally, the various criminal and civil penalties under the Internal Revenue Code for tax practitioners should be taken very seriously in this context.  In light of these exposures, practitioners should take pause before  recommending a quiet disclosure.

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FBAR Deadline is Quickly Approaching For Those With Foreign Bank Accounts

The filing deadline for FBAR is June 30, 2012, and there are no exceptions.  Be aware that FBAR filings  must be received by June 30, not just post-marked.

For more about FBAR filing requirements please read Foreign Bank Account Reporting at the following link: http://www.sjfpc.com/foreign_bank_account_tax_reporting_90-22-1.html

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Employers Playing Tax Games with Worker Classification: Part II: Employee or Independent Contractor?

Our previous post discussed the IRS new Voluntary Worker Classification Settlement Program (VCSP) offering past payroll tax relief when the employer agrees to reclassify workers as employees.  For the details and discussion of this VCSP program please see our just published article at my website at the following link:  http://www.sjfpc.com/IRS_Payroll_Taxes_VCSP.html.  Many have inquired as to what distinguishes an employee from an independent contractor.  For a discussion of this issue and the IRS and case law criteria involved please see our article entitled Employee or Independent Contractor? at http://sjfpc.com/IRS_tax_rules_employee_versus_independent-contractor.html.  Both of these articles can be seen at our website  (www.sjfpc.com).

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New Tax Alert: Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean

The IRS has just introduced a new Voluntary Worker Classification Settlement Program offering past payroll tax relief when the employer agrees to reclassify workers as employees.  For the details and discussion of this VCSP program please see my just published article at my website at the following link: http://www.sjfpc.com/IRS_Payroll_Taxes_VCSP.html at my website (www.sjfpc.com).

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Hidden Offshore Bank Accounts: IRS Offers A Second Chance To Come Forward

The Internal Revenue Service announced on February 8, 2011 a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes.  Here are some of the basic provisions of this program.

 

1. Deadline To Come Forward: August 31, 2011

This second new voluntary disclosure initiative will be available to taxpayers through Aug. 31, 2011.

2. 2011 Offshore Voluntary Disclosure Initiative Makes Raises Penalty Charges and Makes Other Changes to the 2009 OVDP

The new IRS program is called the 2011 Offshore Voluntary Disclosure Initiative (OVDI). It includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting.

3. New Penalty Framework

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 12.5 or 5 percent penalties instead of the 25% penalty. Please see the discussion below for such exceptions.

4. Back Taxes Must Be Paid

Participants also must pay back-taxes and interest for up to eight years.

5. Additional and Usual Penalties Imposed

Taxpayers must pay accuracy-related penalties. No reasonable cause arguments can be made to avoid the such penalties. The IRS will also assert failure to file and failure to pay penalties.

6. Returns To Be Filed By August 31 Deadline

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

7. Special 12.5% Category Instead of 25% Penalty

The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

8. Special 5% Category Instead of the 25% Penalty

If a taxpayer meets all four of the following conditions, then the offshore penalty is reduced to 5%:

 (A) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account);

(B) has exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address;

(C) has, except for a withdrawal closing the account and transferring the funds to an account in the United States, not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and

(D) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

9. Special 5% Category for Foreign Resident

If a taxpayer is a foreign resident who was unaware that he or she was a U.S. citizen, then the offshore penalty is reduced to 5%.

10. Benefits of 2011 Initiative: Avoid Higher Penalties and Possible Criminal Prosecution

The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.

Copyright © 2011, Steven J. Fromm.  All rights reserved. No part of this article may be reproduced or used in any form or fashion without the written permission of Steven J. Fromm.

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