Boehner Piles On FB Founder

There is so much inaccurate and misleading information floating around about Facebook Co-Founder Eduardo Saverin and his tax avoidance that it is time to point out a couple of things.

1. Renouncing U.S. Citizenship does not help you avoid taxes up to that point.  In other words, Mr. Saverin still had to pay capital gains on his FB shares based on the value on the date that he renounced his citizenship.  Which means that he owed (or already paid) hundreds of millions of dollars in capital gains taxes upon his exit.

2. He will have to pay the taxes that have accrued no matter where he lives.  In other words, he is paying his “fair share” on what he earned as a U.S. Citizen.  What he earns after that is between him and his new home country.  The fact that he owns U.S. assets (FB shares) would make it rather easy for the IRS to collect the taxes that he owes.  If he doesn’t pay, they can put a tax lien on his remaining FB ownership.

“There’s already a law on the books, George,” John Boehner said to George Stephanopoulos . “But this is outrageous. This is absolutely outrageous — that somebody would renounce their citizenship to avoid paying taxes. And yes, it’s already against the law.”

Senators Chuck Schumer and Bob Casey have been on the case for a while now.  “Mr. Saverin has decided to ‘defriend’ the United States of America just to avoid paying his taxes,” said Schumer. “We aren’t going to let him get away with it so easily.”

“This guy just thinks he can rip us off by engaging in this scheme,” Casey, D-Pa., said.

“Saverin has turned his back on the country that welcomed him and kept him safe, educated him and helped him become a billionaire,” Schumer, D-N.Y., said. “This is a great American success story gone horribly wrong.”

ABC New’s entitled their article, “Facebook’s Eduardo Saverin ‘Spits in the Eye of the American People.’

Well, I don’t feel like Mr. Saverin “spat in my eye.”  He earned money here and paid taxes on it (and will pay more if he hasn’t already).  If he wants to leave then I think it is his loss.  But, I think that if Mr. Saverin wanted to come back and start another Billion dollar company he should be welcomed back.  Senator Schumer says that this country educated him and helped him become a billionaire.  That is true.  But, without Mr. Saverin’s money, Facebook may never have gotten started.  It was his family money that financed Facebook from the beginning.  Now, look how many Americans have become billionaires because of Mr. Saverin.

Let’s be clear.  I do think that everyone should pay their fair share of taxes.  But, there are two issues here worth mentioning:

1. We live in a Global Economy.  Thus, we have to compete globally.  The U.S. is the only country in the world that taxes it’s citizens on worldwide income no matter where you live.  If someone leaves because U.S. taxes are too high that should tell us something.  Also, the reporting requirements for U.S. Citizens living abroad are cumbersome.  Just to have a foreign bank account means that you have to report the information to the IRS every year on Form TD F 90-22.1.  Not reporting it results in a fine of $10,000 per occurrence.  Just that requirement alone would make someone consider renouncing their U.S. Citizenship.  Think about it.  If you live overseas and you have two checking accounts, a savings account and business account and you forget to report those accounts to the IRS for two years, you could owe $80,000 in penalties, just for not letting them know that “hey, I have some foreign bank accounts.”   And, of course, living overseas means that you have to pay taxes in the country where you live and to the U.S.  Sure, you can exempt about $100,000 or so, but for the high income earners that doesn’t help much.  Singapore doesn’t have a capital gains tax which could be the reason that Saverin chose that country.  But, Singapore will benefit from him living there in other ways because of the money he will spend and invest in their country.  Thus, Singapore is competing in the Global Economy by offering incentives, whereas Schumer is competing by trying to force people to stay.

2. If he owes taxes, he should have to pay them.  I haven’t heard anyone report that Mr. Saverin said he isn’t going to pay the taxes that are actually due.  But, to try to pass a new tax law just because of him?  Come on.  That is a little ridiculous.

In a time where we should be encouraging overseas investment into our economy, new laws like the one Senator Schumer is espousing would only discourage people from doing business here.

As far as Speaker Boehner is concerned, he would be much better served focusing on cutting the Federal Deficit by cutting spending instead of attacking Mr. Saverin.  Perhaps if our Congress would focus more time and energy on finding ways to cut spending and finding ways to bring ex-patrioted dollars back into the U.S. instead of trying to squeeze every last dollar of possible taxes out of people on the other side of the world we wouldn’t be in the financial position we are in.

April 15th (April 17th): Just Another Day

Please, don’t stress about April 17th, the due date for this year’s Individual and Partnership Federal Income Tax Returns.  April 17th is NOT a hard deadline.  Just file an extension and if you think you might owe money make an estimated payment to avoid interest and penalties on the amount due.  Keep in mind, the point of filing an extension, if you owe money, is to avoid a late FILING penalty.

So, why all the hoopla surrounding the tax “deadline”?  We are programmed from an early age to fear the IRS.  Many people believe that if they don’t file their tax return by April 15th (April 17th) they might face serious fines or even go to jail.  Of course, that isn’t really true unless you owe a lot of money and don’t file at all.

Here are the facts:

1.  If you are due a refund, there are no penalties if you file late.  Yep, that’s correct (for Federal returns).  The IRS will even pay you interest on the amount they owe you!  (at .000000001% or something like that)

2. If you owe money, you can avoid late filing penalties by filing an extension.   For Individuals the extension is 6-months and for Partnerships it is 5-months.

So, relax, stop stressing and file an extension.

IRS Delays Tax Refunds: Congress to Hold Hearings

Before the 2012 tax filing season the IRS released the 2012 Refund Cycle Chart showing that taxpayers could receive their refunds in as fast as 5 business days this year.  Unfortunately, the IRS has not lived up to this schedule.   In fact, in almost every instance this year that I’m aware of, the IRS has deposited refunds late.  I’m not aware of a single instance where any taxpayer actually received their refund in 5 business days.

Why such delays this year?  Well, they haven’t really said for sure.  They’ve said things like new “anti-fraud techniques” or “computer glitch”.    They also came out with the standard statement “most taxpayers are receiving their refunds within 10-21 days, which is consistent with historical time frames”.  What?  People don’t care about historical time frames.  If you say you’re going to deposit the money on a certain day, do it!  If you don’t, provide a valid reason to the taxpayer why you didn’t!  And, what is it?  Is it a “computer glitch”, “anti-fraud techniques” or is it just okay because people are getting their refunds within 10-21 days?

But, now Congress has scheduled a hearing to investigate why refunds have been delayed this year.  Hopefully they will get to the bottom of this.  Unfortunately, many taxpayers blame tax preparers when their refunds don’t get deposited on time.  This has led to some tax preparers being threatened.  It is also especially frustrating to taxpayers when the IRS’ “Where’s My Refund” tool also produces errors.  This gives the impression that maybe the tax preparer didn’t even file the return at all, which is not usually the case.

So, if the IRS doesn’t give you your money back on time they just make excuses, but, pay your tax bill late or file a business return late and you get hit with penalties and interest.

The Flawed Earned Income Credit

A single mom, whom we’ll call “Mary”, works hard without support from her ex to provide for her child, and makes about $35,000 per year.  Unfortunately, she makes too much money to qualify for the so called “Earned Income Tax Credit.”  During 2011, she lost her job due to company downsizing.  But, since she lost her job in October, her earnings for 2011 were still close to $30,000 – still too high to qualify for the EITC (with one child).  If she had lost her job in July or maybe August, her earnings would have been low enough to qualify.

Unfortunately, qualifying for the EITC has a lot to do with timing.

Mary is still unemployed and looking for a job.  It could be March or April before she lands a good job.  In other words, she could start working “just in time” to NOT qualify for the EITC again in 2012.  Even though she will have been out of work for 6 months, since those 6 months are split between 2011 and 2012, she doesn’t get the EITC for either year.  This is what you call a “wacky” system that only someone in D.C. could have come up with.

A single parent, claiming 3 dependents, can hit the “sweet spot” of EITC by earning between $12,750 and $16,650 during the year.  They can get EITC of up to $5,751 added on to their Income Tax Refund.  For 2 dependents the EITC is $5,112.

Another single mom that I know has supported 2 children on only about $17,000 per year for the past few years.  Unfortunately, last year she got a second job at a gas station and made an extra $5,000.  This extra income significantly decreased her EITC this year.  Only someone in D.C. could devise such a system that punishes a single mom for getting a second job.

The third situation is about two divorced parents living together with each having children of their own.  They each are providing for their own “household” and paying for each of their children’s expenses.  Thus, they both claim Head of Household and the EITC.  They each get $3,000 – $5,000 per year from EITC.  Then they get married.  Suddenly they no longer qualify for the EITC at all because together they make “too much money” to qualify for EITC.  Again, only a bureaucrat in D.C. could devise a system that encourages co-habitation and punishes married people.

All three of these situations are actual situations and I know all of these people personally.  The EITC is one of the many flaws in our current tax system that needs to be fixed.

Here is how it could be fixed:

1. If you’re going to have EITC at all, allow people to apply for EITC any time during the year using the past 12 months of income.  This could be done on an amended Form 1040X.  They would need to wait 12 months before applying again.

2. In order to not “punish” someone for getting a second job, allow people to take an average income over the past 3 years to determine their EITC.  Putting this in place would help those people who didn’t realize that they were going to be “punished” for working a second job and would allow them to decide going forward, after meeting with their tax professional, if they want to keep working the second job.  When you consider child care, social security and medicare taxes and the decrease in EITC it is hardly worth it for someone to work a second job.

3.  Allow married couples to file as “Single” if they so choose with only one being allowed to file as “Head of Household”.  And, no longer allow people living together to each file as “Head of Household”.  There should only be one “Head of Household” filing per physical address.

Use the Same Tax Professional for Personal and Business

Many taxpayers will hire a professional to prepare their business return, and then will prepare their personal return themselves.  I do not recommend this if you own an S-Corporation or a closely held Partnership.

The primary reason you should not do this is because of the way Bonus Depreciation and the Section 179 deduction is handled.  If you take more Bonus Depreciation or Section 179 than you need, it is lost forever.  When I prepare an S-Corporation return that is closely held and the owner’s personal return(s) I toggle back and forth between the personal and business returns.  This ensures that the taxpayer(s) pay the least amount of tax possible without forfeiting Section 179 or Bonus Depreciation.  Without doing both returns at the same time you really don’t know for sure if you are maximizing your tax savings.

I’ve had business owners tell me to “just take the max” of Section 179.  They say this without really understanding it.  Then they prepare their personal return.  It is possible that they could be forfeiting thousands of dollars of future deductions by taking more Section 179 than they really need for that year.  The future deductions would more than pay for the extra preparation fee.

Of course, one could always file amended returns going back three years.  But, how would you know if you needed to file amended returns unless you hired a professional to take a look.  Also, if you did realize that you took too much Section 179 or depreciation in prior years and went back and filed amended returns, you would have to amend both business and personal, which would result in more preparation fees.  The best option is to simply have your tax professional prepare both your business and personal returns from the beginning.

1 Down, 5 To Go

January 31st is finally gone!  The following items were due on January 31st:

W-2′s

1099′s

941′s, plus payments for those less than $2,500 in payroll taxes for the quarter.  You have until Feb. 10th to actually file the 941 if you made your deposits on time.  The payment, however, is due by Jan. 31st.

940′s, plus payments.  You have until Feb. 10th for this as well, if you made the payments on time.  If you owe more than $500, chances are you should have made a deposit during the year.  The payment is due by Jan. 31st.

State Unemployment Taxes

There are six primary days a year that cause stress for tax and accounting professionals.

They are:

January 31st

February 28th

March 15th

April 15th

September 15th

October 15th

There are others as well.  But, those are my six.

Now we can move on to bigger and better things.  Like preparing tax returns!

IRS Direct Deposit Refunds Will Be Getting Faster

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The IRS is working toward a real-time filing system.  They announced today that they are hosting a Second Real-Time Tax System Meeting.  This real-time system will allow instant matching on returns which should result in 24 hour refunds.

In my opinion this is long overdue, at least the refund part.  Under the current system you can receive your refund in 5-10 business days.  This is without any type of document matching.  Employers don’t have to file W-3′s  and W-2′s with the IRS and SSA until Feb. 28th so any matching that is done is way after-the-fact.  In fact, the IRS admits that “It is not uncommon for a taxpayer to receive a notice 12 to 18 months after a tax return is filed.  This after-the-fact compliance approach can create problems and frustrations for both taxpayers and the IRS.”  So, my question to the IRS now is, what happens in the 5-10 business days that people currently have to wait?  Why is there even a wait time at all if there is currently no matching done?

When I e-file a client’s return I get an almost immediate response from the IRS that the return has been accepted.  In a matter of minutes their computers have matched up the taxpayer’s name, SS#, spouses name, SS#, all W-2 company names with Tax ID#’s and some other various information.  Of course, they cannot match up any W-2 payroll information because they either haven’t received the information from the employer or they have and it hasn’t been processed (it will be 12-18 months later).  Then, they wait 5-10 business days before they directly deposit the money?  Why?  What happens in that 5-10 days?  It appears, nothing.  There should already be 24 hour refunds.  They don’t need a perfect matching system in order to implement that.

This real-time system should be done in two phases:

1) Start refunding taxpayers money immediately upon them filing.  This would be simple to implement under the current system.  Anything larger than $15,000 should require additional approval (or matching) to prevent extremely large fraudulent refunds.

2) Start improving the matching system.

A real-time system is great, but, the big question for me is, how much “matching” is going to be done up front?  All of it?  And, will it cause even greater delays for many taxpayers in getting their refunds?  Employers aren’t perfect either.  Many times the information that they file with the IRS is inaccurate.  Under the current system taxpayers receive letters 12-18 months later.  Then they have to either agree with the changes to the return or disagree and state the reasons why they disagree.  Sometimes it turns out the the employers filed inaccurate information.

I’m for a real-time system.  But, in what form?  I think it would be great if the IRS would match things up faster so that taxpayers aren’t accruing interest and penalties for 12-18 months before they find out that their return is wrong.  But, the IRS already receives the info by Feb. 28th, 30 days after the taxpayer’s receive their tax documents.  Why does it take so long to match things up?  If they can’t match things up within a few weeks after receiving the info how are they going to operate a “real-time” system?

Santa’s Year End Business Tax Tips

Image via Wikipedia

It’s that time of year again.  Time for Santa Claus to start thinking about his tax return for the new year.  Here are some items to help Santa minimize his tax bill for 2012.

IRS Speeds Up Direct Deposit Refunds

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Beginning in 2012, filers receiving a refund will be able to get it in as fast as 5 business days.  In prior years the fastest you could get a refund was 6 business days.

Direct Deposit refunds will also be deposited on Wednesdays instead of Fridays as it has been done in the past.  It is unclear why the IRS has chosen Wednesday instead of Friday.  But, of course, it is unclear why the IRS

Steps To Starting A New Business

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Starting a new business is exciting, however, there are a lot of administrative items to take care of.  Here is a general guide on what to do.