Mobility Law Blog: Posts http://www.worldwideerc.org/Blogs/MobilityLawBlog/Lists/Posts/AllPosts.aspx RSS feed for the Posts list. Wed, 22 May 2013 00:49:47 GMT Windows SharePoint Services V3 RSS Generator 60 Mobility Law Blog: Posts /Blogs/MobilityLawBlog/_layouts/images/homepage.gif http://www.worldwideerc.org/Blogs/MobilityLawBlog/Lists/Posts/AllPosts.aspx Truncation of Tax ID Numbers Advances http://www.worldwideerc.org/Blogs/MobilityLawBlog/Lists/Posts/ViewPost.aspx?ID=177 Body:
In Short:
The IRS, supported by the tax preparer community, has been working for some years to permit the “truncation” (shortening) of ID numbers used on tax information returns in order to combat identity theft tax fraud.  It published proposed regulations in January, expanding a pilot program from 2009, and has also sought legislation to permit truncation of Social Security numbers on Forms W-2.  A bill has been introduced to do just that.
 
The Full Story:
As a part of efforts to fight rampant ID theft, IRS has worked for several years to put in place a program that would allow companies filing information returns to “truncate” the social security numbers of individuals on the payee statements (generally, Forms 1099).  “Truncation” refers to the practice of including only the last four digits of a longer number, and is routinely used by credit card companies.  For tax information returns, IRS published proposed regulations in January of 2013 under which a pilot program it has had in place since 2009 would be made permanent. For the proposed regulations, go to http://www.irs.gov/irb/2013-07_IRB/ar10.html.   Under the program, filers of most information returns are permitted (but not required) to truncate the taxpayer’s social security number on the copy of the statement sent to the payee.   For example, the truncation program would apply to real estate reporting forms (Form 1099-S) and to cancellation of debt reporting (Form 1099-C).  The truncated number would be referred to as a “TTIN.”  The regulations may be utilized by payors prior to finalization, but will be fully effective on the date they are finally adopted. 
 
Most objections to truncation have focused on implementation details, rather than on the concept itself, which does demonstrably result in fewer thefts of taxpayer ID numbers, and less refund tax fraud.  For example, commentators in the pilot program wanted the program expanded to include Employer Identification Numbers (EIN’s) as well as Social Security numbers.   However, IRS concluded that the identity theft risk is concentrated in individual ID numbers, not employer ID’s, and decided to limit the truncation program to individual identifying numbers. 
 
A basic problem, however, is that the IRS would need statutory authority to expand the program to Forms W-2, the basic wage statement given to all employees.  The Social Security number is required on that form, and IRS has no authority to allow a shorter version.  A bill has been introduced in the House of Representatives to allow truncation in wage reporting, but future action is uncertain.  H.R. 1560 (Garcia, D-FL).  The AICPA, which has long supported truncation, has recommended such legislation to Congress, and reiterated that position in a release on May 1, 2013.
 
As has been reported previously by Worldwide ERC®, tax identity theft continues to be a major problem for taxpayers, although IRS has made strides in combatting it.  Testifying April 16, 2013 before the Senate Finance Committee, IRS said it had managed to stop 5 million returns worth about $20 billion in fraudulent refunds in fiscal 2012, up from 3 million and $14 billion in fiscal 2011.  Already during this filing season, IRS has stopped 350,000 returns and $2.5 billion in refunds.  IRS is increasing its screening filters at multiple stages in the return processing cycle.  It has also expanded its identity protection personal identification number (IP PIN) program, which issues a different ID number to victims of identity theft, covering more than 770,000 taxpayers during the 2013 filing season, up from 250,000 in 2012. 
 
Identity theft was also included as the first item in the IRS’s annual list of its “Dirty Dozen” scams, issued March 26, 2013.  IR-2013-33, http://www.irs.gov/uac/Newsroom/IRS-Releases-the-Dirty-Dozen-Tax-Scams-for-2013.  Also included: Phishing (fake emails from IRS); Return Preparer Fraud; Hiding Income Offshore; and Misuse of Trusts.
 
Posted by Peter K. Scott
Category: Withholding/reporting/gross-up
Published: 5/13/2013 10:10 AM
]]> Peter Scott Withholding/reporting/gross-up Sun, 12 May 2013 16:14:32 GMT http://www.worldwideerc.org/Blogs/MobilityLawBlog/Lists/Posts/ViewPost.aspx?ID=177 Home Office Deduction Safe Harbor Useful, But Care Required http://www.worldwideerc.org/Blogs/MobilityLawBlog/Lists/Posts/ViewPost.aspx?ID=176 Body:
In Short:
The IRS on January 15, 2013, announced the availability of a new, optional, safe harbor for the home office deduction.  See IR-2013-5, http://www.irs.gov/uac/Newsroom/Simplified-Option-for-Claiming-Home-Office-Deduction-Starting-This-Year, and Rev. Proc. 2013-13, http://www.irs.gov/irb/2013-06_IRB/ar09.html.  The safe harbor will be available for 2013 returns due in 2014.  The safe harbor provides a simplified method for calculating the deduction for business use of the taxpayer’s home for those eligible for the deduction.  Rather than determining all expenses related to the home office, the taxpayer is allowed to deduct $5 per square foot of office space up to a maximum of 300 square feet, or $1,500.  However, the interaction of the home office deduction with other facets of the taxpayer’s return will generally make it advisable to calculate the deduction both ways to see which is most beneficial. 

The Full Story:
Today’s tax quote:  “If you are truly serious about preparing your child for the future, don’t teach him to subtract, teach him to deduct.”  Fran Lebowitz

A good example of the value of learning to deduct is the deduction for a home office, which is claimed by large numbers of workers, both employees and independent contractors.  However, claiming it requires a quite complicated allocation of expenses for the home, and completion of a form (Form 8829) with no less than 43 lines.  The new safe harbor method requires only that the taxpayer determine the square footage of the office space, and multiply by $5. 

However, the safe harbor is not a panacea, nor will it eliminate disputes as to whether the space qualifies as a home office in the first place.  IRS was careful to explain that all of the rules as to whether a home office deduction is allowable continue to apply.  Some of those rules are themselves rather difficult to satisfy, particularly for employees. 

To review the rules briefly, deductions are allowed for expenses relating only to that portion of the home used exclusively and regularly in one of the following ways: as the principal place of business for a trade or business; as a place of business used to meet with patients, clients, or customers in the normal course of the taxpayer’s trade or business; or in connection with the taxpayer’s trade or business, if the portion so used is a separate structure not attached to the house. The effect of the second and third conditions is that the business portion does not have to be the principal place of business if it meets either requirement. However, most claimed business use would have to qualify under the first condition, that is, as the principal place of business.
Being an employee is a "trade or business." However, in the case of an employee, the business use of the home must be for the convenience of the employer. This means the business use must further some legitimate business purpose of the employer beyond being appropriate and helpful. If the employer provides access to suitable space on the employer’s premises for the conduct of the employee’s duties, but the employee opts to do the work at home as a matter of personal preference, the employee’s use of the home office is not "for the convenience of the employer." Nevertheless, many employee homes will qualify because the location is too remote from the employer’s business location to permit the employee to commute, and all or most of the employee’s activities are conducted in the home so that it is the "principal place of business." Technical personnel, counselors, and others who do most of their work by telephone or computer are examples of employees who might meet this test.

For both employees and the self-employed, however, the "exclusive use" requirement also may be a major hurdle. As mentioned above, deductions are allowable only for the portion of the home used exclusively and regularly for business. While the regular use requirement is seldom an issue, the exclusive use test may be problematic. "Exclusive use" means only for business. If a den is used by the employee as an office, but the children watch television there or the employee uses it to pay bills and manage personal investments, no deduction is allowable. Moreover, this requirement is virtually impossible to meet unless the portion used for business is physically separated, that is, a separate room.

Assuming the exclusive use and other requirements are met, the business portion of the house is determined on the basis of a comparison of square feet devoted to business as opposed to personal use, or a comparison of the number of rooms devoted to business as opposed to personal use, or any other reasonable method. For example, if the office is 200 square feet and the house as a whole is 2,000 square feet, then the business use portion is considered to be 10 percent. However, if the house has only eight rooms, then using a "room count" yields a business percentage of 12.5 percent.  Expenses for the home as a whole are then allocated on the basis of that percentage, except for expenses directly related to the home office, for example, painting that room.

Deductible expenses include the business portion of depreciation, rent, utilities, maintenance, insurance, and repairs. Mortgage interest and real property taxes, however, are fully deductible regardless of business use.   As with all deductions, the amounts claimed for business use of the home must be fully substantiated. 

Assuming the taxpayer qualifies for the deduction, all of the calculation complications described above can be avoided by using the safe harbor.  Moreover, there are some hidden advantages of using the safe harbor that may make it more valuable than it appears. 

First, as noted, mortgage interest and property taxes are fully deductible as itemized deductions without regard to use of part of the home as a home office.  When home office expenses are calculated, a portion of those expenses is allocated to the home office, which reduces itemized deductions.  In contrast, if the safe harbor method is used, 100% of those expenses remain deductible on Schedule A.  (Note that for taxpayers in a high enough income bracket that itemized deductions “phase out,” this is not as big an advantage.  Further, if total itemized deductions do not exceed the allowable standard deduction, then it may be more advantageous to calculate the home office deduction in detail).

Second, the home office deduction requires the taxpayer to calculate and claim depreciation.  While this increases the deduction, it also decreases basis in the home, and the amounts claimed as depreciation do not qualify for exclusion under the capital gain home sale exclusion when the home is eventually sold.  In contrast, when the safe harbor is used, no depreciation is claimed, and all eventual home sale gain (up to the $250,000/$500,000 limits) remains excludable. 
There are also other considerations that may point toward doing the detailed calculations.  For example, if there are in fact substantial “direct” expenses of the home office (such as the painting expense above), these do not have to be allocated and are fully deductible in figuring the home office expense.  Further, the larger the home office, either in actual square feet or as a percentage of the home, the greater the advantage of claiming actual expenses, since more of the overall expenses will be allocated to the office.  And at least for independent contractors, the fact that home office expenses are deducted in determining Adjusted Gross Income may help in reducing AGI below thresholds at which various other benefits, such as the child care credit, begin to phase out. 

All of these contrasting considerations will in many cases suggest that the taxpayer (or more likely, the return preparer) will be well-advised to perform the detailed calculation to determine whether the safe harbor or the actual calculation of expenses is more beneficial.  This is particularly true as income goes up. 

However, many taxpayers, particularly employees, will find it beneficial to simplify their lives and claim the available safe harbor deduction.  Doing so will not only make return filing easier, but will reduce the risk of an audit.

Posted by Peter K. Scott
 
Category: Miscellaneous U.S. Tax Issues
Published: 5/6/2013 9:19 AM
]]> Peter Scott Miscellaneous U.S. Tax Issues Sat, 04 May 2013 19:07:06 GMT http://www.worldwideerc.org/Blogs/MobilityLawBlog/Lists/Posts/ViewPost.aspx?ID=176