Friday, January 20, 2017

Abating IRS penalties


The IRS can assess many types of penalties against taxpayers: late-filing penalties, late-payment penalties, estimated tax penalties, accuracy-related penalties—and the list goes on. This column summarizes common IRS penalties that tax practitioners see almost daily, and practical ways to obtain a penalty abatement.


Many taxpayers file a return late and/or make a payment late. The IRS sends out automated notices proposing failure-to-file and failure-to-pay penalties, often referred to as late-filing and late-payment penalties—and abates many of them.
First-time penalty abatement is an easy "get-out-of-jail-free card" for taxpayers who have a clean compliance history of filing and paying on time with no prior penalties (other than an estimated tax penalty) for the past three years. The reasonable-cause (facts and circumstances) defense can also be successful. Refer to Internal Revenue Manual (IRM) Section for a list of the IRS's criteria for evaluating the most frequently raised defenses for these penalties. Death, serious illness, fire/casualty, erroneous advice, forgetfulness, and even ignorance of the law are among the defenses discussed in the IRM. In addition, other administrative waivers could apply to certain taxpayers, such as disaster victims.
Here are penalty abatement tips for failure-to-file and failure-to-pay penalties:
  • If a client meets penalty abatement criteria, practitioners can attach a penalty nonassertion request to a late-filed return. This way, a practitioner could potentially avoid a notice stream altogether.
  • Practitioners should cite applicable law and authority, including the IRM, when requesting a penalty abatement.
  • Under Sec. 6651(h), the failure-to-pay penalty continues to accrue but at a reduced rate when a taxpayer establishes an installment agreement. However, if a client meets penalty abatement criteria, the practitioner can request penalty abatement at the beginning of the installment agreement and again at the end (i.e., after the debt is paid in full). If the IRS removes penalties at the beginning of the agreement and the taxpayer adheres to the agreement's terms, the IRS can also remove the penalties that continued to accrue until the tax was paid in full.
  • Often, qualifying for relief under the reasonable-cause criteria is subjective, depending on the IRS agent who considers the case. If the IRS originally denies a penalty abatement, consider using the Office of Appeals. Appeals may come to a different conclusion based on the hazards-of-litigation standard. At the very least, Appeals officers may be more willing to negotiate and compromise than IRS agents.
  • Due to IRS budget cuts and service issues, more practitioners are finding relief for their clients via Appeals. It may take over a year to resolve the issue, but it can be worth the wait. Some practitioners have even seen Appeals remove penalties based on first-time penalty abatement criteria, even if the taxpayer did not exactly meet the criteria.


Individual taxpayers must adequately withhold from their wages and/or make estimated tax payments evenly throughout the year. When they do not, the IRS may impose the estimated tax penalty, commonly referred to as the underpayment penalty.
There is no general reasonable-cause exception for the estimated tax penalty; therefore, it is often more difficult to get the penalty removed, but it is not impossible. The IRS may abate it if the taxpayer (1) proves that the IRS incorrectly charged the penalty or made an error, (2) shows that calculating the penalty under a different method reduces or eliminates it, or (3) proves that he or she meets the waiver criteria discussed in Sec. 6654(e)(3) (i.e., by reason of casualty, disaster, or unusual circumstances, or the taxpayer retired or became disabled during the tax year or the preceding year and the underpayment was due to reasonable cause and not willful neglect).
Here are penalty abatement tips for the estimated tax penalty:
  • It is fairly common for the IRS to credit a payment to the wrong tax period, causing an estimated tax penalty. Simply getting the IRS to move a payment to the correct year or period can save a client from paying this penalty. It is advisable to request transcripts from the IRS each year to determine how payments and refunds are applied (as well as to see all information already reported to the IRS). A practitioner likely would need to call the IRS Practitioner Priority Service line at 866-860-4259 to address any payment issues.
  • Be aware of the different methods used to calculate the penalty. For example, the penalty sometimes could be reduced or eliminated by using the annualized income installment method, which is often used if a taxpayer's income varies during the year, as is the case for many sole proprietors. Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, and its instructions provide more guidance on this issue.
  • Use the safe harbor. Individual taxpayers will avoid the penalty altogether when they pay 90% of the tax shown on the current year's return or 100% of the tax shown on the prior year's return (110% if the taxpayer had adjusted gross income greater than $150,000 ($75,000 if married and filing separately)). For corporate clients, refer to Sec. 6655.


The IRS may impose an accuracy-related penalty for many types of misconduct, such as negligence, substantial understatement of tax, etc. This penalty comes up frequently in an audit (almost automatically if the understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000), but it also comes up on notices, such as the common CP2000, which the IRS sends when underreported income is detected.
The accuracy-related penalty cannot be imposed if the return position being questioned meets certain tax authority standards (e.g., the "more likely than not" standard or the "substantial authority" standard), or if a taxpayer proves he or she has reasonable cause for failing to comply.
Regs. Sec. 1.6664-4 provides guidance to help practitioners determine whether clients meet reasonable-cause criteria to avoid an accuracy-related penalty. It boils down to facts and circumstances and proving that the client exercised ordinary business care and prudence.
Here are penalty abatement tips for the accuracy-related penalty:
  • The IRS cannot impose the accuracy-related penalty when a return position is properly disclosed, assuming that the return position had a reasonable basis (i.e., at least an approximately 20% chance of success if challenged by the IRS). Consider disclosing certain return positions with Form 8275, Disclosure Statement, or 8275-R, Regulation Disclosure Statement, where applicable.
  • Common reasonable-cause defenses for the accuracy-related penalty discussed in IRM Section 20.1.5 include reliance on an incorrect information statement that the taxpayer did not know or had no reason to have known was incorrect (Forms W-2 or 1099, Schedules K-1, etc.), reliance on a competent tax adviser, and an isolated computational error.
  • Heavily substantiate a client's reasonable-cause defense. Attach ample documentation to support the facts and circumstances and clearly spell out how a client exercised ordinary business care and prudence.
Remember: Those who do not ask will not receive. Large, and sometimes even small, penalties are worth fighting to get removed. A simple phone call or letter may be all that is necessary to save a client thousands of dollars. And do not be afraid to turn to the IRS Office of Appeals. It is increasingly common for penalty cases to be resolved through this channel.
The AICPA Tax Section offers many resources to help practitioners obtain a penalty abatement:
  • IRS First-Time Penalty Abatement page: Contains guidance on first-time penalty abatement qualifications and tips on how to effectively request an abatement using the waiver.
  • IRS penalty abatement request letter (AICPA Tax Section member login required): Use the letter to compose a written request for penalty abatement based on the first-time penalty abatement criteria. This letter is formatted optimally for the IRS to process the request; it contains IRM citations to substantiate the relief and can help practitioners bill for their work.

Thursday, January 19, 2017

Wills vs. trusts: some advice


I am going to assume that when you say using a will rather than a trust, you are also referring to a probate administration and a trust administration.
I suppose the main reason that a will is preferable to a trust is cost. Trusts can be expensive to set up. Not as expensive as they were many years ago but they still cost a great deal of money.
However, keep in mind that although trusts cost more to set up than wills, the costs associated with administration after death are much lower when using a trust.
If money isn’t a concern, there are still other reasons to consider using a will rather than a trust.
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One of those reasons involves the authority of the court that comes with probate. A probate court’s order can be useful in the event that there are issues during administration. For example, consider the situation where a home needs to be sold during the administration and there isn’t agreement as to its value. If the trustee sells the home, he or she opens themselves up to second guessing by the beneficiaries. On the other hand, if the personal representative wants to sell a home in a probate administration, the personal representative can seek approval from the court. That court approval can protect the personal representative from second guessing of the devisees. A court order is a nice shield for the personal representative that isn’t readily available to a trustee.
Another reason that a will and probate might be preferable to using a trust is because of creditors. Creditors have up to nine months to file claims. However, that time can be reduced to three months if notice of an estate administration is published in an appropriate local newspaper. That could be handy if you are concerned about large but unknown creditors. In probate unknown creditors receive notice when it is published and they only have three months to file claims or else those claims are barred. If a creditor misses the notice, they may miss out on the ability to file and collect on a claim.
Since notice of a trust administration isn’t published, the claim period isn’t shortened and the trustee runs the risk that a creditor can show up on the last day to open a creditor’s estate and file a claim.
Depending on your circumstances, probating a will and opening an estate may make a lot of sense. Probate offers advantages that a non-probate trust administration can’t. It all comes down to the circumstance.

Wednesday, January 18, 2017

Businesses targeted in QuickBooks scam

This clever new phishing scam is fooling small businesses. The message looks like an email alert from accounting software QuickBooks, but it's really a phishing con.

How the scam works: You receive an email with the subject line "QuickBooks Support: Change Request." The message is "confirming" that you changed your business name with Intuit, QuickBook's manufacturer. However, you never made such a request. It must be a mistake, but fortunately the email contains a link to cancel. Pause before you click! Scammers know that you didn't make this request, and the link to cancel is simply bait. It downloads malware to your device, which scammers use to capture passwords or hunt for sensitive information on your machine. This can open you up to identity theft.

How to spot a phishing scam:

Be wary of unexpected emails. Never click on links or attachments in emails you were not expecting without checking them out thoroughly first.

Check the reply email address. One easy way to spot an email scam is to look at the reply email. The address should be on a company domain, such as (

Check the destination of links. Hover over links to see where they lead. Be sure the link points to the correct domain ( not a variation, such as or Scammers can get creative, so look closely.

Consider how the organization normally contacts you. If an organization normally reaches you by mail, be suspicious if you suddenly start receiving emails or text messages without having opted in to the new communications.

Be cautious of generic emails. Scammers try to cast a wide net by including little or no specific information in their fake emails. Be especially wary of messages you have not subscribed to or companies you have never done business with in the past.

Don't believe what you see. Just because an email looks real, doesn't mean it is. Scammers can fake anything from a company logo to the "Sent" email address.

For more information: Learn more about phishing scams and how to protect yourself on the Federal Trade Commission website at

Tuesday, January 17, 2017



We are in a new year and tax season is just around the corner. Because of this, if you have received a personal injury settlement or award it is important that you understand all the tax ramifications before filing your tax returns. Years ago I incorrectly thought that a personal injury settlement or award was simply not taxable. But this isn’t completely accurate. 
So let’s begin with Personal Injury 101. If you are injured in an accident, you are actually entitled to many different kinds of damages in relation to your actual injury, which include compensation for your medical bills, pain and suffering, lost income, and interest accrued on an award that is appealed by the at-fault party. As crazy as it seems, the IRS actually differentiates between theses different types of awards and taxes them differently.
Tax Tip #1: Money for Pain and Suffering
The best way to look at the money that you are being paid for “pain and suffering” is that this is the actual money being paid to you for your physical injury. Currently, according to the IRS compensation that a person is paid for physical injury is federal-income-tax-free. It doesn’t matter if the money is from a settlement or actually from a award after filing a lawsuit. Compensation for emotional distress is also tax-free because it is considered to be part of your physical injury.
Tax Tip #2: Money for Medical Expenses
Money paid to you in order to cover your medical expenses are tax-free too. However, if you claim a tax deduction for accident related medical expenses and you are later reimbursed for those same medical expenses as part of your case, you must “recapture” that amount and will have to pay tax on it because you previously benefited from the deduction that you took. If your settlement or award does not specifically allocate an amount for medical expenses and you previously took a tax deduction for your accident related medical expenses, the award or settlement is automatically considered to be a reimbursement for such expenses up to the amount of those expenses.
So the key here is the tax deduction. If you did not take a deduction for these medical expenses than this award is tax-free, if you did benefit from the taking of a tax deduction that you will need to report these amounts on your taxes after your settlement or award is received.
Tax Tip #3: Interest Paid on an Award
Generally interest will not be part of a settlement, but could be part of an award that is then appealed. Having said that, if any part of your award or settlement is deemed to be interest, that part is taxable.
Tax Tip #4: Reimbursement for Lost Wages
Oddly enough, amounts paid for lost wages are federal-income-tax-free, even though the wages would have been taxable if you had received them.
Example: Let’s say you were injured in a car accident is 2015. In that accident you had $25,000 in medical bills and expenses and $10,000 in lost wages. On your 2015 and 2016 returns, you claimed medical expense deductions totaling $12,000. You eventually receive a $150,000 out-of-court settlement that covers medical expenses, lost wages, pain and suffering, and $5,000 for interest. Only $17,000 is taxable ($12,000 for the medical expenses that were previously deducted and then reimbursed and the $5,000 for interest). The remaining $133,000 ($150,000 minus $12,000 minus $5000) is free from federal income tax.
Tax Tip #5: What About Attorney’s Fees?
You cannot deduct attorney fees incurred to collect a tax-free award or settlement for physical injury or sickness. In other words, no deductions are allowed for fees to collect tax-free compensation.
After that, the rules change and are not so favorable. Let’s say part of your award or settlement is tax-free (for physical injury and wage loss), and part is taxable (for interest). As a general rule, you must report the full amount of the taxable portion of the award or settlement as income on your return, without any reduction for the related attorney fees. Then, you can treat the fees related to the taxable portion as a miscellaneous itemized deduction item on Schedule A of your Form 1040. Calculate the deduction by multiplying the total fees by a fraction. The numerator is the taxable portion of your award or settlement, and the denominator is the total amount of the award or settlement.

Monday, January 16, 2017

Do this today and avoid tax-filing stress


Tax Day can be daunting for the procrastinator, and holding off on filing your tax returns until the last possible minute can cost you.

This year, Tax Day falls on April 18 instead of April 15 because of the weekend and a holiday (Emancipation Day), but that doesn’t mean you should wait for those extra few days to file. Gathering your documents and receipts, meeting with an accountant and even retaining records for next year can relieve potential stress and maybe get you more money, and faster, if you’re expecting a refund.

“You think it’s far off but if you wait until the last minute, you can be overwhelmed by everything you have to do,” said Barbara Weltman, attorney and spokeswoman of Hoboken, N.J.-based tax service J.K. Lasser Institute. “If you take it in small bits you will be prepared for filing and you’ll be positioned to save money.”

Tax filing season begins on Jan. 23 this year (and the deadline for employers to provide W-2 and 1099 forms is Feb. 1). More than 111 million refunds were distributed last year, and the Internal Revenue Service expects to refund more than 70% of taxpayers this year, the government agency announced. About 44% of taxpayers filed their returns by the first week in March, according to IRS data MarketWatch crunched.

There is a caveat to filing early this year: your refund might be delayed because of newly implemented legislation called the Protecting Americans from Tax Hikes (PATH) Act, the IRS said. The PATH Act requires the IRS to hold refunds claiming the Earned Income Tax Credit or the Additional Child Tax Credit in their entirety until Feb. 15, in an attempt to catch potential fraud, so taxpayers impacted by this rule might have to wait until Feb. 27 to receive their refunds. For those not affected, the IRS anticipates issuing 90% of the refunds in less than three weeks it has said.

To get a head start on your taxes, experts suggest these four tips:

Make sure you have these documents

Organize your financial information, including your income statements such as W-2 and 1099 forms, receipts for major expenses, proof of charitable donations and investment documents. “People don’t keep records well,” said Brian Ashcraft, director of tax compliance at Virginia Beach-based tax preparation company Liberty Tax Service. Ashcraft suggests keeping a binder to stash documents all year long. If you’re self-employed, keep your personal and business documentation separate, along with different accounts for each, he said.

Know the difference between a standard deduction and itemizing deductions

Standard deductions are determined by the IRS and allow taxpayers to claim income not subject to federal income tax, according to Intuit, the parent company of tax preparing software TurboTax. Taxpayers can choose between claiming a standard deduction or itemizing deductions, where they list their personal deductible expenses. Tax experts suggest calculating which gives you the biggest deduction before deciding.

For 2017, the standard deduction for single individuals or married individuals filing separately is $6,350, and for married filing jointly $12,700. You can figure out your itemized deductions by adding up deductible expenses including your home mortgage interest, state and local income taxes, real estate and personal property taxes, gifts to charities, casualty or theft losses and unreimbursed medical or employee business expenses, the IRS suggests.

Seek out an accountant early

Accountants are usually at their busiest around Tax Day, so you may want to make an appointment with one as soon as possible, Weltman said. Not everyone needs to work with a tax adviser -- it depends on how complicated your finances are and how confident you are in filing your return on your own — but Weltman suggests booking time with a professional in January. Some questions to ask: his or her eligibility in preparing tax returns, expertise in tax preparation and if the accountant will keep your records, which is vital in the event of an audit.

Getting a refund? Know what to do with it

It never hurts to plan what you’ll do with your refund, Weltman said. In some cases, it may make sense to pay down debt or put that money aside for the future, but in other cases a taxpayer may want to deposit the money into an individual retirement account (IRA) or health savings account (HSA). If you plan to do the latter, tell your custodian which year you’re applying it to — the custodian may assume you’re applying it as a 2017 contribution, but if you’re an early filer you can apply the money to your 2016 account before the deadline, which is Tax Day.

Friday, January 13, 2017

Choosing the Right Tax Professional in 4 Easy Steps

Managing taxes during retirement might be the single most important factor influencing your retirement lifestyle. As you transition from working for an income to withdrawing income from your savings and investments, you might have questions: How can I maximize my income while minimizing income taxes in retirement? How will my Social Security be taxed? Should I be concerned about capital gains taxes when I retire? As we kick off the New Year, it is a great time to evaluate and choose a tax professional who can answer questions such as these and help you with your tax planning needs all year long.
  • Check for credentials.  Not all tax preparers are CPAs.  In fact, in many states, anyone can  prepare tax returns and call themselves a tax professional.  Most serious tax professionals will either be a CPA or an EA (Enrolled Agent).  However, this does not necessarily mean that they are competent enough in the retirement area to assist you.
  • Ask about experience.  In most cases, you would opt for experience over a novice.Do you really think your choice of a tax professional is that different?  Sometimes, there is no substitute for experience.  Ask your tax professional about cases similar to your own, how often they deal with them and how they typically handle them.
  • Ask about education/training.  When most people think “CPA,” they think tax expert. But, the rules governing retirement accounts are highly complex and are constantly changing.  If your tax professional is serious about this area of retirement planning, they will make sure to stay up-to-date on the latest tax law changes.  Make sure to ask about the last conference or continuing education class they have attended on retirement planning.
  • Ask about continuity.  Planning to maximize your retirement distributions and transfer your wealth is not a one-time deal.  Some of your most important decisions may not be made for years, or even decades.  If you don’t expect your tax professional to still be working, you may want to ask what type of plan they have in place to make sure you will still receive the high level of advice you deserve when you need it the most. 
In addition to a financial planner and estate planning attorney, a qualified tax professional is an integral part of any planning team.

Thursday, January 12, 2017

Top 5 tips for doing your own taxes

With the 2017 tax season a few short weeks away, now is the time to start thinking about your taxes, especially if you are doing your return by yourself. Whether you are a seasoned filer or a first timer, keeping a few tips in mind could help you increase the size of your refund (or minimize the amount you owe) and win the season like never before! Here are five tips to keep in mind while you prepare:

1. Find out if you need to file before starting to prepare a return.

Several factors affect whether you should file, including how much you earned, the source of your income, filing status and your age. You should file a federal income tax return if your gross income (generally, your income before deductions and exemptions) is above the threshold for your age and filing status. The Internal Revenue Service (IRS) online Interactive Tax Assistant is a tool that can help you figure this out. It asks basic questions about your filing status, dependent status, gross income and whether you had federal income tax withheld. At the end, you will know whether you are required to file.

2. So you found out you have to file. Make the process go more smoothly by reviewing your 2015 returns.

Since some of the information on your 2015 tax return may be relevant for 2016, having this information handy will help speed up the process. Reviewing your old return will also remind you of any major life changes this year that you need to account for like getting married, having a child or going to school. If this isn’t your first time filing online, tax preparation software’s including H&R Block’s online products allow you to easily import last year’s tax return from any other tax preparation service or provider.

3. If you have health insurance, gather your tax documents.

Filers who have coverage from the Affordable Care Act marketplace will receive the “Health Insurance Marketplace 1095-A” form. You will need this document to accurately complete your tax return. If you have coverage through your employer, the government or another source, you will receive either a Form 1095-B or 1095. If you’re not sure whether you were covered for the entire year, these forms will help you accurately complete your tax return.

4. Compare standard and itemized deductions to see which works best for your situation.

Nearly every tax filer can claim a standard deduction which reduces their taxable income and taxes owed. But depending on your situation, you might get an even bigger deduction if you choose to itemize your deductions instead, which means deducting specific qualifying expenses including charitable donations, mortgage interest payments and state and local income or sales tax.

5. Make sure your entries are correct before submitting to avoid mistakes.

It is important to verify your entries before submitting your taxes, but almost any kind of error is fixable. You may be able to file an amended return to correct errors and go back three years to claim an additional refund if you missed a credit or deduction. Most individual tax returns can be amended by completing a Form 1040X. This form amends a previously filed Form 1040, Form 1040A or 1040EZ Forms.