Reliance Upon A Tax Professional Will Not Save The Day If Your Tax Filing Is Late

Larry J Brant for Larry's Tax Law writes: In Peter Knappe v. U.S., 713 F3d 1164 (9th Cir., April 4, 2013), the United States Court of Appeals for the Ninth Circuit was presented with the question whether reliance upon a tax professional may excuse the late filing of a tax return.

Peter Knappe was the personal representative of the Estate of Ingborg Pattee.  He was also trustee of her testamentary trust.

Mrs. Pattee died in 2005, leaving a large estate.  Mr. Knappe was her long-time friend.  Although he had business experience, Mr. Knappe had no experience serving as a personal representative or preparing estate tax returns.  So, he engaged the services of Mr. Francis Burns, CPA.  Burns had been his company’s outside accountant for several years.  Mr. Knapp was always satisfied with his work.

Burns told Knappe that a Form 706 for the estate of would need to be filed by August 30, 2006.  Knappe had trouble obtaining the needed appraisals on or before the filing deadline.  Burns advised Knappe that he could obtain an extension of one (1) year for both the filing and the payment of the taxes due.

Burns filed a Form 4786, seeking both an extension for filing and for payment of the taxes due. The extension sought was one year.

As we know, the filing extension, unless the personal representative is out of the country, is only six (6) months.  The payment extension, however, in the discretion of the Service, may be up to one year.  Burns, however, believed both extensions were automatically one (1) year.  OOPS!

Given this belief, upon receipt of the extension acknowledgment from the Service, Burns did not examine it carefully.  He thought he received the requested one (1) year extension for both filing and payment of taxes.  The extension, however, actually provided a new filing date of February 28, 2007, and a new payment date of August 30, 2007.

Burns filed the 706 on May 18, 2007, and enclosed a check in payment of the tax shown due.  A few weeks later, Burns received a notice from the IRS that the estate owed a late payment penalty of about $200,000.  The penalty assessed is 5% per month, up to a maximum of 25%.

In response to the notice, Burns actually pulled the Code and Regulations off his bookshelf.  Once he dusted off the cobwebs, and reviewed the Code, he realized he made an error.  Nevertheless, the taxpayer asked the Service to abate the penalty under Section 6651 for reasonable cause.  The taxpayer argued his reliance on CPA Burns constituted reasonable cause for the late filing.  The IRS denied the request.  So, Knappe paid the penalty and filed a claim for a refund with the Service.  Upon denial of the claim for refund, he sued in District Court.

Unfortunately, the District Court ruled summarily in favor of the Service.  Knappe then appealed to the Ninth Circuit.  The court concluded:  “To constitute reasonable cause, a taxpayer must prove he or she exercised ordinary business care and prudence, and was nevertheless unable to file the return” on time.

Of course, Knappe argued his reliance on the advice of Mr. Burns constituted ordinary business care and prudence.  It was clear that Mr. Burns did not know that a Form 706 filing extension is limited to six (6) months.  So the question was:  Did Knappe’s reliance on Burns’s bad advice constitute “reasonable cause”?

The court broke reliance into two categories:

1.         reliance on substantive advice; and

2.         reliance on non-substantive advice.

For substantive advice, reliance upon a tax professional may constitute reasonable cause.  For non-substantive advice, however, the court concluded that reliance upon a tax professional will not save the day.  The court ultimately concluded the Form 706 due date is not a substantive tax issue.  The law is clear—there is no debate!

Accordingly, reliance upon a tax professional will not save the day in the context of a tax filing deadline.  The $200,000 late filing penalty was upheld.  OUCH!

7 Tax Breaks for Small Business to Consider for 2013

Angela Stringfellow for Intuit writes: It’s up to you to keep the appropriate records and take advantage of the available IRS income-tax deductions. There’s a fine line between cheating the system and not cheating yourself.

Here’s a look at a few of the breaks available to small-business owners for the 2013 tax year.

1. Home-Office Deductions – Many small-business owners work from home. The home-office deduction allows these taxpayers to deduct a percentage of their mortgage interest and utility bills that’s equal to the proportion of the total square footage of the home that their dedicated office space occupies. Note that the space must be used exclusively and regularly for business purposes.

“One mistake to avoid is not having a full and complete understanding of the home-office tax deduction. It’s a great way to minimize your tax liability, but only if your office truly qualifies to take it,” warns Andrew Schrage, editor and co-owner of Money Crashers Personal Finance. “Research the IRS website for details or consult with a tax professional. Be sure to do the same before taking any other tax deduction or credit — the last thing you want is to have to deal with an audit.”

For the 2013 tax year, there’s a simpler option for the home office deduction. The IRS is allowing taxpayers to deduct a standard rate of $5 per square foot instead of calculating the actual percentage of all expenses, up to 300 square feet.

2. Office Supplies — Any supplies you purchase for your business qualify as a tax deduction, according to IRS Publication 587. That means paper, ink, stamps, envelopes, and anything else you use in the course of doing business. Keep all your receipts in a central location for easy access at tax time. Better yet, document all your expenses as you go in an expense-tracking or accounting software program.

3. Education and Training — If you attend conferences, training workshops, or industry events to expand your expertise, you may deduct these costs from your net income. This differs from the American Opportunity Credit and other higher-education tax benefits available to traditional students.

Deductions for job-related education and training qualify as miscellaneous expenses, and the following qualifying criteria apply:

• You must itemize your deductions.
• Your miscellaneous deductions must exceed 2 percent of your adjusted gross income.
• The training must maintain or improve your job skills, or be required by your employer to maintain your job status.

Under the education and training tax benefit, you may deduct more than just the actual cost of the training event or tuition, including books and materials, facility or lab fees, lodging and transportation, and the cost of research and related expenses.

4. Startup Costs — If you started a business in 2013, you may deduct all the costs of getting your business up and running. “Expenses incurred during the startup of a small business are tax deductible and include things like the costs associated with finding a location for your business, marketing, and employee training. You [may] write off as much as $5,000 worth of expenses the first year you are in business,” Schrage says.

5. Travel — Various travel costs are often overlooked by small-business owners. Taxpayers may elect to use either the standard mileage rate or the actual expenses of operating a vehicle for business purposes as a tax deduction. The IRS raised the standard mileage rate for 2013 to 56.5 cents per mile (a penny increase over the 2012 rate).

If you travel to an office-supply store to purchase printer paper, for instance, you may deduct the standard mileage rate based on the round-trip miles to and from the retail location. Likewise, you may deduct any travel related to training and educational events, industry conferences, meetings with clients, or any other business endeavor. Throughout the course of a year, this deduction adds up!

6. Software and Subscriptions — There are two different ways to deduct software and subscriptions used for maintaining financial records, managing social media profiles, or any other business-related function. One is under the Section 179 Deduction (or Depreciation), which addresses tangible property and applies to off-the-shelf software, as described in IRS Publication 946.

If you pay for an entire subscription up front, the fee is considered a prepaid asset and a capital expense. The cost is spread out over the term of the license or subscription. In other words, you may only deduct one-third of the cost for the 2013 tax year for a license purchased in 2013 that lasts three years.

If you pay on a monthly basis, however, these costs are deducted as they’re paid as an operating expense. The end result is basically the same: You’re paying for what you’ve used or are reasonably assumed to have used in a given tax year.

7. Capital Equipment — Other business equipment falls under the Section 179 deduction. Through the end of 2013, businesses may deduct up to $500,000 worth of capital equipment without depreciation.

In other words, you may deduct the full amount of both new and used equipment under this benefit in a single tax year. It’s a perfect time to purchase new gear for your business — such as computers, office machines, and other tools — and take advantage of the tax savings before the end of 2013.

Everything you need to know about home office tax deductions

Dawn for Dawn's House writes: As tax time fast approaches, make sure that you have everything in order for home office tax deductions.

According to Forbes,  an estimated 26 million Americans have home offices, but just 3.4 million taxpayers actually claim home-office deductions. Why? In the past home office deductions often triggered red flags with the IRS. But, with the invent of the internet and as the number of people working from home has sky-rocketed, this is no longer the case. SO, why not get everything you can out of home office tax deductions.

Here are the 6 requirements for home office tax deductions, straight from the IRS website:

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business, or
• as a place to meet or deal with patients, clients or customers in the normal course of your business, or
• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

Advice from David about your home office tax deductions to avoid red flags with the IRS:

- Make sure that your home office is used exclusively and regularly for business  (however, you don’t have to be at your home office full-time, if you spend a significant portion of your time with clients –like an electrician or interior designer–yet use your office for billing and other record keeping, it still qualifies.)
- Set it up to “look” like an office so that there is no question
- Take a picture of your home office and include it with your tax records

Also, remember, that by establishing this home office, whenever you make trips to a client, supplier, bank or post office, you will be able to deduct a portion of your vehicle as a business expense, just remember to keep track of the mileage!

What else qualifies for home office tax deductions?

1) Direct Expenses (dedicated things required for your office- 100% deductible):

- Computers, printers and office furniture
- Paint, carpet and shelving
- Office supplies
- A dedicated business cell phone

2) Indirect expenses (pro-rated depending on the size of your home office and amount used for your business):

- Mortgage and utility bills (gas,electric, phone, water, internet)
- Home alarm system

…or, use the new rule for 2013

New (easier!) guidelines for home office tax deductions for 2013:

To simplify the above calculations for indirect expenses, the IRS is putting an alternative in place when filing your 2013 taxes called the “Safe Harbor Method”. Simply multiply the square footage of your home office (must still meet above requirements) and multiply by $5.00 (not to exceed 300 square feet).

Here are a few restrictions the IRS has put in place with the Safe Harbor Method:

• The deduction is limited to $1,500 per year, meaning that your home office space should not exceed 300 square feet; the exception to this, however, is dependent upon how many qualified home offices are under the same roof.
• The option chosen, whether the “safe harbor” method or the conventional (actual expenses) method must be consistently applied to all the Taxpayers’ qualified businesses.
• Taxpayers who share a home, regardless of filing status, may each claim the safe harbor deduction provided they have separate and distinct home office areas.
• Taxpayers who have more than one qualified home office, i.e. in more than one home, may use the safe harbor method for only one home office space.
• A taxpayer cannot opt for the safe harbor method if he or she derives rental income from the same home as the qualified business use.
• The safe harbor method is not applicable for those Taxpayers reimbursed by an employer for home office related expenses.

In addition, business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

However, if you feel that your business would receive larger tax benefit from the original itemized deduction method, you may still choose this.

And as always, check with your tax professional about what is best for your small business!

3 Reasons to Start Your Taxes Now

Credit.com/Fox Business writes: I am normally a tax procrastinator. I get them done, but not without my accountant bugging me a few times. But this year will be different. I am actually already starting on my 2013 taxes in 2013 (what a concept!) - and you may want to do the same. 

Yes, we’re into the busy holiday season, and no, you may not have all of the information you need to complete them if you’re waiting for W-2s or 1099s. But there are some good reasons to get started now and here are three of them.

1. Increase Your Refund Last year, about 75% of taxpayers got a refund, and the average refund was close to $3,000, says CPA Lisa Greene-Lewis with TurboTax. You may be able to bump up your refund (or minimize your bill) by making some smart year-end moves. 

One of them, she says, is to simply clean out your closets. You have to make room for all the new stuff you get over the holidays anyway, right? Donate what you don’t want or need to qualified charities and you should be able to deduct the fair market value of those donations if you itemize. TurboTax offers a free online tool called ItsDeductible that helps track and assign values to these deductions. It’s also available as a free iPhone app where you can track and value your donations on the go. Of course, cash donations are also welcomed by charities, and you make a donation by credit card as late as Dec. 31, and still get the deduction, as long as you have proof that it was made before the end of the year. Search for qualified charities on the IRS website. Another strategy, if you can afford it, is to make a contribution to your 401(k). 

For 2013, taxpayers under 50 can donate up to $17,500. If you are over 50, you can contribute up to $23,000. (You have until April 15, 2014, or when you file your taxes, whichever is earlier, to contribute to an IRA.) 

2. Beat the Crowds If you are counting on your tax refund to pay off your holiday bills, you may have to wait a little longer this year. That’s because the date that the IRS will accept e-filed returns may be a little later this year, due to the government shutdown. 

“There will be a lot of people filing at one time,” warns Greene-Lewis, “and the IRS processes tax returns on a first in, first out basis.” 

If you can be ready when e-filing is officially opened up then you can just push a button and get as close to the front of the line as possible. (TurboTax is accepting tax returns as early as Jan. 2 and storing them securely so they can be transmitted to the IRS as soon as the agency is ready to accept e-filed returns.)

Another good reason to file quickly? Taxpayer ID theft. As Adam Levin, Co-Founder and Chairman of Credit.com and Identity Theft 911 points out, if scammers try to file a tax return using your name and Social Security number, they won’t be successful if you have already filed.

3. Get Them Before They’re Gone Several valuable tax breaks -- Greene-Lewis says they’re called “tax extenders” -- expire at the end of the year unless Congress acts. And while it’s been something of a given in past years that our elected officials won’t let these things lapse, this year may be different. After all, who would have thought the federal government would shut down for two weeks over political wrangling? Here are some of the tax breaks that will expire at the end of 2013 unless Congress acts. 

Tuition and Fees Deduction: Also known as the “Torricelli Deduction,” it allows many taxpayers to deduct up to $4,000 in tuition and expenses from taxable income. (There is a phase-out for higher income taxpayers.) One strategy: if you haven’t already spent the maximum amount allowed for your tax bracket this year and you plan to take courses in the first quarter of 2014, prepay them now, Greene-Lewis says. 

Teacher Education Deduction: Teachers can typically deduct up to $250 of money spent for supplies for their classroom. Educators who are eligible for this deduction and haven’t already spent $250 this year may want to purchase the supplies they need for the next quarter or semester before the end of the year.

State and Local Sales Tax Deduction: Taxpayers currently have the choice of either deducting state income taxes or sales tax paid during the year, but the option to deduct sales and local taxes on purchases option will expire at the end of 2013 unless Congress extends it. “This one is huge for people who don’t pay state income taxes, like in Florida,” Greene-Lewis notes.

If you live in a state where there is no state or local income taxes and are planning a major purchase - car, boat, home renovation, etc. -- you may want to squeeze it in by year end to take advantage of this deduction. (You may also come out ahead by deducting sales tax if your state or local income taxes are low.) 

You’ll find a sales tax calculator on the IRS website. This is the provision that allows many homeowners who have sold their home through a short sale or lost it through foreclosure to avoid paying taxes on the forgiven debt. It’s a big deal, as it can often allow former homeowners to exclude tens, even hundreds, of thousands of dollars in canceled debt from their taxable income. Last year Congress extended it, but only through the end of 2013. If you are currently trying to complete a short sale, you may want to push as hard as you can to complete it by the end of the year.

How to Not Get Trapped into an IRA or 401(k)

Scott Jackson for Fox Business writes: Do you have an IRA or 401(k)? You may be getting yourself trapped.  Most Americans who are concerned about preparing for retirement are lured into contributed pre-tax dollars into 401(k) plans or tax-deductible contributions into IRAs.

Such qualified plans only give you tax-favored advantages during the contribution and accumulation phase of your retirement account. What about the most important phases, like withdrawing money for your retirement income or transferring any remaining funds to your heirs? Has anyone told you the rest of the story?

A Texas couple filing a joint tax return with taxable income in excess of $72,500 will be in a 25% marginal tax bracket. If they were fortunate enough to both qualify for deductible contributions to their IRAs, they would save $1,375 annually in taxes on a total contribution of $5,500 per year. However, most retirees will pay back every dollar to the IRS that was saved in taxes during the first 18-24 months of their retirement. In fact, the average retired couple will pay eight to twelve times the taxes during their retirement years than the taxes they saved during their contribution/accumulation years.

One of the original IRA/401k tenets held that deferring tax until retirement was advantageous because funds would likely be taxed at a lower rate. That is no longer true. You may spend retirement in the same or higher tax bracket if you accumulate a respectable retirement nest egg. In fact, tax rates are rising in the future. So why postpone the inevitable and compound the tax problem? Learn how to have tax-free retirement by educating yourself about a safe alternative to the stock market.

Is there a way to have your cake and eat it too? The answer is yes! Through proper planning, you may safely utilize tax-free plan advantages during the accumulation years. More importantly, you can enjoy tax-free income during the retirement years and transfer any remaining funds to your heirs tax-free. This strategy can increase your spendable income and reduce taxes for you and your heirs.

Key IRA Limits in 2014

Chuck Saletta for The Motley Fool writes: Individual Retirement Arrangements (IRAs) -- commonly referred to as Individual Retirement Accounts -- provide a great way to save for your retirement in a tax-advantaged manner. Money grows in IRAs completely tax deferred and you may either qualify for a tax deduction on your contributions or the ability to take qualifying withdrawals completely tax free.

Because those benefits are so strong, Congress has placed limits on how you can fund your IRA. Limits in 2014 are pretty consistent with 2013 levels, and most people won't notice any difference.

Key IRA limits, 2014 edition:
Contributions: The maximum amount people under the age of 50 may be able to contribute to their IRA in 2014 remains $5,500. For those ages 50 and up, an additional $1,000 "catch-up" contribution is typically available, for a total limit of $6,500.

Age for contributions: If you reach age 70 1/2 or older by the time 2014 draws to a close, you may not contribute to a traditional IRA. That age restriction does not apply to Roth IRA contributions. There is no minimum age to contribute to an IRA, but you (or your spouse, if married filing jointly) must have earned compensation to contribute. 

Age for withdrawals (traditional IRAs): Generally speaking, you must reach at least age 59 1/2 to withdraw money from a traditional IRA without penalty. If you need the money sooner, you'll need a qualifying reason or you'll face a 10% penalty on top of any taxes due. Once you reach age 70 1/2 you must start making required minimum distributions or you'll face a 50% penalty on the amount you should have withdrawn but didn't.

Age for withdrawals (Roth IRAs): You are never required by your age to take money out of your Roth IRA. You may always take your direct Roth IRA contributions out without tax or penalty, no matter what your age. If your Roth IRA is at least five years old and you have reached at least age 59 1/2, you may withdraw any amount money from your Roth IRA completely free of any Federal income tax.

You may also withdraw any "rollover" contributions from your Roth IRA free of additional tax, but the rollover has to age at least five years or you'll face the 10% penalty. Similar to a traditional IRA, with a qualifying reason, the 10% penalty can be waived on an early distribution from a Roth IRA, but any early distribution of earnings will be subject to income tax.

Income: You (and/or your spouse, if married filing jointly), must have earned compensation of at least the amount you plan to contribute to you IRA. There is no maximum compensation limit for making traditional IRA contributions, but there are income limits for Roth IRA contributions. The table below from the Internal Revenue Service shows those Roth IRA limits for 2014 contributions:

Table courtesy of the Internal Revenue Service, as of Dec. 19, 2013 .

People whose income is too high to qualify to make direct Roth IRA contributions may still be able to get money into a Roth IRA through what is typically called a "back-door Roth."

Deductions: Contributions going into a Roth IRA are not deductible. If neither you nor your spouse have a qualified retirement plan available to you through your work, you may deduct your traditional IRA contribution, no matter how high your income. If either you or your spouse have a qualified retirement plan available to you at work, the deduction gets a bit trickier. Once again, the IRS comes through with a pair of useful tables:

If you are covered by a qualified retirement plan at work:

Table courtesy of the Internal Revenue Service, as of Dec. 19, 2013 .

If you are not covered by a qualified retirement plan at work:

Table courtesy of the Internal Revenue Service, as of Dec. 19, 2013 .

It's complicated, but worth it
While the IRA limits for 2014 are a bit complicated, it's worth the effort to navigate them. The long-term benefits you can get from decades of tax-advantaged compounding can easily outweigh that complexity. When your golden years wind up truly golden because of your foresight to contribute, your future self will certainly thank you for it.

Another key weapon in your retirement arsenalIn addition to your IRA, Social Security plays a key role in your financial security. While it most likely won't be enough to guarantee you a comfortable retirement on its own, Social Security will supplement your own investing in your golden years.