2012 TAX UPDATE Delia (Dee) Tillman, CPA, MTx January 17, 2012

2012 TAX UPDATE

Delia (Dee) Tillman, CPA, MTx

January 17, 2012

SELECTED TAX UPDATES

EXPIRED PROVISIONS

NEW FOR 2012FORM 8939 (due today!)EXTENDED SOCIAL SECURITY 2% EMPLOYEE REDUCTIONNEW FUTA CALCULATIONS FOR GEORGIA EMPLOYERS1099 REPORTING CHANGESTANGIBLE PROPERTY REPAIR REGULATIONS (T.D. 9564)FORM 1127 (EXTENSION OF TIME TO PAY)

IRS AND THE TAX PREPAREREITC NEW REGULATIONS (T.D. 9520) ISSUED 12/19/11ACCESSING CLIENTS’ ELECTRONIC FILESEFILING REQUIREMENTS AND FORM 8948

EXPIRED PROVISIONS

* Deduction of health insurance premiums for self-employment tax purposes

* Hybrid, lean-burn, and alternative fuel motor vehicle credits (§30B(k)(2))

* Employer’s exemption from the 6.2% Social Security tax for newly-hired qualified unemployed workers

* “Making Work Pay” credit* Work Opportunity Credit for unemployed veterans* &

disconnected youth* Income exclusions for certain state & local tax benefits

granted to members of qualified emergency response organizations

* Tax-free payments from §529 plans for computer-related equipment & services

* $10,000 up-front deduction for “start-up expenses” (reverts back to $5,000)

EXPIRED PROVISIONS

* 5-year carry back for qualified general business credits and allowing credits to reduce AMT (reverts back to 1-year)

* Deferral and ratable inclusion in income for cancellation of qualifying business debt (COD) under §108(i)

* 5-year amortization of musical compositions & copyrights to musical compositions

* Treating natural gas line as 15-year property* Authority to issue “Build America Bonds”* Provision allowing long-term contractors to ignore §168(k)

deduction in determining percentage of project that is complete

* 50% credit for investments in qualifying therapeutic discover projects

NEW FOR 2012

FORM 8939 – due today!!• New form to Allocate Increase in Basis

for Property Acquired From a Decedent • Applicable for 2010 – no Form 706 • Executor can elect to file Form 8939 to

elect “Pre-Act” rules for an individual who dies in 2011

EXTENDED SOCIAL SECURITY 2% EMPLOYEE REDUCTION

Bill signed on 12/23/11extending the tax break on the employee portion of the Social Security tax for the first two months of 2012.

Jan & Feb, the employee portion of the OASDI tax has been limited to 4.2% of wages up to the taxable wage base of $110,100.

NOTE: If the reduction is NOT extended for the balance of the year, any employee who receives more than $18,350 in wages during the first two months of 2012 (2/12 x $110,100) will have to add the 2% reduction on any excess wages received to his or her tax liability on the 2012 income tax return.

If Congress extends the current reduction credit rate through the end of the year, this limit will not apply.

EXTENDED SOCIAL SECURITY 2% EMPLOYEE REDUCTION

EXAMPLE:

Employee has an annual salary of $120,000 ($10,000/month) throughout the year. His total wage received for January & February equals $20,000. This is $1,650 in excess of the annual limit ($20,000 - $18,350). He will have to add $33 to his 2012 income tax liability (1,650 x 2% = $33).

NEW FUTA CALCULATIONS FOR

GEORGIA EMPLOYERS

20 States & 1 Territory have been assessed a Federal Unemployment credit reduction for 2011. Any agency that has taken a loan from

the Federal Government for unemployment benefits and has failed to repay that loan in a timely fashion is subject to the reduction.

Employers paying wages to a state/territory subject to the reduction must pay additional FUTA tax

NEW FUTA CALCULATIONS FOR

GEORGIA EMPLOYERS

Payment related to the credit reduction is calculated on Form 940

.3% states pay an additional $21 (max) per employee (AK, CA, CT, FL, FA, IL, KY, MN, MO, NC, NJ, NV, NY, OH, PA, RI, VA, WI, & Virgin Islands)

.6% states pay an additional $42 (max) per employee (IN)

.9% states pay an additional $63 (max) per employee (MI)

1099 REPORTING CHANGES

COMPREHENSIVE 1099 TAXPAYER PROTECTION & REPLACEMENT OF EXCHANGE SUBSIDY OVERPAYMENTS ACT OF 2011 SIGNED 4/14/11 RETROACTIVELY REPEALED:

1) FORM 1099 REPORTING REQUIREMENT TO CORPORATE PAYEE

2) FORM 1099 REPORTING REQUIREMENT FOR PAYMENTS > $600 FOR “GOODS OR OTHER PROPERTY”

3) PROVISION THAT ALL LANDLORDS ARE CONSIDERED TO BE IN A TRADE OR BUSINESS AND ARE THEREFORE SUBJECT TO FORM 1099 REPORTING REQUIREMENT

1099 REPORTING CHANGES

The IRS now requires credit card processing companies and third-party payment services, such as PayPal, eBay and Amazon to report how much money they handle for merchants. (Form 1099-K)

Small operations having fewer than 200 transactions totaling less than $20,000 are exempt from the reporting requirement

TANGIBLE PROPERTY REPAIRS REGULATIONS

Temporary and proposed regs issued on 12/23/11

Clarifies & expands current §263(a) standards for repairs & improvements

Covers broad range of tangible property acquisition issues

Defines materials and supplies

Defines de minimis capitalization threshold


“[These guidelines] are probably the most comprehensive set of rules issued related to fixed asset accounting for federal tax purposes, in my view, since the 1986 Tax Reform Act.”

Susan Grais, Executive Director of Ernst & Young LLP’s Federal Tax Services Group in Washington,

D.C.


New regs : Address when repairs to tangible property are treated as

capital expenditures or deductible expenses. Address how to account for retirement of components of

tangible property such as buildings, manufacturing equipment, etc.

May require some modifications to what taxpayers are currently doing

Are Applicable for 2012 and are implemented with a 481 adjustment (requires an adjustment to opening accounts)

Will treat these changes as automatic method changes (Form 3115)


De Minimis Rule Highlights:

Establishes a ceiling that limits total deductible amount

Aggregate of amounts paid and not capitalized under the de minimis rule must < the greater of (1) 0.1% of gross receipts for the taxable year, or (2) 2% of depreciation and amortization expense for the taxable year as determined in the taxpayer’s applicable financial statement (AFS)


De Minimis Rule Highlights:

Taxpayers without an AFS will be precluded from applying the de minimis rule. (May take deduction for materials & supplies costing $100 or less).

Taxpayer must have a written accounting procedure as part of the AFS that allows for expensing of items below a certain threshold


Materials, Supplies and Spare Parts Highlights:

Taxpayers can elect to treat materials

& supplies under the de minimis rule.

Make the election by deducting amounts

paid to acquire or produce a material or

supply and by complying with the other de minimis rule requirements

Cost of Spare Parts may be deducted when first

installed.


Improvements to Tangible Property Highlights:

May require an automatic accounting method

change and related §481(a) adjustments.

Must apply improvement standards separately to

the primary components of a building and its specifically defined building components

(HVAC, plumbing, electrical, etc.)

Eliminates the 50% threshold test & recovery

period previously used to determine whether a replacement is a major part of the building.


Leased Property Highlights: The lessee must capitalize improvements

except to the extent of any rental allowance The lessor must capitalize improvements

paid directly or indirectly through a construction allowance

The lessor must capitalize a lessee’s payments for an improvement if such payments constitute a substitute for rent.


Compliance with New Temporary Regs:

Any changes made by the taxpayer to comply with these new Temporary Regs are considered Changes in Accounting Method and will require a determination of the Section 481(a) adjustment.

Regs are effective for tax years beginning on or after Jan 1, 2012.

Revenue Procedures related to these changes are expected.

FORM 1127

APPLICATION FOR EXTENSION OF TIME FOR PAYMENT OF TAX DUE TO

UNDUE HARDSHIP

The term “undue hardship” means more than an inconvenience. You must show you will have a substantial financial loss (such as selling property at a sacrifice price) if you pay your tax on the date it is due.

EARNED INCOME TAX CREDIT

IRS ESTIMATES THAT 1 IN EVERY 4 EITC CLAIMS FILED LAST YEAR WERE ERRONEOUS – COST $15B

MAIN REASON TAX PREPARERS FILE RETURNS WITH ERRONEOUS EITC CLAIMS

MISINTERPRETATION/MISUNDERSTANDING THE LAW

ACCEPTING CLIENTS’ INFORMATION AT FACE VALUE (WEAK DUE DILIGENCE)

FRAUD


STIFFER PENALTIES FOR TAX PREPARERS

THE UNITED STATES KOREA FREE TRADE IMPLEMENTATION ACT SIGNED INTO LAW ON 10/21/2011 - AMENDED IRC SECTION 6695(g) INCREASED PENALTY FROM $100 TO

$500 PER RETURN FINAL REGULATIONS (T.D. 9570)

WERE SIGNED ON 12/19/2011.


• FORM 8867 MUST BE FILED WITH THE RETURN

• RETENTION REQUIREMENTS INCLUDE COPIES OF FORM 8867 PLUS ANY DOCUMENTS THE CLIENT PROVIDES FOR THE EITC QUESTIONNAIRE AND ANY NOTES THE TAX PREPARER TAKES DURING THE INTERVIEW

• KEEP FOR 3 YEARS AFTER FILING DATE


ACCOUNTING FIRMS OR TAX PREPARATION COMPANIES ARE SUBJECT TO THE SAME PENALTY AS THEIR PREPARERS IF

o ONE OR MORE MEMBERS OF THE PRINCIPAL MANAGEMENT OR PRINCIPAL OFFICERS OF THE FIRM OR ITS BRANCH OFFICE PARTICIPATED IN OR, PRIOR TO THE TIME THE RETURN WAS FILED, KNEW OF THE FAILURE TO COMPLY WITH DUE DILIGENCE;

o THE FIRM FAILED TO ESTABLISH REASONABLE AND APPROPRIATE PROCEDURES TO ENSURE

COMPLIANCE; ORo THE FIRM HAD SUCH PROCEDURES BUT

DISREGARDED THEM THROUGH WILLFULNESS, RECKLESSNESS OR GROSS INDIFFERENCE.


NEW DUE DILIGENCE REQUIREMENTS

FORM 8867 CHECKLIST MUST BE FILED WITH RETURNS STARTING WITH 2011

COMPLETE THE EITC WORKSHEET, DOUBLE-CHECK COMPUTER SOFTWARE GENERATED

RECORD RETENTION: WORKSHEETS MUST BE ON FILE AND AVAILABLE FOR 3 YEARS; MUST SHOW

WHO PROVIDED THE INFORMATION AND WHEN IT WAS RECEIVED (EITHER PAPER OR ELECTRONIC FORMAT)

KNOWLEDGE REQUIREMENT: SHOW AN UNDERSTANDING OF THE LAW AND THE CLIENT; BE ABLE TO DETERMINE THE REASONABLENESS OF CLAIMS


90% OF TAX PREPARERS WHO RECEIVE FINES FOR FILING ERRONEOUS EITC CLAIMS FAIL THE KNOWELDGE REQUIREMENT.

YOU CAN NOT KNOW, OR HAVE REASON TO KNOW, THAT THE EITC INFORMATION PROVIDED BY YOUR CLIENT IS INCORRECT, INCOMPLETE, OR CONTRADICTORY. (REASONABLENESS)

60% OF ERRORS IN THE EITC CLAIMS RELATE TO:

CLAIMING A CHILD WHO DOES NOT MEET THE AGE, RELATIONSHIP, OR RESIDENCY TEST

INCORRECT FILING STATUS: CLAIMING SINGLE STATUS WHEN MARRIED

UNDER/OVER REPORTING INCOME AND/OR EXPENSES


TIPS TO AVOID THE TAX PREPARER PENALTY FOR ERRONEOUS EITC CLAIMS:

# 1) DOCUMENT THE QUESTIONS YOU ASK AND THE RESPONSES GIVEN AT THE TIME THE CLINET INTERVIEW HAPPENS

# 2) ASK ADDITIONAL QUESTIONS; DON’T RELY ON SOFTWARE CHECKLISTS ALONE

# 3) REVIEW THE FORM 8867 AND YOUR WORKSHEET FOR ACCURACY AND COMPLETENESS

# 4) ASK SIMPLE QUESTIONS; MAKE SURE YOUR CLIENT UNDERSTANDS WHAT YOU ASK

# 5) ASK ENOUGH QUESTIONS TO MAKE SURE CHILD MEETS ALL ELIGIBILIGY REQUIREMENTS



# 6) KNOW THE SPECIAL RULES AND EXCEPTIONS AND WHEN THEY APPLY

# 7) UNDERSTAND WHEN AND HOW TO DETERMINE THE TIE-BREAKER RULES

# 8) DON’T LET THE CLIENT DETERMINE HIS/HER FILING STATUS

# 9) KNOW THE SPECIAL RULES FOR HH STATUS WHEN TAXPAYER IS STILL MARRIED

#10) WATCH FOR QUESTIONABLE W-2S (HANDWRITTEN OR ALTERED)



#11) BE VIGILENT WITH SCH C AND OTHER INCOME ENTRIES ON THE TAX RETURN

#12) SUBSTANTIATE INCOME OR EXPENSES THAT PUTS A CLIENT IN THE “SWEET SPOT” THAT MAXIMIZES THE EITC

http://www.eitc.irs.gov/rptoolkit/hottopicsrp


IRS ENFORCEMENT PROGRAM:

# 1) OUTREACH AND EDUCATIONAL PROGRAMS TO CONTACT PREPARERS WITH A HIGH VOLUME OF EITC ERRORS

# 2) EDUCATIONAL VISITS TO TAX PRACTISIONERS# 3) CONDUCT ON-SITE AUDITS OF PREPARERS WHO

FILE AT LAST 25 RETURNS WITH EITCFILING (90% OF THESE AUDITS RESULT IN PENALTIES)

# 4)CONTINUED NON-COMPLIANCE BEHAVIOR COULD FACE CRIMINAL CHARGES AND ADDITIONAL PENALTIES

# 5) INJUNCTIONS TO BAR PREPARERS WITH HISTORY OF FILING ERRORS FROM FUTURE TAX

ACCESSING CLIENTS’ ELECTRONIC FILES

Small Business/Self-Employed Division of the IRS has implemented a program to request the accounting software files of certain business taxpayers under examination.

The IRS has taken the position that, if a Client’s business files are maintained in software like QuickBooks and Peachtree, the entire electronic file must be turned over if records have been requested in an audit or examination, even though the file may contain information from tax years unrelated to the examination or data not normally considered part of a firm’s “books and records.”

ACCESSING CLIENTS’ ELECTRONIC FILES

The IRS offers two suggestions in response to this concern:

Have your clients backup their electronic data files at the end of each tax year, thus reducing the amount of data provided to the IRS.

Have your clients condense/archive the files for dates prior to the year(s) under audit.

Note: QuickBooks has released its 2012 version which includes a “time bound” breakout feature that gives you the ability to create a copy that is for a date-specific range and adheres to the IRS requirements.

EFILING REQUIREMENTS AND FORM 8948

The Worker, Homeownership, and Business Assistance Act of 2009 mandates that tax preparers who prepare and file 11 or more individual or trust income tax returns in 2012 will be required to e-file.

Notice 2011-27 addresses situations where a paper return may be filed on behalf of a client;1) tax preparer obtains written statement from the taxpayer, and2) statement is hand signed and dated by the taxpayer, and3) statement is signed and dated on or before the date the return is mailed, and4) statement provides that the taxpayer wishes to paper file


Notice 2011-27 says the following statement will meet these requirements:

“I do not want to have my income tax return electronically filed, and I choose to have my return filed on paper forms. I have asked my tax return preparer to mail my return to the IRS on my behalf.”

Taxpayer’s Signature: ________________________Date: _____________________________________

Note: Either spouse may sign for a joint return Statement should NOT be attached to the return, but be retained by

the tax preparer. This statement is applicable if the tax preparer will be filing the return for the taxpayer, not if the taxpayer is filing on his own.


Rev Proc 2011-25 – Safe-Harbor Statement for client Choosing to File Return in Paper Format

“My tax return preparer [Insert Preparer’s Name] has informed me that [insert he/she] may be required to electronically file my [insert tax year] individual income tax return [insert type of return] if [insert he/she] files it with the IRS on my behalf (e.g., submits it by mail to the IRS). I understand that electronic filing may provide a number of benefits to taxpayers, including an acknowledgment that the IRS received the returns, a reduced chance of errors in processing the return, and faster refunds. I do not want to have my return electronically filed, and I choose to file my return on paper forms. I will mail or otherwise submit my paper return to the IRS myself. My preparer will not file or otherwise mail or submit my paper return to the IRS.

Taxpayer’s Signature: ________________________Date: _____________________________________


Notice 2011-26 provides for cases where an Administrative Exemption is available for paper filed returns.

Complete Form 8948 (Preparer Explanation for Not Filing Electronically) and attach it to the paper return being filed.

Documents

2012 TAX UPDATE Delia (Dee) Tillman, CPA, MTx January 17, 2012