February 13, 2012

Installment Agreement

Authored By: Neal Machanic completed his Masters in Accounting at the University of Utah prior to qualifying as a Certified Public Accountant.  He is also an Enrolled Agent authorized to represent taxpayers before the Internal Revenue Service. He is currently studying to become a Certified Valuation Analyst. Neal crunches numbers in his sleep!

What happens when a taxpayer is ready to file their 2011 individual income tax return and they have a balance due? Well, the Internal Revenue Service wants them to pay it in full by April 15^th. Unfortunately, a taxpayer’s current fiscal situation might require a different response.

If a taxpayer is not going to pay their tax bill in full they usually have three options:

1. Ignore it, hoping it will go away (it never does)
2. Pay it off over time (very much like a loan)
3. Negotiate a reduction in the total amount due (such as with a short sale of a house)

We can assist you with all three options. In fact, many taxpayers who originally chose option one have come to us to help them out. We may have then chosen option two or three to assist them in getting their tax dilemma resolved.

The option that this article will focus on is number two, which in tax lingo is called an installment agreement. The condensed version goes something like this: a taxpayer cannot pay their balance due in full, they request an installment agreement. The IRS sets them up with monthly payments. They pay the tax bill over time with smaller, more manageable payments. The downside to this option is that the IRS will continue to charge them interest on the outstanding balance until it is paid in full. 

Beginning in 2012, the 2011 tax filing season, the Internal Revenue Service has loosened its rules on who can qualify for an installment agreement and the amount of financial data the taxpayer is required to disclose in order to qualify for an installment agreement. They have also increased the maximum number of months generally allowed to pay off an installment agreement.

The IRS now requires only minimal disclosure for tax balances up to $50,000. They have identified three balance groups: balances up to $10,000, balances between $10,000 and $25,000 and balances between $25,000 and $50,000; with each group requiring progressively more financial disclosure. However, disclosure in the highest group listed is minimal as compared to the information the IRS requires for installment agreements over $50,000.

For those taxpayers who owe $10,000 or less in combined tax, interest, and penalties for all open tax years, the IRS will guarantee acceptance. The IRS cannot turn you down as long as you meet these three conditions:

1. During the past five years, you have filed all tax returns in a timely manner, paid any tax due, and did not enter into any other installment agreements.
2. The IRS determines you cannot pay the balance in full when due, and you provide the IRS any information it requires to make that determination.
3. You agree to complete the installment agreement within three years, and you comply with tax laws while the agreement is in effect.

For those taxpayers whose total balance owed is between $10,000 and $25,000; they are not guaranteed acceptance for an installment agreement, although most requests are granted. In this group, if accepted, they can have up to seventy-two months to pay off the balance owed.

For those taxpayers who owe between $25,000 and $50,000, they must provide answers to a number of basic financial questions in addition to the information provided with lower dollar balance owed installment agreement requests.

It should be noted here that balances owed that are greater than $50,000 are eligible for an installment agreement. But before the IRS grants such a request for these large balances, a taxpayer would be required to disclose substantial amounts of financial data, and fill out a significant amount of IRS forms.

Even though the IRS has relaxed its rules on what balances qualify for an installment agreement and how long a taxpayer can take to pay, the IRS does not want to be America’s money lender. They want taxpayers to try to obtain the funds from any and all other possible sources before resorting to an installment agreement.

So, if you are faced with a tax bill you cannot pay in full, an installment agreement is an excellent way of taking care of your tax responsibility. It sure beats the option of doing nothing because the IRS will find you eventually; they always, always do. It is also an effective method unless you are in dire financial straits, and cannot pay even with an installment agreement. Then an offer-in-compromise might be in order for you. But before this method is considered, remember that like a request for an installment agreement greater than $50,000, the amount of financial information that must disclosed and provided is significant.

The accountants of Cook Martin Poulson, PC are ready to assist you with this or any tax situation or problem.

 

February 8, 2012

Partnership Interest Abandonment or Worthlessness

Authored by: Troy Martin, CPA, Shareholder.  Troy specializes in advance tax planning for individuals, businesses, estates, trusts, and pension plans.

Assessing the potential for an ordinary loss

A partner may own a partnership interest that becomes worthless (or nearly worthless). In these situations, it may be impossible to find someone to purchase or take the interest, and the partner is tempted to just “walk away” from the partnership. To the extent the partner has remaining adjusted basis in his partnership interest, he may be allowed a loss under IRC §165(a) for an abandonment or because the interest is worthless. Several factors must be considered in order for the taxpayer to properly deduct such a loss, including the following: establishing the abandonment or worthlessness of the interest, identifying the proper year of deduction, and determining the character of the loss as ordinary or capital.

Claiming a deduction

IRC §165(a) allows a loss that is not recovered through insurance or some other means of compensation to be deducted in the year sustained. Treas. Regs. §1.165-1 indicates that a loss is treated as sustained during the year that the loss occurs “… as evidenced by closed and completed transactions and as fixed by identifiable events occurring in such taxable year.” Treas. Regs. §1.165-2 allows a deduction for the obsolescence of non-depreciable property. The loss incurred must 1) relate to a business or a transaction entered into for profit, 2) arise from a sudden termination of the usefulness of the property, and 3) be associated with either the discontinuance of the business or transaction or the permanent discarding of the property (e.g., abandonment) from use in the business. This provision does not apply to losses that are sustained upon the sale or exchange of the property.

Establishing partnership interest abandonment

In order for a taxpayer to establish the abandonment of an asset, he must show intent to abandon the asset and overtly act to abandon it. The partner should claim an abandonment loss in the year that he has intent to abandon the partnership interest and overtly communicates his intent to interested third parties (the other partners) his decision to walk away.1 In some states, withdrawal from a partnership is allowed only where provided in the partnership agreement.

Establishing partnership interest worthlessness

Although certain steps must be taken to establish an abandonment loss, there is some support that these steps are not necessary for establishing a deduction for a worthless asset. In Echols v. Commissioner, the court of appeals looked to the taxpayer’s subjective determination of worthlessness as “largely a judgment call by a taxpayer based on his own particular, highly personal set of economic factors, including tax effects.”2 The fact that other investors might have determined that the partnership interest was worthless in an earlier year or that other investors might be willing to hold on to the interest and infuse cash were not factors in determining the worthlessness of the partnership interest specific to the taxpayer. Nevertheless, it is prudent to do as much as possible to establish the worthlessness of the partnership interest.

January 31, 2012

Who is a Qualifying Relative?

Authored by: Rod Washausen, CPA. Rod is a Senior Accountant in the Logan office of Cook Martin Poulson, PC. He specializes in the taxation of small businesses and individuals as well as QuickBooks setup and training. Rod is a CPA in Utah, Missouri and Illinois and a Certified QuickBooks ProAdvisor.

Questions regarding dependency exemptions are common. Figuring out the rules for who can be claimed as a dependent can quickly become confusing for a person who is supporting an extended family member or elderly parent, or who has a non-related individual living with them.

In general, you may always claim your child (including a step-child, foster child, adopted child, a child placed with you legally for the purposes of adoption, your brother or sister, or a descendant of any of these). The tax code calls these “Qualifying Children” (please note that there are age, residency and financial support tests that must be met to claim a dependent as a qualifying child).

However, the tax code provides for dependency exemptions for additional persons under special circumstances. The tax code refers to these individuals as “Qualifying Relatives”. These individuals are the subject of this article.

There are two general rules and four additional tests that must be met in order to claim someone as your qualifying relative.

General Rules:

1.The person in question must have been a U.S. citizen, U.S. resident alien, U.S. national or a resident of Canada or Mexico for some part of the year, and

2.They must not file a joint return with someone else (unless it’s only to claim a refund of the taxes they had withheld)

Additional Tests:

1.The person must be one of the following:

a.Your child, stepchild, foster child or a descendant of any of these

b.Your brother, sister, niece or nephew

c.Your father, mother, grandfather, grandmother, aunt or uncle

d.Your step-brother, -sister, -father, -mother

e.One of your in-laws (brother, sister, father, mother, son or daughter in-law), or

f.Any other person who lived with you for the entire year

2.The person cannot be claimed as someone else’s qualifying child (e.g. – if your child lived with your parents and was supported by them, then they are your parents’ qualifying child)

3.The person must have made less than $3,700 of gross income for the year

4.You must have provided more than one-half of the person’s financial support for the year

In short, the “Qualifying Relative” category can cover a number of special situations. If you financially support a parent (or child, sibling, step-sibling, in-law, etc.) financially, you may be able to claim a dependency exemption for them even if they do not live with you, as long as they do not have more than $3,700 of gross income for the year. Please note that tax-exempt income, such as certain social security benefits, is not included in gross income.

It is also important to note that unlike a qualifying child, a qualifying relative can be any age.

Lastly, in certain situations you may be able to claim a person who lives with you and whom you support, regardless of their relationship to you, as long as they do not make more than $3,700 during the year.

For more information, please give us a call or see the section entitled “Exemptions for Dependents” found in IRS Publication 501. This publication is available online at www.irs.gov.

January 25, 2012

Exceptions to 10% Early Withdrawal from IRA’s and 401(k)’s

Many people have been dipping in to their retirement savings in order to make ends meet.  What many people don’t realize is that there is a 10% penalty on most early withdrawals from IRA’s and qualified accounts such as 401(k)’s if they are made before the age of 59 1/2.  This 10% penalty is in addition to the income tax that must be paid on the withdrawal amount at the taxpayer’s individual tax rate.

There are some exceptions to this 10% penalty that many people may not be aware of.  If the money is used for any of the reasons below you could avoid the 10% penalty.  Some of these exceptions only apply to IRA’s and some only apply to qualified accounts, so be sure to consult with your tax advisor regarding your specific situation.  You will also need to notify your tax preparer that you used the money for one of the reasons listed below as that information will not be reported on the 1099-R tax form you will receive in the year of distribution.

Exceptions:

• Distribution made to an employee who has attained age 55 and separated from service
• Distribution is part of a scheduled series of substantially equal periodic payments made over the life expectancy of the participant or joint lives of participant and his beneficiary
• Distribution made due to total and permanent disability
• Distribution made due to death of the employee or account owner
• Distribution to the extent the individual’s unreimbursed medical expenses exceed 7.5% of his AGI
• Distribution made to an alternate payee pursuant to a qualified domestic relations order (QDRO)
• Distribution to pay for health insurance premiums for certain unemployed individuals
• Distribution to the extent of the qualified higher education expenses for the year of the taxpayer, spouse, child or grandchild
• Distribution for first-time home purchases (no home ownership in prior two years). This distribution is limited to $10,000 (lifetime)
• Distribution due to an IRS levy on the qualified plan or IRA.  This exception will not apply if funds are withdrawn to avoid a levy or to satisfy a levy on other property
• Distribution to reservists while serving on active duty for at least 180 days

January 16, 2012

Potential Lease Accounting Changes on the Horizon

Authored By:  Dustin Wood, CPA.  Dustin has been with the firm 7 years and is the audit manager here at Cook Martin Poulson, PC.  He specializes in financial statement services.

Significant changes to accounting standards for lease accounting are on the horizon as part of a convergence project between accounting standards setting bodies in the United States and internationally.  Potential changes to lessee accounting would do away with current accounting requirements, which provide a bright line test to determine whether a lease is an operating lease or a capital lease for the lessee.  Operating lease payments are currently expensed as rent and lease payments while capital leases require the recording of an asset and a liability, as if the asset were being purchased.  Based on current discussions, changes to lease accounting would require recording assets and accompanying liabilities for all leases, and would require adjusting lease accounting for leases already in place.  The proposed changes are currently still in the discussion stage, but if finalized, would require analysis by companies and their accountants to determine the effects of the changes and what adjustments may be necessary.