Tag: IRS

April 15 is Tax Day, Except for Flooding

With the recent flooding in Eastern Massachusetts, several counties were declared federal disaster areas. The bonus is that you have an automatic extension for filing your taxes.

If you live in Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk or Worcester County in Massachusetts, you have until May 11 to file your income taxes. that applies for both Federal and Massachusetts filings.

Massachusetts is not alone. These parts of the country were also granted extensions:

  • New Jersey: Atlantic, Bergen, Cape May, Essex, Gloucester, Mercer, Middlesex, Monmouth, Morris, Passaic, Somerset, and Union counties
  • Rhode Island: Bristol, Kent, Newport, Providence and Washington counties
  • West Virginia: Fayette, Greenbrier, Kanawha, Mercer and Raleigh counties

The automatic extension applies regardless of whether you were underwater or high and dry.

Good news for me. I suffered no damage, but can still procrastinate in finishing my taxes.
Sources:

  • TIR 10-7: Extension of Time for Certain Tax Filings and Payments for Taxpayers Affected by March 2010 Severe Storms and Flooding

FBAR Filing Deadline Extended (For Some)

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The deadline for Foreign Bank Account Reporting was June 30. The Report of Foreign Bank and Financial Account is IRS TD F 90-22.1 (.pdf). Any United States person who has a financial interest in or signature authority, or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year must file the report. An FBAR must be filed whether or not the foreign account generates any income.

Although FBAR requirement has been around for a few years, the IRS recently revised the filing requirements. It seems to have caught many people by surprise.The IRS had extended the FBAR Filing deadline to September 23 for taxpayers who reported and paid tax on all their 2008 taxable income, but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR.

There are a few instances that the filing requirement seems unclear and really unexpected, so the IRS further extended the filing deadline in two instances:

  1. Persons with no financial interest in a foreign financial account but with signature or other authority over the foreign financial account.
  2. Persons with a financial interest in, or signature authority over, a foreign financial account in which the assets are held in a commingled fund.

If that is you, then then you have until June 30, 2010 to file FBARs for the 2008, 2009 and earlier calendar years.

In the first instance, company officers and employees were caught off guard that they need to personally file an FBAR for company accounts. As part of IRS Notice 2009-62 (.pdf), the Department of the Treasury is requesting comments regarding when a person with signature authority over, but no financial interest in, a foreign financial account should be relieved of filing an FBAR for the account. Especially, when the person with a financial interest in the account has filed an FBAR.

The second instance was triggered by statements made by the IRS in June indicating their view that the term “foreign commingled fund” includes private investment funds organized outside the United States. As part of IRS Notice 2009-62 (.pdf), the Treasury Department is asking for comments on this approach.

References:

FBAR Deadline

The deadline for Foreign Bank Account Reporting is June 30. The  Report of Foreign Bank and Financial Account is IRS TD F 90-22.1 (.pdf).

Any United States person who has a financial interest in or signature authority, or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year must file the report. An FBAR must be filed whether or not the foreign account generates any income.

The IRS has engaged in a large-scale initiative to seek out taxpayers with undisclosed accounts overseas. While in the past the prosecution of those failing to comply with the Foreign Bank Account Reports reporting requirements have been rare, following enactment of the Patriot Act of 2001, the IRS appears ready, willing and able to crack down on the non-compliant.

The granting, by IRS, of an extension to file Federal income tax returns does not extend the due date for filing an FBAR.   There is no extension available for filing the FBAR.

There are a few exceptions to the filing requirement.

An officer or employee of a bank which is currently examined by Federal bank supervisory agencies for soundness and safety need not report that he has signature or other authority over a foreign bank, securities or other financial account maintained by the bank, if the officer or employee has NO personal financial interest in the account.

An officer or employee of a domestic corporation whose equity securities are listed upon any United States national securities exchange or which has assets exceeding $10 million and has 500 or more shareholders of record need not file such a report concerning signature or other authority over a foreign financial account of the corporation, if he has NO personal financial interest in the account and he has been advised in writing by the chief financial officer or similar responsible officer of the corporation that the corporation has filed a current report, which includes that account.

An officer or employee of a domestic subsidiary of such a domestic corporation need not file this report concerning signature or other authority over the foreign financial account if the domestic parent meets the above requirements, he has no personal financial interest in the account, and he has been advised in writing by the responsible officer of the parent that the subsidiary has filed a current report which includes that account.

An officer or employee of a foreign subsidiary more than 50% owned by such a domestic corporation need not file this report concerning signature or other authority over the foreign financial account if the employee or officer has no personal financial interest in the account, and he has been advised in writing by the responsible officer of the parent that the parent has filed a current report which includes that account.

Accounts in U.S. military banking facilities, operated by a United States financial institution to serve U.S. Government installations abroad, are not considered as accounts in a foreign country.

The willful failure to disclose foreign accounts, or to report all of the information required on an FBAR, can result in severe civil and criminal penalties. The civil penalty amount is limited to the greater of $25,000 or the balance in the account at the time of violation, up to a maximum of $100,000 per violation. Criminal violations of the FBAR rules can result in a fine of not more than $ 250,000 or 5 years in prison or both.

Section 5314 of the Bank Secrecy Act of 1970 authorizes the Secretary of the Treasury to require residents or citizens of the United States to keep records and/or file reports concerning transactions with any foreign agency. (31 U.S.C. §5314) The provisions resulted from concern that foreign financial institutions located in jurisdictions having laws of secrecy with respect to bank activity were being extensively used to violate or evade domestic criminal tax and regulatory requirements.

References:

You’re a Victim of a Ponzi Scheme, But What About Your State Taxes?

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You missed the warning signs and got suckered into a Ponzi scheme. The IRS offered some tax relief for long-term Ponzi scheme investors (like some of the Madoff victims) who have paid taxes on gains from the investment. The IRS clarified the federal tax law governing the treatment of losses in Ponzi schemes. They also set out a safe harbor method for computing and reporting the losses.

The revenue ruling (2009-9) addresses the difficulty in determining the amount and timing of losses from Ponzi schemes and the prospect of recovering the lost money. The revenue procedure (2009-20) simplifies compliance for taxpayers by providing a safe-harbor for determining the year in which the loss is deemed to occur and a simplified means of calculating the amount of the loss.

But what about state taxes?

California: On March 25, 2009, the California Franchise Tax Board announced that the federal guidance (Revenue Ruling 2009-9 and Revenue Procedure 2009-20) regarding the treatment of Madoff-related or other Ponzi scheme losses would be generally applicable for California purposes.

Connecticut: On April 9, 2009, the Connecticut Department of Revenue Services released Connecticut Announcement No. 2009(7), which describes the effect for Connecticut income tax purposes of the reporting of Madoff-related or other Ponzi scheme losses under the Revenue Procedure 2009-20 safe harbor and under Revenue Ruling 2009-9. In general, Connecticut does not allow federal itemized deductions for Connecticut income tax purposes. Thus, any theft loss deduction claimed by a taxpayer under the Revenue Procedure 2009-20 safe harbor will not affect a taxpayer’s 2008 Connecticut income tax liability. However, if the amount of a taxpayer’s theft loss deduction allowed under Revenue Ruling 2009-9 or Revenue Procedure 2009-20 creates an NOL, then the taxpayer must file amended Connecticut income tax return(s) for the year(s) to which such NOL may be carried back for federal income tax purposes.

Massachusetts: On March 20, 2009, Massachusetts issued: “Notice—Individual Investors; Investments in Criminally Fraudulent Ponzi-type Schemes and Reporting of Fictitious Investment Income.” Massachusetts did not adopt the Revenue Procedure 2009-20 safe harbor in the case of individual investors since Massachusetts tax law does not recognize the theft loss deduction provided under federal tax law.

New Jersey: On April 2, 2009, the New Jersey Division of Taxation had issued guidance on the treatment of Madoff-related
or other Ponzi scheme losses for New Jersey gross income tax purposes. Under this guidance, taxpayers are allowed a theft
loss deduction for New Jersey gross income tax purposes in an amount equal to the original investment plus the income
reported in prior years minus distributions received in prior years. New Jersey does not allow NOL carrybacks or carry
forwards.

New York: On May 29, 2009, the New York State Department of Taxation and Finance issued guidance TSB-M-09(7)I (.pdf) on the
reporting of Madoff-related or other Ponzi scheme losses. In general, New York State will recognize the Revenue Procedure
2009-20 safe harbor.

For more information, Seyfarth Shaw put together some information: Some States Have “Weighed In” on Tax Treatment of Madoff-Related and Other Ponzi Scheme Losses (.pdf)

It’s Tax Day – Are You Tempted to Cheat on Your Taxes?

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The American tax system is a good test case for cheating. We know it’s good to pay taxes because the government does lots of good things for us. At the same time, we have a selfish desire to pay as little in taxes as possible.

Our tax returns are self-reporting for our income and characterization of our deductions. We police ourselves, knowing that there are criminal penalties for not reporting income and the threat of an audit. With increasingly computerized reporting systems, the IRS seems to know lots more about our income.

The IRS has three dimensions of tax compliance: filing, payment, and reporting. Filing compliance refers to whether taxpayers filed required returns in a timely manner, or at all. Payment compliance considers whether taxpayers paid their reported tax liability in full on a timely filed return. Reporting compliance addresses the accuracy with which taxpayers report their tax liability to the IRS.

Math errors increased from 2.98% in 1996 to 7.63% in 2002, while under-reporting decreased from 1.23% to 0.86%

Have you finished your taxes? The compliance numbers show that you need to double-check your math.

See:

Image is from Wikimedia Commons: No IRS.

You’re a Victim of a Ponzi Scheme, But What About Your Taxes?

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You missed the warning signs and got suckered into a Ponzi scheme. Can the IRS help by giving you some tax relief? This is a critical issue for long-term Ponzi scheme investors (like some of the Madoff victims) who have paid taxes on gains from the investment. After all, they have been paying real taxes on fictional gains.

The IRS has stepped up with guidance on what to do. They clarified the federal tax law governing the treatment of losses in Ponzi schemes. They also set out a safe harbor method for computing and reporting the losses.

The revenue ruling (2009-9) addresses the difficulty in determining the amount and timing of losses from Ponzi schemes and the prospect of recovering the lost money.  Some of the older guidance from the IRS on these losses is somewhat obsolete.

The revenue procedure (2009-20) simplifies compliance for taxpayers by providing a safe-harbor for determining the year in which the loss is deemed to occur and a simplified means of calculating the amount of the loss.

The first question is whether a loss from a Ponzi scheme is a “theft loss” or a “capital loss” under IRC §165? With the criminal intent of a Ponzi scheme, it is a theft loss. That also results in it being an itemized deduction that is not subject to the deduction limits in IRC §67 or IRC §68. You can read further in Revenue Ruling 2009-9 for more information.

Even with the clarification in the revenue ruling there many factual issues that have to be addressed to properly take the deduction. Given the ongoing investigations, it is hard to know the facts. So the safe-harbor in the revenue procedure draws some bright lines around what you need to take the deduction.

The first thing you need to determine is whether the Ponzi scheme was a theft. The revenue procedure provides that the IRS will deem the loss to be the result of theft if:

    • the promoter was charged under state or federal law with the commission of fraud, embezzlement or a similar crime that would meet the definition of theft; or
    • the promoter was the subject of a state or federal criminal complaint alleging the commission of such a crime, and
    • either there was some evidence of an admission of guilt by the promoter or a trustee was appointed to freeze the assets of the scheme.

      That seems to work very nicely with the facts for the Madoff scheme.

      Now that you can claim the theft loss, you need to calculate the amount of the loss. It may take years to find any assets and distribute them to the victims. Therefore, you have a problem figuring out the actual amount of the loss and the prospect of recovery. The revenue procedure generally permits taxpayers to take a deduction in the tax year they discover the loss and to deduct 95% of their net investment (less the amount of any actual recovery in the year of discovery and the amount of any recovery expected). If you are an investor suing persons other than the promoter (like the Madoff feeder funds), then your deduction is reduced by substituting “75%” for “95%”.

      This new guidance seems to address the phantom income concerns, but are predicated on the victims not filing amended returns for prior tax years. Are there other concerns that the IRS did not address?

      See: