IRS to regulate tax preparers

We support this position being considered by the governement in an effort to reduce the amount of revenues lost due to poor regulation as well as the erroneous over taxation of individuals due to preparers relying too heavily on tax software and not questioning if there might be a different option under the tax code. Too often I have seen preparers relying on the tax software they are given without understanding the workings of the tax code. With hundreds of tax software packages in existense I feel preparers should be well versed in the tax code.
The IRS is working on new rules that could require paid tax preparers to be licensed to improve tax compliance and reduce fraud. A large portion of taxpayers get help with their returns, either from paid preparers or computer programs. Tax preparers currently don't have to be licensed, unless they represent clients in proceedings before the Internal Revenue Service.

Year-End Tax Strategies

One thing is certain: It was a very bad year for investors. And while this will probably come as cold comfort for most people, your investment losses will serve up certain tax benefits. It's worth spending some time now, before the end of the year, to be sure you are maximizing any opportunities to trim your tax bill.

The stock market is a risky place but there is a lot of opportunity out there. Risk is prevelent but my general view is that to all those of who were behind in investing and building their IRAs, this could be a 2nd chance! My firm believes that the market will rebound and when it does the individuals who did not cower but were able to roll with the fluctations, and pick strong companies, will be in very strong positions in the future. Everyone is down right now, research and then consider buying. Think about it, the federal government has given huge Dow 30 firms billions and billions of dollars. They are not going to let them fail. I don't pretend to know what is going to happen with all of the firms-but the Feds can't afford for these companies to fail. So there will be greater insight but also hopefully stronger more agressive companies will prevail.

Keep in mind that taxpayers can use their realized investment losses to offset an equal amount of gains (if you're lucky enough to have any, of course). But if you don't have any investment gains, or your losses exceed your gains, those losses can be used to offset up to $3,000 of ordinary income, or $1,500 for married individuals filing separately. Remaining losses can be carried forward to future years -- indefinitely.
That means you should assess the damage within your taxable portfolios for investments you want to sell, and get rid of them before the end of the year. Of course, you do not want to sell investments haphazardly simply to generate a loss for tax purposes. Your long-term strategy should always take precedence.
'If you do sell a security that you still like and expect to buy back later, be aware of ''wash sale'' rules, which forbid you from reaping a tax benefit if you buy the same investment within 30 days of selling it at a loss. Any losses logged won't count.

Here are several other actions to consider, given depressed asset values:
CHARITY Investors often donate appreciated stock to charity so they can circumvent capital gains taxes. This year, investors might consider selling slumping stocks first, realizing the losses, and giving the proceeds to charity, said Susan Hirshman, a wealth adviser at JPMorgan. Or, donate stock that is still trading above its purchase price.

CONVERT TO A ROTH This is an ideal time for individuals to convert their traditional individual retirement accounts to a Roth I.R.A. You must pay income taxes on the entire amount converted, so lower asset values work to your advantage. For now, individuals will face income limits for converting: single and married joint filers must have adjusted gross income of $100,000 or less. But those income limits expire in 2010.
GIFTS You can give any number of people annual gifts of up to $12,000, free of gift tax, which is an effective way to reduce the value of your taxable estate. It works particularly well now because you can give away more shares when they are worth less, and the shares can recoup their value outside of your estate. Likewise, if you want to give someone more than $12,000, you will also be able to give more shares away. And since the value has declined, you will eat into less of your $1 million lifetime gift tax exemption, which applies to gifts over the $12,000 threshold, said Maureen McGetrick, a partner with BDO Seidman.
Beyond opportunities tied to the market's swoon, some taxpayers might need to rethink their typical tax-savings strategies. Normally, it makes sense to accelerate certain deductions, like paying a portion of next year's property taxes early, and push as much income, like a bonus, into the next year as possible. But if you expect to land in a higher tax bracket in 2009, you might do the reverse: take as much income as possible now and defer certain deductions.
Some wealthier taxpayers might prefer to take this reverse approach because it's unclear if and when their taxes will rise.
''The bottom line is that we don't know where tax rates are necessarily going, but what we do know that the political and economic outlook is ripe for tax increases,'' said Ms. Hirshman of JPMorgan. ''And most importantly, we do know our tax rates are at historical lows.''
On the other hand, if you are a victim of the flagging economy and you expect your income to drop significantly next year -- or you expect to lose your job -- you might accelerate deductions and offset as much of this year's income as you can, said Mark Luscombe, a principal analyst at CCH.
Of course, all strategies need to be considered in light of the alternative minimum tax, a parallel tax system set up in 1969 to ensure that the wealthiest taxpayers paid their fair share of taxes. People who expect to be caught by the A.M.T. should calculate their taxes twice: once under the regular system and again under the A.M.T., which has its own set of complex rules and excludes certain deductions like property taxes. For joint filers, the amount of income exempt from A.M.T. increases to $69,950 this year from $66,250 in 2007, and, for singles, to $46,200 from $44,350.
Several other tax breaks were either extended or added this year by Congress, including these:

PROPERTY DEDUCTION This new, additional standard deduction for property taxes (up to $500 for single filers and $1,000 for joint return filers) can be claimed by people who take the standard deduction and pay property taxes.
It might end up being a better deal for people who normally itemize their deductions. And, ''if you are in this category, consider turning the usual year-end strategy on its head: Shift as many deductible expenses, such as charitable contributions, from 2008 to 2009,'' said Bob Scharin, senior tax analyst from the tax and accounting business of Thomson Reuters. ''That way, you can claim the bigger standard deduction in 2008 and, by shifting what would otherwise be 2008 expenditures into 2009, put yourself in a better position to exceed the standard deduction amount next year.''

SALES TAX Individuals who itemize their deductions have the choice of deducting state and local sales taxes instead of income taxes. This works well for anyone who has made an unusually large purchase or for those in states without income taxes, like Florida.
I.R.A. DONATIONS Individuals who are at least 70 1/2 can use tax-free distributions up to $100,000 from their I.R.A.'s for contributions to qualified charities in 2008 and 2009. Such distributions do not count as income and cannot be deducted as charitable donations.

HOME BUYER CREDIT First-time home buyers can take what amounts to an interest-free loan from the government in the form of a federal tax credit of $7,500 or 10 percent of the purchase price, whichever is smaller. You must pay back the loan over 15 years, and income limits apply.
EDUCATION A deduction for higher education expenses was extended through 2009 and applies to all taxpayers, including those who do not itemize their deductions. Single filers with adjusted gross incomes under $65,000 (or $130,000 for joint filers) can deduct up to $4,000 for education expenses. Taxpayers with income of $65,000 to $80,000 (or $130,000 to $160,000 for joint filers) can claim a reduced deduction of up to $2,000.

KIDDIE TAX Beginning this year, children under age 19 (up from age 18) and full-time students under age 24 with investment income in excess of $1,800 will be subject to their parents' tax rate.

Source for this article: New York Times

Ponzi Scheme Victim?

IRS assisance-Investors can deduct losses in same year suffered: Because IRS rules are fairly generous about losses from theft, the apparent victims of an alleged Ponzi scheme that is the basis for charges against Bernard Madoff should be able to take their tax losses in the same year they were experienced. The Willens Report, published by tax and accounting expert Robert Willens, says most of the losses from the alleged fraud would qualify for same-year write-offs.

IRS looking at S corp officer pay

IRS 'Fact Sheet' on S corporation compensation and health insuranceThe IRS has issued a Fact Sheet (FS-2008-25) on salary requirements for S corporation officers. The main point of the Fact Sheet is that corporate officers are required to take a "reasonable" salary out of the S corporation. The IRS doesn't like it when S corporation owners don't take a salary; S corporation income that passes through on a K-1 instead of a W-2 isn't subject to FICA and Medicare tax, so S shareholders are tempted to take little or no salary to avoid the 15.3% combined employer and employee tax hit.However, the tax law isn't clear on how much salary you need to take to avoid IRS trouble, and there is little IRS guidance on the matter .

Courts that have ruled on this issue have based their determinations on the facts and circumstances of each case. Some factors considered by the courts in determining reasonable compensation: Training and experience, Duties and responsibilities, Time and effort devoted to the business, Dividend history, Payments to non-shareholder employees, Timing and manner of paying bonuses to key people, What comparable businesses pay for similar services, Compensation agreements, The use of a formula to determine compensation S corporation shareholder medical insurance. etc...

The fact sheet also addresses S corporation owner health insurance: The health and accident insurance premiums paid on behalf of the greater than 2 percent S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder-employees Form W-2. They
are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. Therefore, this additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder, but would not be included in Boxes 3 or 5 of Form W-2.The shareholder can then deduct these amounts on Line 29, page 1, Form 1040.

The Fact Sheet refers to Notice 2008-1, the detailed IRS guidance on reporting S corporation owner health insurance, and it addresses a question posed to us by several commenters: Payments of the health and accident insurance premiums on behalf of the shareholder may be further identified in Box 14 (Other) of the Form W-2. Schedule K-1 (Form 1120S) and Form 1099 should not be used as an alternative to the Form W-2 to report this additional compensation.So as you head into the final paychecks of the year, be sure your S corporation shareholders have their health insurance as a taxable benefit (but not for FICA and Medicare) on their paystubs before year-end so the W-2s come out right.

Economic Problems

In this time of uncertainty, it is good to remember Warren Buffet's strategy of buying and holding stocks he likes "forever." The market will recover, it is just a question of when. Is it better to sit out on the sidelines and get back in when things are calm, that answer is different for everyone. The market will be back and most blue chips will recover nicely.

Advice on Job Loss or a cut in hours

FINANCIAL ADVICE ON JOB LOSS -
Some things to consider in this troubled market...

-Conserve cash. I know easy to write but tough to do. If you're paying more than the required payment on your mortgage, auto or student loans, pay only the required amount and conserve your cash for your living expenses.
-Create a new budget. Budget your expenses and figure out which items can be eliminated or at least reduced.
-Assess your financial situation. Review your assets to determine the best sources to tap for your cash needs. Set up a plan for which assets you'll use and in what order if your unemployment is lengthy. Make sure you understand the potential tax consequences of each.
- Consider purchasing medical insurance outside of COBRA. You may find a better deal.
-Obtain a home equity line of credit. If you think you might lose your job, and you will absolutely have to borrow money to see you through, it is easier to get this type of loan while you’re still employed.
-Discuss severance benefits with your employer. Ask about severance pay, outplacement services and medical insurance continuation options.
-Here is the tough one- Try to Make sure you have six to twelve months of living expenses. The rule of thumb used to be three – six, but it’s a different world now.
-SO IMPERATIVE-I think most will work with you but YOU HAVE TO CONTACT THEM----Contact your mortgage lender as well as your credit card companies to explain your current situation and ask them to work with you. If you continue to run up your credit you could end up filing for a bankruptcy and that will stay on your records for a long time, making obtaining future loans that much more expensive.
-Remember that cash is king. It’s going to be harder and more expensive to get credit.

Fair Value Accounting-how firms value securities...

Fair value accounting is still fair game for attack, but there may be more common ground than imagined between critics and proponents of the rules governing how financial firms value the securities they hold.
The SEC recently heard comments on fair value, or mark-to-market bookkeeping, which requires firms to value securities in their portfolio at, well, market prices.
Such accounting arcana has turned into a political football in recent months as firms were forced to write down the value of debt for which few buyers existed - like mortgage-backed securities in a deflating real estate bubble. SEC chief Christopher Cox said Wednesday that the fair-value standards need "further work."
He wasn't alone. Though fans maintain the fair-value approach results in greater transparency for investors, critics such as former Federal Deposit Insurance Corp. chief William Isaac argue that it does no such thing.
Worse, they say, it's intensifying the financial-sector meltdown by forcing banks to write down the value of debt securities even if the loan payment streams behind them are flowing satisfactorily.
"[M]ark-to-market accounting has been extremely and needlessly destructive of bank capital in the past year, and is a major cause of the current credit crisis and economic downturn," Isaac said in prepared remarks.
"The rules have destroyed hundreds of billions of dollars of capital in our financial system, causing lending capacity to be diminished by ten times that amount." (Banks typically lend out around ten times their capital.)
Caught in the middle is the Financial Accounting Standards Board, the private-sector group that sets U.S. accounting rules along with the SEC.
Not so opposite
Despite the lively debate, one expert says there is more common ground than might be initially apparent - which, in his view, means the mark-to-market rules are likely here to stay.
"Those who looked like polar opposites were actually much closer than they appeared," says David Larsen, a managing director at investment advisor Duff & Phelps and a member of the FASB committee that advises the board on fair-value accounting issues. "The task now is to harmonize the conflicting views."
Isaac's broadsides aside, Larsen says he believes many comments made at Wednesday's meeting show that critics of the mark-to-market regime often misunderstand the current rules and how they should be applied. Proponents and critics of the rules, he says, often agree on some principles but don't know it because they're "speaking different languages."
That observation, he says, gives the FASB and the SEC latitude to possibly issue further guidance and make minor changes to the rules, without throwing them out - a move that he said would reduce whatever insight investors have into often opaque financial firms.
One aspect of the fair-value approach that may need adjusting, Larsen says, revolves around how to hold accountants, auditors and financial executives accountable for the judgments they make in assessing the value of an infrequently traded security.
He says that one common misperception centers on what happens when a recent trade has been at a fire-sale price. He takes the example of Merrill Lynch's (MER, Fortune 500) agreement in July to sell a $30.6 billion portfolio of troubled debt to Lone Star funds for 22 cents on the dollar.
Fair value rules don't force holders of similar securities to use 22 cents as their mark, Larsen says. But he says some comments made by opponents of the fair value rules suggest they believe otherwise - and he fears that accountants and auditors who recall Arthur Andersen's prosecution for its mishandling of Enron's books may see things the same way.
"We have people who are doing the right thing who are just afraid of making a mistake," said Larsen. He says one thing regulators might consider is some sort of safe harbor that would permit accountants to make difficult securities-valuation judgments without the risk of jail time.
Those aren't the only changes that may come to the fair-value regime. The FASB is working on adding disclosure requirements, Financial Week reported, that would help investors and analysts more fully understand the types of assumptions firms made in valuing infrequently-traded securities.
Wednesday's roundtable came about as a result of the passage earlier this month of the Emergency Economic Stabilization Act, which directed the SEC to study the economic impact of fair-value accounting. The agency is due to hold another roundtable next month and to report back to Congress by Jan. 2.
Larsen, for one, believes the fair value rules are here to stay, even if their form is apt to change at the margins. "My sense is that investors want and need transparency," he said. "That's out of Aladdin's lamp, and you can't push it back in."