Monday, August 28, 2017

IRS response to Hurricane Harvey

IRS Gives Tax Relief to Victims of Hurricane Harvey; Parts of Texas Now Eligible; Extension Filers Have Until Jan. 31 to File
WASHINGTON –– Hurricane Harvey victims in parts of Texas have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments, the Internal Revenue Service announced today.
This includes an additional filing extension for taxpayers with valid extensions that run out on Oct. 16, and businesses with extensions that run out on Sept. 15.
"This has been a devastating storm, and the IRS will move quickly to provide tax relief to hurricane victims," said IRS Commissioner John Koskinen. "The IRS will continue to closely monitor the storm's aftermath, and we anticipate providing additional relief for other affected areas in the near future."
The IRS is now offering this expanded relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. Currently, 18 counties are eligible, but taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief.
The tax relief postpones various tax filing and payment deadlines that occurred starting on Aug. 23, 2017. As a result, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were originally due during this period. This includes the Sept. 15, 2017 and Jan. 16, 2018 deadlines for making quarterly estimated tax payments. For individual tax filers, it also includes 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017. The IRS noted, however, that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief.
A variety of business tax deadlines are also affected including the Oct. 31 deadline for quarterly payroll and excise tax returns. In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after Aug. 23 and before Sept. 7, if the deposits are made by Sept. 7, 2017. Details on available relief can be found on the disaster relief page on
The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.
In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.
Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2017 return normally filed next year), or the return for the prior year (2016). See Publication 547 for details.
Currently, the following Texas counties are eligible for relief: Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria and Wharton.
The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit
For information on government-wide efforts related to Hurricane Harvey, please visit:

Wednesday, August 23, 2017

Tax software can lead tax payers astray

A recent Tax Court case provides a cautionary tale for taxpayers who rely on do-it-yourself tax preparation software to prepare their tax returns. In the case, the Tax Court held that a taxpayer couldn't blame his tax prep software for deductions that he took on his tax return that were disallowed (Bulakites, T.C. Memo. 2017-79).
Barry Bulakites is an insurance consultant who used TurboTax to prepare his own returns. The IRS believed he claimed too many deductions, but Bulakites argued that he had enough evidence to prove some of them and, according to the Tax Court, blamed the software for "luring him into claiming others."
TurboTax, which is aimed at individual taxpayers preparing their own returns, asks the user a series of questions and then fills out the tax return based on those answers. The problem is that sometimes the user doesn't understand the questions.
The main issue in Bulakites's case arose from a lawsuit in which Bulakites was a defendant. In 2007, the settlement of that lawsuit left him liable for $500,000.
Bulakites claimed interest deductions on the loan of $31,000 for 2011 and $48,000 for 2012. The court acknowledged that he paid the interest to the lender, but the amount paid did not match the amount deducted on the return.(ALWAYS MATCH FORM 1098) Bulakites did not produce any paperwork to show what had happened to the original loan, which was originally due to be paid off in 2008(BE ABLE TO DEFEND YOUR POSITION). The court said it could not figure out if the loan had been extended or refinanced: "Without any paperwork (in a situation where there should have been lots of paperwork) we are left only with his testimony about the total amounts of the payments and the allocation of those payments between principal and interest" (slip op. at p. 7). Finding Bulakites to be a less-than-credible witness, the court upheld the IRS's disallowance of the entire amount of his interest deduction for both years
In 2009, Bulakites and his wife legally separated, and they divorced a year later. Under their separation agreement, Bulakites was to pay $2,000 per month in spousal support to his ex-wife until he sold the marital residence. After that, the payments would increase to $8,000.
Bulakites and his ex-wife never entered into any subsequent maintenance agreements, but because he could not sell the house, and to do "the right thing," Bulakites orally agreed with his ex-wife to increase his payments to her to $5,000 per month. According to the Tax Court, he paid his ex-wife about $50,000 in both 2011 and 2012. Bulakites deducted these payments as alimony in the years at issue (2011 and 2012), but the court ruled that the oral agreement he had with his ex-wife wasn't sufficient to modify the couple's separation agreement and therefore the payments did not qualify as alimony.
Bulakites also claimed a net operating loss (NOL) of $185,673, all but $142 of which the IRS disallowed. The court noted that, to claim an NOL, a taxpayer is required to substantiate the claim to the deduction by filing "a concise statement setting forth the amount of the net operating loss deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the net operating loss deduction". Bulakites failed to provide this documentation at trial(BE ABLE TO DEFEND YOUR POSITION). He submitted a return for a previous year but not for the year in which the NOL arose(ALWAYS FILE A RETURN, FOR THE PAPER TRAIL). Therefore, the court found that the IRS had properly determined that Bulakites was not entitled to an NOL deduction.
Finally, the court addressed the IRS's imposition of accuracy-related penalties under Sec. 6662(a) for substantial understatements of income tax for both 2011 and 2012. Bulakites tried to blame TurboTax for his mistakes, but the court rejected his claim and upheld the penalties, quoting another Tax Court case, Bunney, 114 T.C. 259, 267 (2000), "[t]ax preparation software is only as good as the information one inputs into it" (slip op. at p. 9).
Thanks to Craig Smalley, enrolled agent for pulling this together.

Tuesday, August 22, 2017

Phishing scams to get W2 forms

The FBI is warning of scams to get workers'  W2 forms.  All employers are at risk.  The phishing scams are embedded in fraudulent emails which look like they are from an entity's payroll department/human resources department.   If you notice a phishing scheme, contact the IRS at email authentication:

Wednesday, August 02, 2017

Uber houses and tax consequenses!

Short-term rentals, often called vacation rentals, have exploded onto the travel scene, becoming hugely popular with homeowners and travelers alike. With the help of technology, it is incredibly simple for a property owner to broadcast their rental across the world.
Millions of people in the U.S. are currently renting their homes or apartments on Web sites such as HomeAway, VRBO and Airbnb. With this level of activity, it is vital that accountants and tax professionals have an understanding of property rentals and income tax implications. Though sometimes overlooked, sales and lodging taxes are an entire class of taxes that expose clients to a significant liability.

A significant liability
Short-term rental property owners are required to collect and remit sales and lodging taxes on the gross rent collected from guests – the same taxes a hotel is required to collect. Short-term in most states is less than 30 days, but there are a handful of states that have 90-day definitions and a few, such as the popular travel states of Hawaii and Florida, where short-term is defined as up to six months.
The property owner or host is required to collect lodging taxes from the guest on any short-term stays. These taxes are typically 10 percent to 15 percent of the gross rent collected – overnight accommodations are heavily taxed. Sales and lodging taxes are a type of gross receipts tax and there are no deductions.
The average short-term rental will generate $20,000 to $30,000 per year in rent, thus amounting to $2,000 to $5,000 in sales and lodging taxes that must be collected and paid. This is a significant liability if your client is not compliant, especially if they are audited for three to five years of history. These lodging taxes can build into a huge hidden liability for unsuspecting or unknowing clients renting their primary or second homes.

Bloomberg News
Income tax vs. lodging tax
It is well understood that income tax treatment is completely different from sales and lodging taxes. For income taxes, a client may deduct operating expenses from the rental property such as mortgage interest, utilities, maintenance, property taxes and even depreciation. In fact, most short-term rentals do not have taxable income after expense deductions – they operate at a net loss position. Even if there is net taxable income, after expense deductions, it is often a small amount, especially when compared to 10-15 percent lodging tax on gross rent.
As a result, most short-term rental properties have a significantly greater sales and lodging tax liability compared to income tax. Income tax is typically minimal or zero, whereas lodging taxes average several thousand dollars or more per year in taxes to be collected from the guest and remitted to the proper agencies.

Lodging taxes are often overlooked
Lodging tax can be easily overlooked because a large number of owners are often unaware of these requirements. Most homeowners or hosts have never heard of or dealt with these taxes before, and the rental activities are to simply generate additional income. Long-term rentals are typically defined as greater than 30 days (this definition varies by state), and are usually not required to collect lodging or any other transaction taxes.
Further complicating lodging taxes is the fact that there are often different city, county and state taxes that apply to reach rental. Essentially, there are multiple levels of government that are potentially each applying a separate tax. The state department of revenue may only handle a portion of the required taxes, and the remaining portion will need to be remitted directly to city or county tax agencies.
How to be compliant
Lodging taxes function similarly to sales taxes and many accountants and tax professionals who deal with state and local taxes will be familiar with the ways to ensure compliance. A note of caution – rarely are lodging taxes solely collected by the state revenue agency. There are usually additional city or county taxes (sometimes both) that the state will not be aware of. This is one major difference from sales taxes where, in most states, the state revenue agency collects 100 percent of sales taxes.
Below are the basic steps in order to be compliant:
  1. Determine the tax rate. Start with the state revenue agency and search for hotel or transient room taxes. Once you find hotel tax requirements, this also applies to vacation rentals. Based on what you learn from the state, check with the city and county where the rental property is located. It is important to confirm that the property address is within city and county boundaries, as you can’t always rely on ZIP codes or mailing address.
  2. Register. Once you determine the applicable tax rate, your client will need to register with city, county and state agencies that administer the taxes. This may include obtaining a business license or rental permit. You should find the forms required when you are researching the taxes and tax rates with each agency.
  3. File and remit. The tax agency determines the frequency of remittance, though sometimes the tax agency will allow you to request a frequency when completing the application forms. These taxes are almost always required to be remitted monthly or quarterly, and most vacation rentals will be required to remit taxes to two different agencies, such as the city and state. Like all sales taxes, returns are usually due by the 20th of the month and there are stiff penalties for not filing on time or missing a filing.
Many of your clients are already engaging in this activity, or will be soon. They will need help and guidance, and will likely expect you to know about these requirements and to aid in the management. Be on the lookout for your client’s short-term renting and make sure that they, and you, are not missing these taxes that are required for each rental transaction.
Thanks to Rob Stevens of Accounting Today for this information!