Posts Tagged ‘accounting’

The following is a news alert that we received from Thomson Reuters/PPC, the tax research service to which we subscribe.  It is very disturbing, and all our clients and friends of the firm should be aware of it:

Consumers and Tax Professionals Targeted in IRS E-mail Schemes:  The IRS has seen an approximate 400% surge in phishing and malware incidents so far this tax season. The emails are designed to trick taxpayers into responding to official communications that lead to websites designed to imitate official looking websites. The sites ask for social security numbers and other personal information. The sites also carry malware which infect computers and allow criminals to access files or track keystrokes to gain information. “While more attention has focused on the continuing IRS phone scams, we are deeply worried this increase in email schemes threatens more taxpayers,” Koskinen said. Tax professionals also are reporting phishing schemes to obtain their online credentials. If a taxpayer receives an unsolicited email that appears to be from either the IRS e-services portal or an organization closely linked to the IRS, report it by sending it to phishing@irs.gov. IR-2016-28.

Rules of Thumb:

  • If the “IRS” or “Treasury Department” calls you threatening legal action against you for a tax issue of which you are unaware, hang up – IT IS A HOAX!  As we have pointed out in earlier blog posts, the IRS will never initiate action against you without following strict protocol and they will certainly not call you about something without corresponding with you in writing beforehand.
  • Similarly with e-mail – if an e-mail claims to be an official communication, don’t believe it.  Actually, try not to open it to avoid malware issues.  The bottom line is, the IRS does not use e-mail for “official communication.”[1]  However, if you have a doubt about the authenticity of an e-mail, you can call the IRS at the appropriate number (found at:  https://www.irs.gov/uac/Telephone-Assistance) and speak with them about it.  And, of course, consider reporting the incident as indicated above.

The Internet is a wonderful thing, but with the good comes the bad, and the ability to defraud uninformed taxpayers is right up there with the bad.  Don’t let these geeky, tech-savvy criminals take a bite out of you.

[1] If you are already under examination and working with an agent, s/he may use e-mail to communicate with you, but you will already know who s/he is.  In any event, the communication will not be “official.”

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This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche.

I guess physical house robberies and street muggings are too risky for criminals these days.  Over the past couple of years, an entire cottage industry of IRS scammers has sprung up whereby telephone “solicitors” call unsuspecting Raymond Russolillotaxpayers and threaten them with legal action if they do not pay their back taxes immediately.  A number of my clients have received such calls and were, to put it mildly, shaken up by the whole experience.

Here’s the deal – we all know that the IRS is a huge, unwieldy bureaucracy that is very easy to criticize and ridicule and just as easy to fear.  As an institution, it is far from perfect.  But, the one thing IRS really knows, and lives by, is PROCEDURE!  There are time constraints and notice requirements and all kinds of legal processes procedures in place to protect both the taxpayer and the taxing agency.  And the bottom line is, procedure dictates that IRS not shake down taxpayers by telephone!  If the IRS is truly “after” you, you will know because they always make first contact by mail.  The telephone may be used to communicate with you once you are in the audit process, but any settlement offer, assessment, or bill will always be delivered to you on paper, not by an angry, demanding phone call.

Scammers rely on taxpayers’ ignorance of procedure and fear of government agencies.  Don’t be so easily fooled.  Knowing the rules the IRS lives by will enable you to spot a scam and nip it in the bud.  The IRS will never:

  1. Call to demand immediate payment, nor will they call about taxes owed without first having mailed you a bill.
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  4. Ask for credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

So, what if you receive a call from a scammer?  First of all, stop, take a deep breath….and do nothing.  End the call.  If you receive a voice mail message, you may want to save the recording, particularly if you plan to report the incident to the authorities.   If you have some doubt about the legitimacy of a call (under the theory that “where there is smoke there is fire” – perhaps you received a letter that you ignored or forgot about), you should immediately contact your tax advisor for assistance.  At the very least, you can contact the Internal Revenue Service yourself at (800) 829-1040 to see if there are any open tax items you may have neglected to address.  But, if you know you owe no taxes or you are unaware of any issues in dispute, you may want to consider reporting the incident to the Treasury Inspector General for Tax Administration (TIGTA) at (800) 366-4484 or at www.tigta.gov.  You can also file a complaint using the FTC Complaint Assistant; choose “Other” and then “Imposter Scams.”  Include the words “IRS Telephone Scam” in the notes.

Finally, regarding other forms of communication, it is safe to say that the IRS is not even in the 21st century yet.  They do not use unsolicited e-mail (which itself is so 20th century), text messages, or any kind of social media to discuss your personal tax issues.

You know the old saw about “a fool and his money are soon parted.”  Don’t let fear and ignorance make you that fool.

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We recently conducted tax training for our firm’s newly hired staff accountants.   At the beginning of the program, I wanted to convey to them the importance of their jobs and so I launched into a discussion of how the federal tax law exists not merely to raise and collect revenue but also to incentivize and encourage specific taxpayer behavior in an attempt to achieve certain economic, social and political goals.  It all sounds pretty good as long as you don’t focus on the incompetence in Washington these days.  Of course, it is also pretty meaningless at this time of year because right now, all taxpayers want is one thing – minimize my tax bite!  And, don’t confuse me with talk of tax equity and other wonky stuff!

All kidding aside, tax planning is really not conceptually difficult because all it involves is reducing, eliminating, or deferring tax or taxable income.  That’s it.  Sure, it may seem daunting because, well, tax law is law and the law is generally daunting.  However, each of us can follow a fairly short and straightforward “to-do” list and take advantage of most of the opportunities available to us.  One caveat – although conceptually simple, the implementation of some of these steps may be more complex than they seem, so please consult your tax and investment advisors before jumping in.

  1. It’s always best to start at the beginning.  You or your accountant should prepare a baseline projection of your 2015 and 2016 income tax liabilities.  This multiyear tax projection is the best tool for testing the effectiveness of the various tax planning strategies listed below.  Don’t make the mistake of shortchanging this process.  You do so at your own peril, as it is truly impossible to plan on the back of an envelope.
  1. Determine if you have the ability to defer or accelerate any ordinary income items such as bonuses, client fees or IRA/Keogh distributions (among others). Go back to step 1 and evaluate the impact of these potential moves.
  1. To avoid possible penalties, make sure you take all required minimum distributions (RMD’s) from your IRA’s and other retirement plans by 12/31. This may not save you any taxes, but it will certainly save you headaches and, as I mentioned, those possible penalties.
  1. Review your portfolio and prune for tax purposes. Try to match capital gains and losses to lower the tax bite as much as you can, but not too far below zero.  For federal purposes, net capital losses can be deducted up to $3,000 per year ($1,500 for married filing separate) with any balance carried over indefinitely.  However, you may be more limited for State purposes.  For example, New Jersey does not allow net capital losses to offset ordinary income, nor does it allow for carryover losses.  So NJ residents who consciously generate net capital losses are throwing away any future tax benefit.
  1. Manage your deductions, keeping in mind that prepayment of most expenses (other than charity) has significant implications for the alternative minimum tax. In other words, consider the deduction and then return to step 1 to evaluate its impact.

The most common deductions that people defer or accelerate are:

  • Charitable contributions
    1. You can’t go wrong with direct contributions of cash or appreciated long term securities, but be sure to get a receipt for any contribution of $250 or more.
    2. Don’t even think of contributing depreciated securities- better to sell them first, take the tax loss and donate the cash.
    3. Consider using a donor advised fund.  It is a really simple way to accelerate outsized contributions to the current year, particularly if you are unsure who the ultimate charitable beneficiary should be.
    4. Be careful when donating old clothing or household goods to charity.  They must be in “good or better” condition for their value to be deductible and the proof of that condition is on you.
  • State and local income taxes
  • Real property taxes
  • Some interest expense
  • Miscellaneous itemized deductions such as investment or tax advisory fees.
  1. Make sure that all retirement plans and IRA’s to which you are entitled are funded to the max.  Make an early New Year’s resolution for 2016 to fund these plans as early in the year as possible, rather than waiting until Thanksgiving.
  1. Fund the appropriate “529 plan” for yourself and/or your beneficiary(ies). 529 plans enable you to accumulate savings free from federal income tax if the eventual proceeds are used to pay for qualified post-secondary education expenses.  In some states, such as New York, contributions to certain plans may be deductible for state tax purposes.  Compare the plans at http://www.savingforcollege.com.
  1. Review your family’s gifting program.  Up to $14,000 in gift-tax-free, present value gifts ($28,000 if married and gift splitting) can be made to as many donees as you would like.  In addition, check out the “gracious grandparent” technique we outlined in a recent blog post where, under the right circumstances, you can invest upwards of $140,000 in a 529 plan free of any gift tax.
  1. Keep current on late breaking tax news at the end of the year.  Certain “extender” provisions have not yet been enacted and reinstatement of these extenders prior to year-end may produce additional tax savings opportunities.

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This week’s guest blogger is Susan Murphy, CPA, a tax manager in the Boston office of WithumSmith+Brown.

At his State of the Union Address earlier this year, President Obama identified the “Angel of Death” tax loophole as one of his major agenda items for 2015.  “Angel of Death” – very ominous sounding!  What does it mean for you?  Has any progress been made toward President Obama’s goal of eliminating this loophole?  Murphy Pic - 2015

Internal Revenue Code (IRC) § 1014 or the “step up in basis” as it is more commonly known, is our President’s vilified Angel of Death tax loophole.  In general, this code section allows for the passage of property from a decedent to his/her intended heir with a basis equal to the fair market value of the property on the date of death of the decedent.  Therefore, low basis assets remaining in an estate are transferred to the heir(s) at current market value.  What a boon for the beneficiary (hence the targeting by the President!)  If later sold by the heir, there is no long term capital gain assessed for the period of appreciation that occurred during the decedent’s life time.  Post death taxable consequences arise only for the period of appreciation that occurred while in the hands of the heir.

In late 2012, the tax law was significantly altered with respect to transfer taxes, incorporating (among other changes) a permanent increase in the top tax rate to 40%, an increase in the lifetime exemption to an inflation-adjusted $5,000,000[1] and the introduction of portability[2] to the estate planning arena.  These are all game changers and, except for the increase in the top tax rate, fairly taxpayer-friendly, especially for smaller estates.   If you have not reviewed your existing estate plan and will since the law changes, now is a good time to do so.

Unfortunately, these game-changers also make the already-existing “Angel of Death loophole” more pronounced and subject to criticism which, in all likelihood, will not go away.

However, it is now nearly September.  Has President Obama’s tax proposal to increase capital gains tax in this area seen any significant progress?  According to political pundits (of which I am not one), the answer is a resounding no.  Nor will it be likely, due to our currently Republican controlled Congress.  Stay tuned….

[1] 2015 exemption is $5,430,000.

[2] Portability is defined as the amount of unified credit NOT used in the decedent spouse’s estate and therefore available for use for gift or estate tax purposes by the surviving spouse.  (IRC § 2010). More on this nifty feature in future blogs.

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This week’s guest blogger is Al LaRosa, CPA, a trust and estate specialist in the New York Office of WithumSmith+Brown.

A common and effective technique for transferring wealth to the younger generation is the use of Family Limited Partnerships (“FLP”) or Limited Liability Companies (“LLC”). These entities are a great way to consolidate and manage family assets. They provide for a more orderly transition and, as an added benefit, enable the grantor to benefit from valuation discounts when determining the fair market value of the assets being transferred for estate and gift tax purposes.  As you can imagine, discounting taxable value is not something the IRS is particularly keen on and has resulted in litigation over the years as well as legislative and administrative proposals to limit or eliminate it.  Valuation discounts are threatened again (read on….) so, now may be the time to consider using this technique if it makes sense for your overall estate plan.Alfred LaRosa

How it Works: When assets are transferred, the taxable value is the “fair market value,” a somewhat nebulous amount defined by law as the price at which the property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or to sell and both reasonably knowledgeable of the facts.  Sometimes, that value is obvious – if you give away marketable securities with no strings attached, the gift tax value would be the exchange value of the securities on the date of transfer.  Other times, like with FLPs and LLCs, the valuation is a bit murky.  A whole industry exists to determine, as objectively as possible (without an actual sale), what that value is.  There is, let’s say, some wiggle room.

Ownership of an interest in an entity such as an LLC or a FLP that holds assets will generally result in a lower valuation for transfer tax purposes than the outright ownership of those same assets outside the entity.  Lower valuations result because minority interest and lack of marketability discounts are allowed when valuing these transfers.  Here’s the wiggle room – if you give an interest in a properly structured LLC or FLP to your child, you will continue to control the entity and s/he will be along for the ride.  If s/he can’t control the internal investments or sell the LLC or FLP units, are they really worth as much?  And how much will this save the family?

Turns out, it can be plenty.  For example, an effective valuation discount of 35% would allow a senior family member to transfer a 30% interest in a $25,000,000 controlled entity to younger family members at a reduced gift tax value of $4,875,000, rather than $7,500,000.  If available, the value of the transfer will be sheltered from any gift or estate taxes to the extent of the taxpayer’s remaining lifetime gift/estate tax exemption.

As noted, there have been numerous proposals and continued discussions to eliminate or reduce the benefits associated with valuation discounts for FLPs and LLCs.  Recently, these talks have become quite concerning.  At a recent American Bar Association’s Tax Section meeting, Cathy Hughes, from the Department of Treasury’s Office of Tax Policy, hinted that proposed regulations might be released real soon (possibly in September 2015) that would limit the availability of valuation discounts for FLPs, LLCs and other family entities.

Given the increased likelihood that the window of opportunity to utilize valuation discounts may be coming to a close, it may be prudent for those individuals who intend on utilizing valuation discounts to transfer assets take action now (prior to the release of any future regulation that restricts their benefits).

Remember, obtaining a professional valuation appraisal is critical to substantiate these discounts that are being used to adjust the value of the transfers.

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You are reading (and I hope you will continue reading) the first post in Withum’s new blog series, Private Wealth Matter$.  You may be familiar with its predecessor, Charitable Nation, a blog more focused on all things charitable.  We decided to expand our coverage to many more topics of interest to those with wealth because…

Private Wealth Matters!

Many years ago, a client’s son got married.  Back then, his family was on the Forbes 400 list but lived a relatively modest lifestyle.  The children knew they were rich but had no idea how rich, although one would think the Forbes 400 list would have been a dead giveaway.   Anyway, prior to the wedding, Mom and Pop wanted to educate Son and future Daughter-in-Law about their wealth.  They weren’t concerned about the risk of a greedy Daughter-in-Law getting ideas because the family had a long history of tying up their money in trust.  The trusts were of the “sprinkling” variety with distributions at the discretion of the trustee(s), so it made sense for Son and Daughter-in-Law to understand and plan accordingly.  I will never forget both kids’ eyes getting as wide as saucers as they saw the assets, sorry, income available to them because…

Private Wealth Matters!

At the other extreme, I recall a family office consultant telling a story about a billionaire client who essentially had no use for his children or succession of ex-wives.  He hadn’t done any financial/tax/estate planning and did not intend to because he really didn’t care.  In fact, he wanted his family to end up with as little as possible.  I guess this is the exception that proves the rule because…

Private Wealth Matters!

Private wealth can help and it can hurt.  Some go to inordinate lengths to keep as much of it out of Uncle Sam’s hands as possible.  Some want to give it all away.  There are those like Warren Buffett who once famously said that he wants to give his kids enough “so, that they could feel that they could do anything, but not so much that they could do nothing.”  There is no boiler plate plan that will enable you to enjoy your lifetime wealth, minimize its taxation, support your favorite charities and enrich future generations.  There are, however, building blocks that can be efficiently integrated in ways that make sense for you.  Exploring some of these building blocks is the purpose of this blog.  Over the coming weeks, we will bring you thoughts from experts internal to Withum as well as external money managers, attorneys and other specialists.  We’ll keep it short; we’ll keep it fun.  We encourage you to participate in the dialogue by posting comments and calling us if you need more in-depth assistance.  We do all this because…

Private Wealth Matters!

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So far, this blogger has covered a variety of “level 101” charitable tools & techniques.  Today, we begin to take it up a notch to the “201” level – though, we’re not quite graduate students, we are upperclassmen, at least as far as split interest trusts go!  This week we will discuss a key limitation of the charitable remainder trust (CRT)

First, a quick review:  You want to give a sizeable donation to your favorite charity but, truth be told, you do not feel comfortable parting with the assets today because you need the income for living expenses.  In the right interest rate environment, the CRT can be a perfect tool.  The CRT is a tax exempt trust in which the donor or other noncharitable beneficiary retains the income interest from the trust for a period of years or for the life or lives of one or more individuals.  The donor transfers cash or other property into the trust and in return, receives periodic payments over the term of the trust.  For income tax purposes, in the first year, the donor can deduct the actuarial present value of the remainder interest as a current charitable contribution.   Upon termination, any assets remaining in the trust pass to one or more charities.   Its best use is for a donor who wants to make a large charitable gift but hold onto that annual income; it can also be used to monetize and diversify an asset or asset pool at little or no tax cost to the donor.

Generally speaking, however, it does not make sense to fund a CRT in a low interest rate environment.  Because there are a number of fences built around CRT’s designed to ensure that they do what they are supposed to do – get money to charity in a tax-efficient (but not too efficient) manner,  a transfer made to a CRT in a low rate environment may not even work!  Here’s why:

By law, the annual payout percentage from a CRT cannot be less than 5% nor greater than 50% of its  market value[1].  In addition, based on the published §7520 interest rate[2] in effect at the time of the transfer, the projected charitable remainder interest going to charity must equal or exceed 10% of the initial fair value of the trust.  In completely plain English, this means that you can’t use a CRT to avoid tax completely nor can you use it to cut out the charity completely.  Combining the two limitations means that the lower the published government rate, the more difficult it will be to meet the 10% rule.[3]  In addition, there is yet another stress test to be met – there has to be a less than 5% probability that the assets will run out before the trust terminates, either at term or at the death of the grantor(s).  Again, the lower that published government rate, the harder it is to meet this requirement; the only way around this is to let the grantor(s) season a bit (i.e. get older) before funding the trust or reduce the term over which the annuity will be paid.  The result?  All math, all painful, all the time.

Let’s compare a charitable remainder annuity trust (CRAT) set up in today’s low rate environment versus the higher rate environment of, say, 2008.  Except for the actual published government rates, we will hold all other assumptions between the two years equal.

Our hypothetical grantors are both 65 years old and wish to monetize their $1,000,000 portfolio using a CRAT, with the remainder interest earmarked for their favorite charity.  Per the trust agreement, they will take back the minimum allowable annual payout of 5% of the initial fair market value of the trust, or $50,000[4].  They structure the trust to run until the death of the second grantor.  The results are summarized in the following table:


(Click to enlarge)

As you can see, from an income tax perspective, the CRAT is far less attractive today as the calculated charitable contribution is worth only 64% of what it would have been in the interest rate environment of 2008.  Of equal or even greater concern is the fact that contribution itself may be disallowed for tax purposes because there is a more than 5% chance that the trust will run out of money before its time.  Clearly this is a bad deal in today’s low interest rate environment.

As a planning tool the CRT may be on hiatus (or at least in hiding) for a bit because of today’s low interest rate environment, but, as we all know and expect, what is low now will eventually rise.  When that happens, all hail the triumphant return of the CRT!

[1] In the case of a charitable remainder annuity trust (CRAT), this would be the initial fair market value; in the case of a charitable remainder unitrust (CRUT) it would be the fair market value on the annual revaluation date for the trust.

[2] Let’s call it the “published government rate.”

[3] The §7520 rate for February 2015 is 2.0%.  When funding a CRAT, you are permitted to use the best (highest) rate in effect during the current month or the immediately preceding two months.  In our example, the January 2015 §7520 rate (2.2%) is best.

[4] Because this is an annuity trust rather than a unitrust, the annual payment is set in stone and does not change over time.

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