Wednesday, August 29, 2012

Section 101 Life Insurance Exclusion

How does the IRS treat life insurance payments?

§ 101(a) provides that gross income does not include “amounts receive under a life insurance contract, if such amounts are paid by reason of the death of the insured” Congressional Policy Favors this.  An individual who purchases a term life policy and lives out the term of the policy is not allowed to deduct the cost of the policy as a loss. On the other hand, no tax is levied on the profit from the policy.  The proceeds of a Whole life policy qualify for the same tax benefits as term life insurance. Maybe this exclusion is offset by the fact that premiums are not deductible.

Term Life Insurance v Whole Life - Term life insurance premiums are not deductible and death benefits are not taxed. Same with Whole life insurance.

Pre-death benefits. § 101(g) - Terminally ill can get tax free benefit, otherwise it is taxed. No transferring life insurance into annuities than getting a payout

Sunday, August 26, 2012

Tax Compliance and Enforcement

Tax Compliance and Enforcement by the IRS

Taxpayers will heavily consider how much it will hurt them in their decision making costs, however some think that the penalties are not big enough. The Tax Gap = The amount of income tax that should have been paid but wasn’t.  The gross tax gap was around $335 billion dollars in 2012. This initial difference between what IRS thinks should have been paid. Enforcement efforts got back about $55 billion. Most of the enforcement gain is from overstated taxes is from understated income and overstated deductions.

The biggest innovation was withholding from the IRS. 82% of income tax collections came through withholding. Computers then compare info with what is reported and the self-reporting. Uncertain tax reporting regime = Effort to respond to a major crisis to respond to tax shelters in the late 1990s. Mainly business tax shelters.

There has been lots of attention for Americans living outside the United States in recent years. See the following information on filling the new td f 90-22.1 2013 changes.

Schedule UTP: Business taxpayers can already report this. A UTP is a tax position for which a taxpayer is not certain. For example, they might mislabel a business expense as something wrong. Taxpayers put aside reserves in case they get challenged. Now the IRS also wants this information.  Corporate taxpayers over $10mil in assets, must file a schedule UTP that lists these uncertain position. Must provide the primary code section primarily involved in the transaction. It is a little more work for taxpayers. UTP will help the IRS prioritize issues in audit.Practitioners think this provides the IRS an audit roadmap. This might be considered privileged information.

Increased oversight in the tax preparation business: There is a movement toward more regulation of this industry. Offering financial products tied to the size of the refund. The IRS is worried about this.   “Culture of Non-Compliance” There will be registration and more training/regulation.b.    There will be taskforce to study return preparation software

Circular 230 is very specific ethical duties for tax practitioners. Makes the practitioner more involved with audits. They have to submit information that the IRS requests. Lots of rules for tax opinions.

Tax opinion is the opinion of a legal practitioner that some tax treatment is the correct one. This is like getting a PLR, but getting it from your lawyer.  Lots of rules for these opinions.

Tuesday, August 21, 2012

Exempt Purpose Section 501 c 3

What constitutes an educational, religious, charitable, or other exempt organization is, like many other legal concepts, reasonably clear at the core, but more amorphous at its perimeters.  Lots of room to wiggle. Educational is very vague. Section 501(c)(3) definition of Charitable Organization is very important for personal income tax reasons.

Regulations authorizing tax exemptions may not be so unclear as to afford latitude for subjective application by IRS officials. The standards may not be so imprecise that they afford latitude to individual IRS officials to pass judgment on the content and quality of an applicant’s views and goals and therefore to discriminate against those engaged in protected First Amendment activities.i.    “Objective standards are especially essential in cases such as this involving those espousing nonmajoritarian philosophies. In this area the First Amendment cannot countenance a subjective “

Rev Proc 86-43 1986 CB 729- Educational Purpose for Exempt Organization

Organizations violate the “full and fair exhibition” test if the organizations communications involved:

1. Presentation of viewpoints unsupported by facts that make up a significant portion of the organization communication

2. Facts that purport to support the viewpoints are distorted

3. The organizations presentations make substantial use of inflammatory terms and express conclusions on the basis of strong emotional feeling over objective information

4. Does the audience consider it educational?

This still remains very vague, but has not yet been challenged by any type of organization.  If any one of the factors is met, there is a red flag, but the correct analysis is under the totality of the circumstances can the organization still be considered educational. IRS doesn’t challenge organizations on this a lot.

Private Inurement - Insiders

The regulations provide than an organization will not be considered to be operated exclusively for an exempt purpose if any part of its net earnings inure “to the benefit of any shareholders or individuals.” IRS applies this provision to salaries and perks often. Extending this principle to disqualify exempt organizations whose operations unduly benefit outsiders may be very difficult.

A charity is not to siphon its earnings to its founder, or the members of its board, or their families, or anyone else fairly to be described as an insider, that is, as the equivalent of an owner or manager.   The private benefit argument is that a charity was created to benefit a private party. Only being operated for the benefit of one company.

Lobbying and Political Activities

Charitable organizations are permitted to engage in lobbying, so long as it does not constitute more than an insubstantial part of their activities. The bar on political activity on behalf of or in opposition to a candidate for office, in contrast, is absolute: any such activity is disqualifying. This is stated expressly in § 501(c)(3)

Section 501(h) safe harbor provisions

Anywhere from 5-20% of its total expenses on lobbying, up to $ 1 mil.b.    What they cannot do is political activity in opposition to candidates or for candidates. No money directly for candidates. Public Policy Constraints: Congress and the IRS want organizations operating in way that violate public policy to be foreclosed from qualification for exempt status under § 501(c)(3), even if their ends are otherwise within the range for which qualification for exemption would be available.

Sunday, August 19, 2012

Section 170 Charitable Contributions

What is a Charitable Contribution under § 170?

§ 170 - Taxpayers get an itemized deduction for contributions to charitable organizations. This occurs below the line, so taxpayers have to decide to take standard deduction or not. What is a charitable organization is important?

What is a charitable gift under §170?   

No services or “Donated Rent."  Property is OK. If a taxpayer gives appreciated property, the IRC looks very favorable on that.  Regulation § 1.170A-1(g): No deduction is allowed under § 170 for a contribution of services. POLICY: Reflects the commonsense notion that one should not be treated as giving away what one was never treated as possessing. Also, similar to lines of imputed income arguments.

One rationale for the deduction is simply to encourage tax-payers to support charitable organizations.  Therefore, Congress will not need to fund this sector by allocating funds. However, this rationale is troubling for a few reasons. Some of the organizations Congress might not want to support.  Richer people tend to get more benefit from charitable deductions because they are the ones enjoying some of the services and because it is below the line deduction that they can take advantage of easier. Not even clear if the deduction causes increased giving. Another rationale is that the charitable gift is seen as reducing the consumption opportunities of the donating taxpayer by the amount of the charitable gift.

Information about Donating Art to Charity as Charitable Donation

Wednesday, August 15, 2012

Note Receivable Interest Journal Entry

A company accepted a $8,000 interest-bearing note receivable from a customer on July 1. The interest bearing note requires payment of 12% annual interest, and both the principal amount of the note and the interest will be due six months later, on Dec.31. 

If financial statements are prepared at the end of July, which of the following entries will the company have to make at the end of July?

A. DEBIT Interest Revenue 80
CREDIT Interest Receivable 80

B. DEBIT Interest Receivable 160
CREDIT Interest Revenue 160

C.  DEBIT Interest Receivable 80
CREDIT Interest Revenue 80

D. DEBIT Interest Revenue 160
CREDIT Receivable 160

Accounting Answer:

$8,000 x .12 = $960 in interest per year that is owed. 

960/12 = $80 interest revenue/month.

The note was issued July 1, and you must prepare financial statements for the end of July. This is the same as one month of intrest. 

DEBIT Interest Receivable 80
CREDIT Interest Revenue 80

The reason you debit Interest Receivable, is because you don't actually receive the cash until Dec 31

The correct accounting answer is C

DEBIT  Interest Receivable 80
CREDIT Interest Revenue 80

Popular Accounting Problems

The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.