Saturday, December 29, 2012

IRS Tax Penalties

What kinds of penalties are out there?
1.     Failure to file returns § 6404(1)
2.     Failure to pay § 6651(a)-(b)
a.     .5% of the tax on return plus extra .5% for each month In addition to interests, up to 25% percent
b.     Cannot deduct these as a business expense. POLICY: Congress enacted these rules to stop borrowing money from the government.
3.     Accuracy of Filings- § 6662
a.     Negligence of Substantial Understatement
b.     20% of any understated tax on your return
c.     Understating your tax liability
                                               i.     Negligence- Must make reasonable attempt
                                             ii.     Substantiality- Reckless
                                            iii.     Substantial Valuation Problem- overstating how much you gave, doing stuff with assets.
4.     Frivolous Returns- § 6702
a.     Tax protesters and people with positions the IRS deems frivolous
b.     Waste of time. Constitutional position is considered frivolous $5,000 fine
5.     Civil Fraud (Evading Taxes)- § 6663
a.     Use any legal means to reduce tax liability.  Avoiding taxes is fine. Evading taxes is bad.
b.     The government has burden to show more than a taxpayer is trying to reduce tax liability
                                              i.     Clear and Convincing evidence that the deficiency is due to intentional evasion. False material representations. INTENT TO EVADE TAX
                                             ii.     Concealing bank accounts, failure to cooperate, lack of good books and record. Experience and knowledge, more you know, more likely you knew what you were doing.
6.     Failure to Withhold § 6672
a.     Employers who fail to withhold. 100% of the amount not withheld
7.     Promoting Tax Shelters § 6700
a.     100% of gross income derived from the activity
8.     Penalty for aiding other tax payers understate. § 6701
a.     Both provisions are similar.
Criminal Tax Penalties - Not Big Enough to Deter Tax Evasion.
1.     Criminal Fraud §  7201
a.     People who are criminally hiding from taxes
b.     Guilty of Felony because violation of known legal duty
2.     Criminal Lying Penalty § 7206
a.     Fine or up to 3 years in jail.
3.     Exception § 6404(f)
a.     Immunity if you get bad advice from the IRS, you get immunity. Must be acting on good faith
b.     If you didn’t file 5% of the unpaid tax for the year, plus penalty for continued delinquency. Rises if your failure to file is deliberate.

Basic Federal Tax Concepts and Terms

Below is some basic terminology that deals with basic federal income tax issues. A better understanding of these terms will help with the filing of a business tax return on a personal 1040 return.

Tax Income Exclusions – THINK SOURCE

A tax allowance takes the form of an exclusion if qualification for the allowance depends on the source of an economic benefit. To some extent, the more favorable treatment of exclusions may be explained by their lower visibility. Harder to track and report to the IRS.

Deductions- THINK USE

An allowance takes the form of a deduction if it depends solely on the use of the funds by the taxpayer. Deductions appear as entries on tax returns, while exclusions do not.  The higher visibility of deductions makes them more obvious targets than exclusions, when Congress is in the mood to impose limitations on tax benefits. Current tax deductions are currently in in flux.


A credit directly reduces tax liability, while a deduction or exclusion reduces tax liability only indirectly – by reducing taxable income. Unlike a one dollar deduction which reduces taxable income by one dollar, a one dollar credit reduces tax liability by one dollars. Credits, like exclusions, but unlike many deductions, are allowed regardless of whether one itemizes deductions or claims the standard deduction.  Because of this, you would prefer the credit to the even if your marginal tax rate was greater than 20 percent, if you claim the standard deduction. One of the most popular credits is the EITC. Learn about the 2015 EITC Earned Income tax credit to save money on your taxes. It may also be useful to check IRS Publication 596.

REMEMBER: The marginal rate is what matters for taxpayer decision making and planning strategies. You can apply the marginal rate by the amount of a deduction to see exactly how much money you don’t need to pay in taxes because of the deduction.

Information About Top Tax Deductions

Sunday, December 23, 2012

Alternative Minimum Tax Calculations

Alternative Minimum Tax

This is a tax at a flat rate lower than the highest regular rate that applies to an expanded tax income base.  It is compromised out of the AMTI,AMTI is adjusted to eliminate the benefits of many allowances allowed.  AMT was designed to prevent people from taking advantage of the tax system. Congress relies heavily on interest groups that are attached to particular exclusions Moral is important in the tax system because the system relies on voluntary compliance. If people feel that other people are not paying taxes,  then people won’t pay.Taxpayers calculate regular liability and tentative AMT, then pay the bigger one.

Alternative Minimum Tax- Taxable Income if Adjusted For:

1. Depreciation schedules for AMT purposes are different, 168 schedules do not apply. Use less generous depreciation methods. Preferences for investors with minerals

2. Tax exempt bonds. Private activity bonds. If the activity is not government but public enough, then the income is tax exempt. Airports, sewage facilities, certain housing Public/Private project. For AMT, this income is not exempt

3. Installment sales. For AMT, if the installment sale is to a customer, the taxpayer has to take full price under the contract into income for AMT purposes. The generous installment rules don't apply to stuff sold.

3. Misc. Itemized Deductions. Investment Expenses. Not deductible at all for AMT purposese.   

4. Disallows certain expenses that we could deduct immediately For example, 174 – research costs For AMT, these all must be amortized, capitalize

5. NOLs- under AMT, they are different.

6. Incentive Stock Options- When you exercise option, you pay income that you include in AMT.   Income = excess of the FMV over the option price

7. Medical Expenses. For AMT, it changes to 10% of AGI

8. Under §1202 – Sale of Small Business Stock. You can exclude half gain. For AMT, you can exclude 7%

9. Home mortgage interest. Acquisition debt, used to acquire or rebuild a residence. Don't get this deduction under Alternative Minimum Tax.

10. Personal and dependency exception. No standard deduction. No exemptions

Members of congress all want to do something about the AMT. the problem keeps growing and more and more people get pulled in. Widespread sentiment that it is wrong and change is needed. People like the idea of the AMT. Warren Buffet said that people with income over 1 million should pay some set fixed amount that a middle taxpayer pays. Big AMT with Big Exemption. Variety of options, lots of plans for a permanent fix. The next most likely thing is index the whole framework for inflation. Allow dependency exemptions for the purpose of AMT. Not fair to subject large families to AMT. Change the exemption for medical expenses or just repeal the Alternative Minimum Tax all together.

Saturday, December 22, 2012

Long and Short Term Business Goals

Why is the business environment short term oriented? 

It seems that there a few main reasons that many business remained focus on short terms goals. Managerial Incentives tend to focus on pay and rapid promotion. This seems to place pressure on employees to work towards quick pay offs. It seems managers in European countries are more focused on long-term growth and stability than their American counterparts.

How can organizations become more focused with long term goals? 

More training and corporate socialization is one method the texts describes for increasing management focus with long term goals. Making employees they are employed for the long term increases and sense of well being within a company. By building social obligations and investing in employee growth will lead to better long term financial results for a company.

Wednesday, December 12, 2012

Why do small businesses choose not to export?

What are some main reasons that small businesses choose not to export?

There are many advantages to exporting but small businesses may also choose not to engage in exporting for a few reasons. It may be too overwhelming for a small business to engage in international sales. A small business may not be able to handle the demands of shipping internationally, maintaining a web site in multiple languages, and receiving international payments. Lastly, managers/owners may exhibit risk aversion and a strong desire to avoid the problems associated with selling internationally. This may cause firms to decide to no expand internationally.

What are some popular customer contact techniques?

There are many ways to gain contacts and experience in international markets. For example trade shows, catalogs, international advertising agencies, and government sponsored trade missions are great ways to meet people internationally with similar ideas and businesses. Governments often sponsor events for companies looking to expand into new markets. These host governments will often introduce foreign companies to local sale representatives and distributors.

How important is the first move advantage?

This can be a very important element for a successful entrepreneurial firm. This occurs when a firm moves quickly into a new market and faces little competition. To succeed in a situation like this, the product must be be innovative and comprehensive. To be comprehensive means to exceed customer expectations in order to make it harder for competitors to compete. Overall, a small business may choose to export its products after evaluating its business model and situation.

Friday, December 7, 2012

Scholarship and Education Tax Benefits

§ 117(a) excludes from gross income “any amount received as a qualified scholarship by an individual who is candidate for a degree at a college or university. LIMITED TO TUITION, NO ROOM AND BOARD. Were services a condition to the award?

§ 117(c) Does not apply to “any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship. Certain parts of the grant might be excluded.

§ 177(d) = Qualified tuition reduction, it is like a non-compensatory scholarship. Provided to employees of education institutes for the education of the employee.

Hope Scholarship Credit § 25A(b): Equal to first 100% of the first 2,000, 25% to the second 2,000.  Now called the American Opportunity Credit. Up to $2500 for students

Life time learning credit §25A(c): Up to $2000, 20% of the first 10,000 qualified tuition expenses

More information on the taxation of scholarships and fellowships.

Wednesday, December 5, 2012

Tax Employer Provided Health Insurance IRS

§ 106(a) excludes from the gross income of an employee the value of employer- provided health insurance coverage.

§105(b) excludes from gross income the value of benefits received under employer-provided health insurance, to the extent the benefits constitute reimbursement of medical expenses.

§ 125 provides that insurance may be provided under a cafeteria plan. Under § 125  a taxpayer who is offered a choice between cash and health insurance coverage, and who chooses insurance will not be taxed under the doctrine of constructive receipt.

Provisions exclude both premiums and benefits from the base of the income tax. For taxpayers with employer-provided health insurance, the §106 exclusion is the equivalent of an above-the-line deduction for the cost of insurance, not subject to any percent of AGI floor. Congress wants employers to provide pensions and insurance to all employees. Congress conditions tax-favored treatment for the executive’s pensions on the provisions of rank and file employees.

§ 213(a) medical expenses are deductible only to the extent they exceed 7.5 percent of adjusted gross income. Includes Insurance not from employer.

§ 162 (l) – Self-employed person can claim above the line tax deduction for insurance

Group Term Life Insurance - § 79 allows employees to exclude the value of group-term life insurance provided by their employers, for up to $50,000 of insurance.

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.