Budget Cuts Reduce IRS Audits

April 4, 2014

The number of individuals audited by the IRS last year was down 5% from 2012. Agency cites budget cuts as the cause.

The IRS audited just 1.4 million taxpayers in 2013 – the lowest number since 2008. The decline coincides with budget cuts of nearly $1 billion and a personnel reduction of about 10,000.

As lawmakers in Washington craft a budget for 2014, it appears they intend to trim another $526 million from the federal government’s revenue service. In a statement addressing the decline in audits, the IRS contends that “An ongoing decline in appropriate funding presented challenges.” Furloughs for most federal government employees last year had also certainly contributed to the IRS’s reduced workload.

In an effort to compensate, the agency increased the number of correspondence audits (mail) and decreased audits conducted in the field. Furthermore, an additional casualty of the declining IRS budget has been taxpayer assistance services. In reference to this, National Treasury Employees Union president Colleen Kelley stated “Both taxpayers and employees are frustrated by the lengthy lines at Taxpayer Assistance Centers and the long telephone hold times for those who call the IRS with a question.”

Sources: CNN Money

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IRS Ruling on Bitcoin: Property, Not Currency

March 27, 2014

The IRS released a notice on the tax rules for virtual currency transactions on Tuesday – a first official declaration of tax implications regarding Bitcoin.

The verdict is now in from the Internal Revenue Service on the already five year old digital currency known as Bitcoin. Tuesday’s notice stated that “For federal tax purposes, virtual currency is treated as property.” Although some in the industry had speculated (and perhaps hoped) that Bitcoin would be considered a foreign currency, the IRS explained that general tax principles were what guided their announcement.

According to the folks at the IRS, existing tax principles concerning property transactions are already applicable to virtual currency. In short, payments in virtual currency are to be reported just as any other payment made in property.

Taxpayers who have bitcoins should compute gross income by factoring the fair market value in U.S. dollars on the date the bitcoins were received. The IRS also indicated that payments to employees in bitcoin should be reported on W-2 forms and are subject to federal income tax withholding and payroll taxes. In addition, self-employment tax rules generally apply to payments made to independent contractors and require the 1099 form.

Sources: IRS Virtual Currency Guidance, IRS: Notice 2014-21, WSJ Online

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2013 IRS Inflation Adjusted Federal Income Tax Brackets

IRS-logo

March 21, 2014

The IRS made several adjustments to their 2013 federal income tax brackets to keep up with the pace of inflation.

Here are the Internal Revenue Service’s inflation adjusted federal income tax brackets for 2013.

Single:

Tax Rate on Ordinary Income Tax Rate on Qualified Dividends and Long Term Capital Gains
over to
10% $0 $9,075 0%
15% $9,075 $36,900 0%
25% $36,900 $89,350 15%
28% $89,350 $186,350 15%
33% $186,350 $405,100 15%
35% $405,100 $406,750 15%
39.6% $406,750 20%

Married Filing Jointly / Qualifying Widow or Widower:

Tax Rate on Ordinary Income Tax Rate on Qualified Dividends and Long Term Capital Gains
over to
10% $0 $18,150 0%
15% $18,150 $73,800 0%
25% $73,800 $148,850 15%
28% $148,850 $226,850 15%
33% $226,850 $405,100 15%
35% $405,100 $457,600 15%
39.6% $457,600 20%

Sources: irs.gov, Taxes on Income and Capital Gains for 2014

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Tips on Filing Bitcoin Income on Tax Returns

March 20, 2014

The IRS hasn’t instructed how individuals should report bitcoin income yet, but IRS compliance attorney Tyson Cross did his homework and believes that the tax implications have clear precedence.

Tyson Cross of BitcoinTaxSolutions.com asserts that the legal definition of income clearly indicates that bitcoin (฿) is taxable and reportable. Cross concludes that bitcoin falls into either of two categories – foreign currency or capital asset. Capital assets have a broad definition, which Cross believes bitcoin to fall well within, but warns that if the IRS declares bitcoin to be a foreign currency, individuals must make sure to pay the higher tax rate.

The choice to be made is whether to file the income as a capital asset and then make up the tax difference later if the IRS defines bitcoin as a foreign currency, or to declare the income as a foreign currency and instead receive a refund when the IRS decides that bitcoin is actually a capital asset.

Cross also believes that on a state level, bitcoin owners should likely expect the rulings to be the same as from the IRS. As far as when to expect the IRS’s ruling on the now 5 year old digital currency, Cross refers to the issue over airline miles that took several years for them to declare a stance on. Until then, it simply behooves you to file bitcoin as either a foreign currency or a capital asset because legally, there is little doubt about its status as income.

Sources: BitcoinTaxSolutions.com, Bitcoin Taxes

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Direct Deposit Tax Refunds: Saving Time and Money

March 12, 2014

Both electronic filings and direct deposit refunds experienced bumps in popularity in the first month of this year’s tax season. The trend likely reflects more than only the taxpayers’ desire for speed and convenience.

E-filing is up 2.5% and direct deposit refunds up 3%. However, regarding the latter, folks are benefiting in more ways than just making fewer trips to the bank.

So far this year, over 87% have taken advantage of the direct deposit option and its various features. These refund recipients are able to automatically steer different amounts to several accounts. Basically, if it has a routing number, the IRS can point your refund to it.

This comes in handy if someone hopes to hold onto that refund for longer than they might have otherwise. Recipients can funnel parts of their refund straight into savings accounts, retirement accounts, money market accounts, health savings accounts, education savings accounts, and even automatically purchasing up to $5000 in savings bonds.

What’s the catch? In order for individuals to take advantage of the direct deposit option, they must have received a minimum refund amount – $1.

Sources: IRS: 2014 Refunds Ahead of Last Year, FOX Business: What to Do With Your Tax Refund

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Average 2014 Tax Refund Up 3%

March 11, 2014

The IRS paid out about $147 billion in tax refunds between January 31 and February 28. The average refund was $3,034 – a 3% increase over the same period of time a year ago.

These refunds account for 48 million of the 59 million returns received so far, which was 5.6% more received than by the same time last year. The agency’s report also states that this is nearly 40% of the returns it expects to receive this tax season. Ordinarily, taxpayers who anticipate a refund will file sooner than those who do not.

Source: IRS: 2014 Refunds Ahead of Last Year

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New CPE Courses Now Available!

PES is continually releasing new continuing education courses on topics that are timely and relevant to your role as a CPA. Some of our newly released courses include 6790: Tax Implications of Federal Healthcare Reform, 6760: How China’s Rise Will Change Business Forever, and 6810: Settling Tax Debt With the IRS.

Tax Implications of Federal Healthcare Reform covers revenue provisions of the Affordable Care Act along implementation of these changes. The 6 CPE hour course covers provisions in effect for 2013, as well as provisions coming into effect in 2014.

How China’s Rise Will Change Business Forever discusses the global expansion of China’s biggest corporations and the competition they will present to American businesses. The courses discusses strategies Chinese companies are using to rewrite the playbook on international business, and what American companies must do to thrive in the future. This course qualifies for 12 hours of CPA CPE.

Settling Tax Debt With the IRS covers tools that can be used to settle tax debts with the Internal Revenue Service, such as Offers in Compromise and Installment Agreements. The 14 CPE hour course also covers an overview of methods the IRS uses to enforce payment of federal taxes.

Identity Theft Tops IRS Tax Scams List

The IRS has released their annual list of the Dirty Dozen tax scams and Identity Theft is in the number one spot. Other scams making the list include phishing, return preparer fraud, and hiding income offshore. Working with a qualified CPA will help taxpayers avoid many of the scams on the list. The full Dirty Dozen list is available on the IRS website here.

Qualified CPAs are knowledgeable on wide variety of business issues and of course taxes, and stay up-to-date by completing CPE for CPAs.

$1 Billion in 2009 Tax Refunds Still Unclaimed

There is nearly $1 billion in tax refunds from the 2009 tax year that are still unclaimed because the individuals never filed an federal tax return. The IRS estimates that half of the potential refunds for 2009 are over $500. Many of the unclaimed refunds are from the Earned Income Tax Credit which can be worth up to $5,657 for 2009.

April 15, 2013 is the last day to file a 2009 return and receive a refund. After that the unclaimed refunds become property of the U.S. Treasury.

Tax Season Unaffected by Sequestration Cuts

The IRS has outlined how they plan to handle the $600 million in sequester-related budget cuts. The good news for taxpayers is that furloughs for IRS employees are not scheduled to start until the summer and tax season is expected to be unaffected by the cuts. The cuts are across-the-board and will eventually affect taxpayer services, enforcement, operations support, and business systems modernization. Payouts to whistleblowers will also be decreased.