Do You Own Inches of Land in the Yukon?

Originally published in the Cedar Street Times

July 25, 2014

When I was growing up, I remember my Dad once telling me that he owned eight square inches of land in Canada.  He said he got the land as a promotion when buying cereal as a young boy.  At the time, I thought that was kind of cool, and just accepted it at face-value.

As I look back on that now from my perspective as an accountant, dealing with all kinds of financial related issues on a daily basis, a lot more questions come to mind.  For instance, where are the deeds to the property, and how would we find the right recorder’s office to get copies of the deeds if needed? Were the deeds ever even recorded?  Was it a fee simple interest?  Did he have mineral rights?  Eight square  inches may be just enough to drill a very small oil well!  Or maybe there is gold!

How would that impact his retirement planning? What about real estate taxes?  Typically land requires the annual or semi-annual payment of property taxes or the land is taken back or sold to settle the outstanding debt if unpaid.  Are there any laws regarding foreign ownership of land or any new requirements to look into regarding foreign asset holdings?

Could we lease the land, and what would the tax impacts be?  Should my Dad have included it in his estate planning so that loose ends would not pop up at some point which could result in title problems or perhaps probate?  Would there be any liability associated with this land, and should he have carried a general liability or perhaps an umbrella insurance policy in case his eight inches contained a stone on which someone could have tripped?!

What was his cost basis on these inches and how much profit would be recognized if we sold it?  All of these questions and more find their way to my door step for other client issues. As an accountant, we often end up as the independent advisor –  like the hub in a wheel with spokes running out to the financial planner, investment advisor, insurance agent, attorney, banker, etc.  Almost every profession leads back to taxes and tax planning in some way.

In my Dad’s case, I found we did not have any real concerns, but there is a fantastic story to go along with these inches of land which you can read all about at: http://www.yukoninfo.com/dawson-city-yukon/the-klondike-big-inch/.  The gist of the story is that this was a marketing plan in 1955 developed by Bruce Baker to get children to buy Quaker Oats Puffed Rice and Puffed Wheat cereals.

Baker decided to tie-in a popular radio and television show which Quaker Oats sponsored, “Sergeant Preston of the Ukon” by offering children the opportunity to own one square inch of land in the Yukon in Canada if they bought cereal.  The attorneys thought the idea was crazy, but Baker persisted and even flew to the Yukon and secured a 19.11 acre parcel to be divided up into 21 million one-square-inch parcels.  The company eventually agreed to the idea and thus began their most successful campaign ever.  Cereal boxes flew off the shelves as deeds were printed and inserted into each box, and every one inch parcel was given away.  They did a second campaign and Baker had four tons of Yukon riverbed sand sifted and packaged into tiny promotional pieces as well.

As the years rolled on, the inquiries about these hard-earned plots of land kept coming in by owners that wanted to know more about their plot of land, or its worth, and also by estate planning attorneys that were trying to figure out what to do with these deeds!  One child was said to have sent four toothpicks and a string and asked the Quaker Oats company to put a fence up around his property!  One person collected over 10,000 of these from people around the country and asked Quaker Oats to pick out a quiet place for him along a lake or river, if possible!

The reality of what happened is that the company that was created to handle all the deeds – The Klondike Big Inch Land Company, Inc. realized it would be way to expensive to record all the deeds in each child’s name, so with the opinion of a Canadian attorney they decided to send the deeds out and never have them officially registered.  The Klondike Big Inch Company, Inc. did not pay the $37.20 property tax bill in 1965, so the land reverted back to the Canadian government.  The company then shut its doors.

Still, to this day, however, nearly 60 years later, Canada and Quaker Oats receive hundreds of communications each year regarding the land!

Prior articles are republished on my website at www.tlongcpa.com/blog.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Claire Elise Long

Originally published in the Cedar Street Times

July 11, 2014

At 7:50 am on July 3rd, I entered into my second contract of fatherhood! Fortunately it was not during tax season like my last contract when my son was born!  No, I was all smiles when my daughter, Claire Elise Long was born in our home with the help of our wonderful midwife, Maggie Bennett, weighing in at around six pounds 14 ounces and 19 inches long.

Whereas the vast majority of children born on the Monterey Peninsula have a Monterey birth certificate due to CHOMP’s location, I think it is quite fun that my son has a Pacific Grove birth certificate and my daughter will have a Pebble Beach birth certificate.  I told my wife, Joy, that we need to move and have children in Seaside, Sand City, Del Rey Oaks, Carmel, and Marina so we can collect all of the more rare birth certificates.  She did not find that as amusing as I did.

I think Claire Elise may be a Daddy’s girl as she followed through on my in-womb negotiations with her about the timing of her birth…unlike her brother, Elijah, who came during tax season despite express language in his birth contract stating otherwise. Claire Elise upheld the terms of not exceeding seven pounds eight ounces (a point bargained for by her mother) and she was given a right to exercise her birth option from June 29th to July 31 with a birthing bonus if born on July 4th.

When negotiating pressures intensified in the early hours of July 3rd, Joy caved and was very easy to persuade and saw no further need to hold out until the 4th.  I, however, needed more convincing.  Claire Elise deftly pointed out that being born exactly on the first day of the 10th fiscal quarter after her brother was born, would simplify things for quarterly reporting purposes…she knew how to push my buttons.

After holding the beautiful bundle of love, we immediately decided to approve her initial contract for child-rearing.  When my son was born we struck a deal with him to extend his initial contract through kindergarten with two renewable six-year options.

The second renewable option would include an opt-out for us after the middle school years.  There would be some additional language which could allow for a third six-year option to get through the college phase depending on certain performance benchmarks achieved in the prior option period.

Based on our experience with our son, we decided to offer similar terms but with some additional specific language regarding liquidated damages for things like unprovoked dumping of milk and juice and other gravitational experiments with glassware and plates, storing the remote control in a cup of chocolate milk, and breaking necklaces and expensive pairs of eyeglasses.

With business out of the way, we have been having the time of our lives…again!  The precious little noises and movements, the intoxicating cuteness, and her absolute and impartial trust make life a true blessing.  As I hold her in my arms, I know there is much good to come.  I can now look forward to not only experiencing the unique joys of having a son, but also the equally unique joys of having a daughter – and for this, I am very grateful.  I love you, Claire Elise; you make Daddy very proud!

Next step…convincing Momma that baby-modeling is a good idea so Claire Elise can generate earned income and open a Roth IRA!

Prior articles are republished on my website at www.tlongcpa.com/blog.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

We Buy Gold…FIFA World Cup Trophies

Originally published in the Cedar Street Times

June 27, 2014

As a young lad, I played a lot of soccer.  The first team I was on was called the “Half-Pints.”  I think I was four or five years old, but I can still remember our green and white uniforms and the coach wearing jacked-up tube socks with colored stripes along the top.  When I was six and seven I played on the “Chiefs” – I am not sure that team name and logo with the Native American headdress would be allowed today.  Around that time, I also played on the “Jedis” – probably because the original Star Wars trilogy was in its heyday.

By the time I was in middle school, my brother and I were both on traveling soccer teams often playing at opposites ends of the state on any given Saturday.  We played a fall outdoor season, a winter indoor season, a spring outdoor season, and then attended soccer camps during the summer.  In high school I played on regular club teams as well as the high school team.  One very vivid memory was winning the state championship my junior year in high school.  The opposing team had two players that went on to play in the MLS, one of which even played on two U.S. World Cup teams.  I went to college and played a few more years there until other priorities began to emerge.

Throughout my time playing soccer, there was one thing that eluded me – a real gold trophy!   Cheap plastic trophies at the end of a season, or after winning a tournament remained pretty consistent.  They seemed like treasures when I was young and most survived through the years with only minor dents and scratches.  A few unlucky ones had lost an appendage or their fake gold hair paint had rubbed off leaving the embarrassing white plastic beneath.  Eventually, they all got round-filed save one early trophy as a momento.

If I had only managed to keep playing, gain citizenship in a powerhouse soccer country, join the national team, and then win the World Cup, my dream could have been realized! With the World Cup currently in full swing, some country is only two-and-a-half weeks away from holding the world’s most valuable trophy. Not only in symbolic worth to the world, but also in perceived collectible value and sheer melt value, the FIFA World Cup Trophy is the world’s most valuable trophy.

The trophy is not gold-plated as most other major sports trophies are, but its 13.6 pounds is made almost entirely of 18k gold.  If you took the championship trophies from the NHL, NFL, NBA, and MLB and melted them all down, their combined value would be worth only about 28 percent of the melt value of the World Cup Trophy, which currently has about $200,000 of gold in it with an estimated collectible value of $10 – $20 million.

What does this have to do with taxes? – Not a whole lot, but it was a good excuse to talk about soccer. I will say this: buying and selling gold has been quite popular since the markets bottomed out in 2009.    It seems that everybody has a sign that says, “We buy gold.”  I think I even saw that written on the back of an “Anything will help” sign from a panhandler.

There are a lot of special tax and regulatory rules surrounding gold sales, so you need to make sure you get the right advice before you buy a bunch of gold or gold coins thinking you are making a solid investment to protect you from inflation.  For instance, if you owned the FIFA World Cup Trophy, you would be subject to special collectibles tax rates of 28 percent if you tried to sell it, as opposed to lower long-term gain rates even if held over a year.   People wanting to hold gold directly in their IRAs also have special rules to follow regarding the purity of the gold they purchase, in order to maintain the tax deferral.

So, scout it out before you buy gold!  Besides, it’s better to just win the gold.  Go USA!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

What Are Your Chances of Being Audited? Part III – Red Flags

Originally published in the Cedar Street Times

June 13, 2014

Four weeks ago I discussed some of the statistics regarding your chances of being audited by the IRS, and two weeks ago I discussed audit selection methodology.  A few of the high points from the articles were: 1) on the average, audit rates for individuals are generally less than one percent each year, and increase as you make more money, 2) about 75 percent of audits are actually mail correspondence audits focused on a narrow request of information for specific items on your return rather than a full-blown in-person, field audit, 3) the IRS does not release its exact methods of selecting audits, and many people have incorrect notions about this process, 4) the IRS does tell us audit selection is aided by a computer scoring system to help find returns that will likely yield a change; it uses computer matching to ensure information reported on 1099s by third parties matches what you report; it uses publicly available information; and it uses statistical random sampling.  The rest of this article will be devoted to “red flags.”

So what are these “red flags” everyone talks about?  One fairly obvious assumption we can make from the audit statistics released by the IRS is that they follow the money!  You are three times more likely to be audited if you make over $200,000 a year and over eleven times more likely to be audited if you make over $1,000,000 a year.  C-corporations face a similar dynamic of increasing audit rates on larger corporations - for instance, one out of every three corporations with assets over $250 million are audited.

Not reporting all your income even when it is reported to the IRS should not be a surprising red flag, but it happens frequently.  I see this most commonly with stock sales reported on a 1099-B when people prepare their own returns – they either forget, or do not understand the form.  I also see this with contract work where a 1099-Misc is issued and the individual forgets to report it.

There are a number of issues related to small businesses that raise eyebrows.  Keep this in mind – anytime there is an easy path for someone to pass-off personal expenses as business expenses, you are going to have a higher level of scrutiny.  For instance – relatively high amounts of: business automobile mileage (or claiming 100% business use on your vehicle – very rare in reality), home office deductions, meals and entertainment, or travel expenses.  All of these can be easily abused, so they are highly scrutinized.  If you are beyond the norms, you are a clearer target.

Here is another golden nugget – if your job is one that millions of people do for fun as a hobby (although perhaps not nearly as well!), then you have a higher level of audit risk, particularly if you are losing money.  Think of the arts – photography, video, music, drawing, painting, performing, etc.  Also, think of horse racing and breeding for the wealthier set.

That brings us to another “red flag,” businesses that lose money every year.  The IRS is trying to determine which of these three describes your nonprofitable business situation: 1) Are you really trying to make this successful and genuinely feel it will be profitable overall?  2)  Are you trying to deduct your personal expenses, your hobby, or keep up appearances? or 3) Are you just plain nuts?  By allowing people to continue businesses circumscribed in two and three, the rest of the country is having to foot the bill for the lost tax revenues.  This is because the “losses” generated are offsetting the person’s other income that would otherwise be taxable.  With no realistic future expectation to recuperate the losses, the IRS is ready to pounce.

Claiming rental losses in California is fairly common due to the high cost of our real estate, but claiming a real estate professional designation in combination with these losses is an area of greater concern.  If your main occupation is in the real estate related field, and you work at least 750 hours in this trade, you are allowed to deduct all of your rental losses in the year they are incurred.  Everyone else get to deduct $25,000 at most, and are rapidly phased out to no deductions for the losses based on income levels.  The losses get suspended until the property is disposed of or until there is passive gain to offset.  There are a lot of challenges when it appears the person has substantial earned income from a trade or business unrelated to real estate or if there is very little income from real estate related trades.

Refundable tax credits such as the Earned Income Tax Credit, Child Tax Credit, American Opportunity Credit (for education), and Health Care Tax Credit can also be a point of concern, particularly when the total refund on your return is higher than the tax paid in to the system!  The IRS receives thousand of fraudulent returns each year that use refundable credits to steal money from the government.

Although harder to catch, unreported foreign income is an area worth mentioning due to the extremely high penalties by the Treasury Department for failure to report foreign accounts, and it has been a hot-button issue that has raised billions in revenues.

The above is not an exhaustive list, but it does describe many commonly seen areas of concern.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

What are Your Chances of Being Audited? Part II – Audit Selection

Originally published in the Cedar Street Times

May 30, 2014

Two weeks ago I discussed some of the statistics regarding your chances of being audited by the IRS.  A few of the high points from that article were: 1) on the average, audit rates for individuals are generally less than one percent each year, although audit rates jump to over three percent on people making over $200,000 a year, 2) about 75 percent of audits are actually mail correspondence audits focused on a narrow request of information for specific items on your return rather than a full-blown in-person, field audit, 3) partnership, LLC, and s-corporations have a less than half of one percent chance of being audited, while small c-corporations with less than $10 million in assets have an audit rate just under one percent, 4) larger c-corporations have increasingly higher chances of being audited with a roughly one in three chance for corporations with over $250 million in assets.  If you would like to read the full article, you can read it on my website at http://www.tlongcpa.com/blog.  The rest of this article will be devoted to audit selection and in two weeks we will discuss “red flags.”

Regarding audit selection, let me start by saying that no matter what you read or hear, nobody knows the exact methodology the IRS uses to select returns for audit as it is not public information.  All we really know is the broad overview the IRS tells us about its methodology and the limited statistical information the IRS releases about audits; the rest is conjecture based on the type of returns that we as tax practitioners see being audited.  Of course that can be warped by our own experiences.  That said, when you have been in the field long enough and have read about or talked to others about their experiences, you do get a good idea of the common issues for the types of clients with which you work.  When a client comes in and says, “I heard that if you report over ‘x amount’ of this, it is a red flag,” or “I am not going to file until ‘this date’ because you are less likely to be audited,” I know they have latched onto some misguided information.

So what does the IRS say about their audit selection tools and methods?  First, they tell us there is a computer scoring system called “Discriminant Inventory Function System” (DIF).  This system looks at your return and compares your return to similar returns to come up with a score for your return; the higher your score, the more likely an audit will yield a tax change.

Secondly, they use computers to match information reported on your return with information reported by third parties such as on Forms W-2, 1099, 1098, and the like.  Automatic notices can be generated as a result of mismatched items.

Third, they admit to using a variety of other tactics and resources such as the internet, newspapers, and other public information, or even people who may file a complaint or “squeal” on you.  They say they will investigate these sources for reliability before using it for an examination.

They also have the right to contact third parties about you, such as neighbors, co-workers, bankers, etc. Generally they have to inform you if they contact someone else unless they feel it would jeopardize their ability to collect the tax or that you might retaliate against the individual.

Although I have not seen this written as a tactic employed, I am aware of a situation where the IRS was selecting returns because they were prepared by a particular tax professional in a particular industry (and no, it wasn’t me!).

In addition there have been various programs over the years such as the Taxpayer Compliance Measurement Program and the more current National Research Program which introduces a random statistical selection methodology.  One of the uses for the information gathered in this program is to fine-tune the DIF computer scoring system.  It also means that ANYONE can be audited.

In two weeks we will discuss “red flags.”

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

What are Your Chances of Being Audited? Part I – Audit Statistics

Originally published in the Cedar Street Times

May 16, 2014

I have a diverse base of clients, but there is one thing that many of them have in common: they all know the phrase, “…but I don’t want to raise any red flags.”  The part prior to the “but” generally explains how he or she wants to push the limits and minimize the tax liability.  Then I let them in on a little secret, “Did you know the IRS is partially color blind?”

I say this because a component of audit selection is a random statistical process whereupon everyone gets a chance to spin the audit wheel.  But the majority of returns are selected for audit because of, well, “red flags.”  In this issue I will speak about some of the juicy numbers of audit likelihood, and in two weeks, we will discuss some of the methods of selection and possible red flags.

Looking back over the past 16 years of data released by the IRS, you will probably find comfort in knowing that the overall audit selection rate for individuals has generally been close to or under one percent.  In 2013 there were 1,404,931 audits on the 145,819,388 tax returns filed, or a 0.96 percent audit rate!  When most people think of an audit, however, they think of having to meet with a beady-eyed pencil pusher whose sole mission in life is to cause them stress and shake down every last dime out of their pocket.  In reality, only about 25 percent of those audited actually meet with an auditor in a “field audit.”  So now your odds are only 1 out of every 424 people!

The majority of the audits are handled by correspondence mail, and are generally very narrowly focused just asking you to send in supporting documentation on a limited scope of items.  It is less intrusive, but sometimes can actually be more challenging to handle since the auditors do not have to look you in the eye, and are generally hiding behind a cloak of anonymity.  It is also evident from my experience that a lack of training in tax law is prevalent by those reviewing the correspondence audits.

When people are selected for audit, they generally say, “why are they wasting their time on me, shouldn’t they be going after the bigger fish.”  What they are really saying is, “I really don’t care who they audit as long as it isn’t me!”  But to honor their words, you will find that the IRS does in fact follow the money for the most part.  The more money you make, the more likely you are to be audited according to the statistics the IRS releases.

The overall audit rate for individuals making less than $200,000 in 2013 was 0.88 percent.  For those making over $200,000 per year, the rate jumped to 3.26 percent.  And for those making over $1,000,000, the rate jumped to 10.85 percent.  The other big difference is that you are two-and-a-half more times likely to have a field audit than a correspondence audit when making over $200,000 or over $1,000,000.

The overall audit rate for business returns such as C-corporations, S-corporations and Partnerships in 2013 was 0.61 percent of the 9,938,483 returns filed.  Partnerships and S-corporations had the lowest percentage at 0.42 percent, generally since the income passes through and is taxed to the individual owners instead.  C-corporation audit rates, however, vary even more drastically than individual rates – small corporations with less than $10 million in assets had a 0.95 percent audit rate.  Corporations with $10 million to $50 million in assets had a 6.98 percent audit rate, $50 million to $100 million – 15.51 percent, $100 – $250 million – 19.43 percent, and one out of every three corporations with assets over $250 million were audited!  So yes, the IRS does go after the big fish!

Clients will sometimes receive threatening letters indicating that if they do not respond by a certain date, that liens could be placed or their assets could be seized.  I have always found “seizure” to be an overly aggressive choice of words at the early juncture these letters will often arrive, and it is telling that only 547 IRS seizures occurred in the entire country in 2013.

Finally, another interesting statistic for those that find it thrilling to not report income (a.k.a. tax evasion); if you ever have a Special Agent from the Treasury Department show up at your door, I suggest you take that seriously.  They are basically your beady-eyed pencil pushers…but with guns!   There were 4,364 criminal investigation prosecutions recommended in 2013…and the conviction rate was 93.1 percent.  The average sentence for tax and tax related cases was 31 months in prison.  Remember, avoiding taxes through planning, is fine, but evading taxes is a place you never want to be!

Given all these statistics, you may also find it interesting to know that the IRS budget has been cut by close to five percent for 2014, and they have the fewest number of employees in the past 16 years.  I am not sure this is really a good thing, as it will surely reduce the number of qualified individuals trying to wield an already overburdened system, but it will likely mean your risk of audit will be even lower.

In two weeks we will talk more about red flags and audit selection.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Filing an Amended Tax Return

Originally published in the Cedar Street Times

May 2, 2014

It’s May!  The sun is shining and the grass is green.  There is plenty of daylight in the evenings and summer is just around the corner.  You even have your tax returns complete.  Things are looking good!  As you mosey out to the mailbox and pull out today’s haul, you see a letter with an unusually interesting stamp, one kind of like your dad used to collect…then it hits you, “Wait a minute, did I claim the deduction for donating Dad’s stamp collection to the museum!  I even spent $300 on the appraisal, and I completely forgot about it!  And my taxes are already done!”

Fortunately for the hypothetical you as well as everyone else, there is a cure-all remedy elixir called an amendment.

The Internal Revenue Service (IRS) provides form 1040X and the California Franchise Tax Board (FTB) provides form 540X to facilitate this process for individuals.  The ‘X’ comes from the fact that you must be eXtra crazy to want to do your taxes again.  Actually, I have no idea where the ‘X’ comes from, but it is probably rooted in something – just like 401(k) plans.  Many people don’t realize 401(k) is simply the Internal Revenue Code Section that lays down the rules for that particular type of retirement plan.  Somebody was not having a creative day when they came up with that one.  But I digress…

The IRS version and the FTB version of amendments follow a similar format with a column of the original amounts reported, a column for the net change, and a revised column.  They do not cover all lines in the tax returns, however, but selected key lines as well as subtotals for other things.   Any affected schedules and statements are re-prepared in full in the corrected manner and attached to the returns.  The returns must be paper filed, and if there are changes to amounts reported for tax withholdings, the physical copies of the forms showing the withholdings must be attached.

Simple math errors are generally corrected by the taxing authority computer systems, and a change letter is sent automatically, so you generally don’t have to file an amendment if for some reason you noticed an arithmetic error on the return.  With computer tax preparation so prevalent, it is rare to see this unless the return is hand-prepared.  As a side note of interest, every client hand-prepared return I have re-prepared in the past ten years, aside from something basic like a single person with a W-2 or a pension, has had preparation errors – a tribute to the complexity of our tax code today.

If you missed something large and underreported your taxable income significantly, it is to your benefit to amend as soon as possible as interest and penalties will continue to grow.  You could also be assessed a 20 percent accuracy related penalty.

The IRS generally gives you three years to file an amendment and the FTB gives you four years.  More specifically and to illustrate, if you filed your 2013 1040 return on or before April 15, 2014, you have until April 15, 2017 to file your 1040X amended tax return.  If you filed for an automatic extension until October 15, then you have until the earlier of 1) three years from the date you actually file the return or 2) three years from October 15.  If however, you are delinquent on paying the tax you owe, and you have an outstanding balance that carries on for a period of time, that time frame could be extended as you have at least two years (one for California) after the date you actually pay the tax to file an amendment.

After filing an amendment, don’t hold your breath waiting for a response, as it typically takes two or three months to process the returns.  If you are curious, however, you can check the status of your return at http://www.irs.gov.

I have worked with quite a number of people over the years where we have gone back to file amended tax returns to claim missed deductions from the past and obtain a refund.  If the amendment can yield a greater refund than the cost of preparing the amendment, it is certainly worth considering!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Tax Return $3 Presidential Election Campaign Fund

Originally published in the Cedar Street Times

April 18, 2014

Have you ever wondered exactly what that little section is at the top right of your personal tax returns with checkoff boxes for the taxpayer and spouse to send $3 to the Presidential Election Campaign Fund?  And why is it on your tax returns?

The majority of people do not check the boxes.  There are of course a variety of reasons for this.  Perhaps they are just apathetic towards politics, and the boxes appear like additional meaningless gibberish to wade through at tax time.  Or perhaps they loathe politics and politicians in general and would dry-heave at the idea of giving three of their hard-earned dollars to a few baby-kissers!  Or just maybe they understand campaign finance laws, agree with Congress’ original intent, and have made an educated decision about whether or not to check the box.

Despite the explicit language in that section on the return: “Checking a box below will not change your tax or refund,” many people still think they are contributing extra money out of their pocket to give to the election process if they check the box.  In reality, what Congress has done is given you the ONLY direct choice you have about how the tax dollars they just collected from you are going to be spent.  This is your one opportunity to pull the purse strings!

The concept of public dollars being used for presidential election campaign financing had its genesis in the early and mid-1960s amidst a series of campaign financing scandals and a growing disparity between the parties’ abilities to raise funds.  The idea was to level the playing field for candidates running for president to make it more difficult to buy America’s vote.

The Presidential Election Campaign Act, sponsored by Senator Russell Long was passed in 1966, but was repealed the next year in a challenge led by Senator Al Gore, Sr.  Gore and Senator Robert Kennedy felt that the current law did not do enough since it was not the sole mechanism of financing and still allowed the “corrupting influence” of large private contributions.  Ironically, the Kennedy family had used vast amounts of its family’s personal wealth to finance and ultimately win the election of 1960 for Robert’s brother, John F. Kennedy, as well as financing Robert Kennedy’s bid for election in 1968 against Johnson.

The issue was then revived and was passed again in 1971 as a tax return checkoff to allocate $1 beginning on the 1972 tax returns.  Congress decided that Americans would get to decide how much money would be utilized to fund the elections.  President Nixon and most Republicans were opposed to the idea in general, so the IRS was not being pressured to make it easy.  It was a separate form that had to be requested and it was not advertised very well – only bringing $4 million into the fund the first year.  In 1973, Senator Long did some negotiating with the IRS and the checkoff box was moved to the front of the Form 1040 the next year.  By the 1976 election $90 million had been collected.

The intent of the Presidential Election Campaign fund is to provide full funding for the major party presidential nominees in the general elections, provide funds for the party nominating conventions, and provide partial funds for the primary elections.

In order to receive the funds, the candidates must show broad national public support in the primaries; they must not spend more than $50,000 of their own money; in the general elections they cannot accept any private individual or Political Action Committee (PAC) funds; and there is a cap on the maximum that can be spent on the election campaign.

The various caps and funding amounts were indexed for inflation, however the checkoff amount was not.  The only change since 1972 came in 1994 when the checkoff amount was raised from one dollar to three dollars by Congress.  Making matters worse, its peak participation in 1980 of 28.7 percent of taxpayers utilizing the checkoff has consistently fallen to the 2012 level of only 6.4 percent.  If there is a shortfall, then candidates will just get less money prorata.

President Barack Obama and Mitt Romney became the first general election candidates since the program’s inception to turn down public financing and to raise the funds privately instead.  And two weeks ago, President Obama signed into law legislation that ends the portion of the law that finances the presidential nomination conventions.

All of these factors combined indicate the pendulum is rapidly swinging the other direction and unraveling the system that has operated over the past 40 years.  I suppose after a few more scandals or when one party starts out-fundraising the other substantially there will be outcry again, and the campaign finance laws will be reinvigorated once again.

At least for now, you still have the option to tell Congress how to spend a few of your tax dollars.  If you have already filed your returns for 2013 and have an incredibly intense desire to contribute to this degenerating fund, you can file an amendment to do so.  Interestingly, if you now have an incredibly intense desire to uncontribute to this fund, you cannot amend your return to do that!  This will lead us to our next topic in two weeks – amending your tax returns!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Tax Deadline Looms

Originally published in the Cedar Street Times

April 4, 2014

If you have been hibernating through the winter months, it is time to awaken from your slumber and complete your tax returns for 2013.  As a tax professional it is interesting to see how each tax season seems to take on a flavor of its own.  This year I found that many clients did not come in early, but delayed gathering their tax information, and came in much later.  Another professional in the area called me last week and said he was experiencing the same issue.  Compressing an already compressed time frame certainly makes for long hours, and will probably lead to more extensions as well.

Over the past few years, new rules have been phasing-in which force financial companies to report cost basis in the stock they sell on your behalf.  (Generally I like this new requirement as I have to repaint my ceiling much less frequently as clients are no longer staring at it so intently to come up with the basis in the stock they inherited  thirty years ago.)  I recall last year, we had many clients with revised 1099 financial packages being issued well into late March.  Although I did not see a lot of late issued/revised financial packages this year, I have a feeling that has something to do with why many people opted to bring in their information later.

Technically, you are supposed to file an amendment if additional information surfaces that was not reported on your original returns.   This can be cost prohibitive, however, especially if it consists of minor changes.  If these items are missed, sometimes the IRS will just send a proposed adjustment and basically rework the tax return for you and propose a balance to pay.  California’s Franchise Tax Board will typically follow-up as well once they get wind of the issue from the IRS..

If you cannot get your returns completed on time, then you may wish to file an extension.

If you are filing your own extension for your personal tax returns with the IRS use Form 4868.  Be sure to get some kind of proof of delivery and make a copy of the extension.  Even with delivery confirmation it is difficult to prove what you sent.  The best way is to e-file the extension through home-use tax software or by using a tax professional that e-files and obtains an electronic submission ID (the new modernized e-file system replaces the old declaration control number system with submission IDs).  What about California?  In the midst of a tiresome sea of nonconformity with the IRS, I continue to applaud California for this one act – you need not file a form to be granted an automatic extension! After you have filed your federal extension you have until October 15, 2014 (six months) to file your California personal return as well.

BEWARE!!  Just because you file an extension does not grant you additional time to pay!  The tax you calculate on the return you are going to prepare and file by October is still due by April 15.  So if you think you might not have enough tax withheld, you need to make some good estimates and send in some checks.  You may want to hire a tax professional to help with this calculation.  You can send the federal check with Form 4868.  For California, you can use FTB Form 3519 to send with your check.  There are also electronic options for paying both of these.

If you do not pay your tax or file your return on time, interest and penalties are calculated based on any amount of tax you come up short. Interest varies with market changes (currently three percent a year for the IRS and California).

If you file an extension, but do not pay in enough tax by April 15, you will pay late payment penalties and interest.  The IRS late payment penalties are a half-percent of the balance each month (up to 25 percent).  California will charge you five percent up front plus another half percent of the balance each month (up to 25 percent).

If you fail to file an extension or file after the extended due date, the IRS and California penalties are each five percent of the balance each month (up to 25 percent).  California has an additional trick.  If you extend your return and then file late, they go all the way back to the original due date to calculate penalties and interest owed as if you never had an extension.

You may also incur underpayment of estimated tax penalties depending on your circumstances.

One other nice thing to know: if you owe no tax, you will owe no penalties, even if you file late.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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