Archive for the ‘FTB’ Tag

Back to Basics Part XXIX – Form 8822 Change of Address

Originally published in the Cedar Street Times

December 11, 2015

If you are like most people, whenever you change addresses you will almost certainly notify the United States Post Office so they can forward any mail that is still being delivered to the old address.  Although you may have notified people and businesses prior to and just after your move, you will inevitably have those that are off your mental radar, and do not get notified.

Since people generally only file their taxes once a year, and it is sometimes an experience they want to forget (although never in my office, I am sure!), the IRS and any state taxing authorities often end up in the off-the-mental-radar list!

The fact that the USPS will forward your mail for up to a year after your move does assuage the need to update the taxing authorities since filing a new return with an updated address will also effect the same change.  Plus it seems the IRS and FTB (here in California) have an uncanny ability to track you down anyway, if you owe them money!

All of this said, you may not want to risk your private tax information and Social Security number  being delivered to the new people in your old house by mistake.  Not to mention, you may have action items that require attention within 30 days of the letter date.  Mail forwarding can sometimes take a good chunk of that time, or maybe it never makes it to you if accidentally delivered to the old address.

So what are your options?  Well, you could call the taxing authorities, but be prepared to wait.  These days I tell clients to find a time where they can put the phone on speaker, make some popcorn and watch a movie while they wait.

This is a sidebar discussion – but here is the reason for the long wait times…the IRS is considered a discretionary program in the US budget and it is funded by annual appropriations by Congress.  The IRS budget has been cut by about $1.2 billion in total over the course of the past five years (approximately 10 percent) according to the GAO.

You may recall the IRS revealed in 2013 that its nonprofit audit department had been targeting certain political groups.  Well, that did not help!  This caused an uproar and Congress has been unwilling to increase the IRS budget.  In fact it decreased it further since 2013.  By examining the disproportionately large declines in taxpayer services according to statistics at the IRS, in relation to their ten percent budget cut, it is speculated that the IRS reaction to Congress has been to focus its internal funding cuts on taxpayer services (think phone support, etc.) in order to gain sympathy in the public eye for more funding.  So taxpayers are caught in the middle of political chess.

Whenever I speak with the IRS representatives, I always try to be as courteous and supportive as possible while trying to get the information needed.  Although you may be frustrated with such a long wait, it is not the fault of the representatives answering the phone, and they are probably feeling pressure and get tired of talking to upset people all day.  Courtesy can go a long way sometimes.

Anyway, back to address changes – the easiest way is to mail a Form 8822 Change of Address to the IRS (FTB Form 3533 for California). The Form 8822 is a simple one-page form which you can download off the internet.  You essentially list your name and Social Security number, your old address, and your new address.  You sign and date it, and mail it in.  California FTB Form 3533 is pretty much the same except they manage to stretch it into two pages in order to cover business entities as well.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. 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.

Back to Basics – Part XV – Form 2848 Power of Attorney

Originally published in the Cedar Street Times

May 29, 2015

Question: My mother is older and it is sometimes difficult for her to sign her tax returns.  I have a general power of attorney over her affairs that her estate planning attorney put together for us, so am I authorized to sign her tax returns?  Also, we need to file a tax return for my son, who is away at college.  Can I sign for him now that he is over 18?  Can I call the IRS and talk to them about my mother’s taxes or my son’s taxes if needed?

Answer: In all of these cases, the IRS would first want you to file a Form 2848 – Power of Attorney.  This is a limited power of attorney that just governs tax issues. (California also has an equivalent Form 3520, although they will generally accept a copy of the IRS Form 2848 as well.)

The Form 2848 is the standard document the IRS uses to process any individual that is acting as a representative for another person.  As a CPA, I use this document as well when a client needs me to get access to their past tax information, balances owed, current status of notices, etc.  It is also used if they need me to represent them during a tax audit.  As with a general power of attorney, it is only good as long as the person is living.  Once someone dies, a Form 56 – Notice Concerning Fiduciary Relationship is filed instead.  An authorized executor or trustee, for instance, would file a Form 56, as a fiduciary, and they literally step into the shoes of the deceased individual with all the rights and authority that person had.  After filing the Form 56, the fiduciary could then file a 2848 to authorize someone else, such as a CPA to represent them.

It is important to note that you cannot give just anyone full representation rights by filing a Power of Attorney.  CPAs, attorneys, EAs, and immediate family members, are the only ones you can appoint for individual representation and provide them with full authority and practice rights before the IRS.  (There are certain other classes that have limited practice rights, however.)

The Form 2848 also allows you to designate what authorities and for what tax periods you want to designate to your representative (such as “Income taxes and Gift taxes, Forms 1040 and 709, 2011-2015”).  You can also indicate if you want your representative to receive copies of all IRS communication with you, if you want them to be able to add additional representatives without your consent, sign your returns, etc.  If you want them to be able to sign your returns, there is additional language required as specified in the instructions to the 2848.

Generally, anytime you file a new Form 2848 it will replace any prior power of attorneys on file with the IRS unless you indicate otherwise and provide copies of the prior power of attorneys you wish to remain in effect.  Both, the taxpayer and the representative must sign the power of attorney.  Also note that this IRS Form 2848 – Power of Attorney does not replace or affect a general power of attorney in any way for other purposes.  It is only used with the taxing authorities.

If the taxpayer is competent, but unable to sign the Form 2848, the IRS will allow an “X” to be made with the signature of two witnesses as well, and an explanation.  In the case of someone who is incompetent, hopefully they had a general power of attorney.  In these cases, as with the situation of the mother in the question at the beginning of the article, the power of attorney can be filled out with the exception of the taxpayer signing, and then the general power of attorney can be attached to the Form 2848.  In the case of incompetent individuals without a general power of attorney in place it can become a sticky situation.  A conservatorship is the proper legal vehicle to give one adult authority over another adult’s affairs when that person is incompetent and no other planning is in place, but this can be quite costly and impractical at times.  I’ll let you wrestle with the IRS on that one!

If you would like to catch up on our Back to Basics series on personal tax returns, 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.

As an addendum to the print version of this article, I am adding this additional information regarding authorizing someone else to sign your tax returns for you.  Generally, you can only authorize someone to sign your returns if: 1) disease or injury prevents you from signing, 2) you are out of the country for at least 60 days prior to the tax return due date, or 3) you request and the IRS grants you permission.  In the question of the college student who needs a parent to sign his returns or the mother who has difficulty signing, both would have to meet one of these three requirements as well.

Relief if You Paid Tax on a Short-Sale 2011-2013

Originally published in the Cedar Street Times

February 21, 2014

Hopefully we are nearing the end of the short-sale and foreclosure saga that has continued since 2008.  My litmus test based on tax return filings is indicating that things are much closer to being back on track.  Prior to 2008, it was all about 1031 exchanges.  Those turned off like a faucet when the markets crashed, and then short-sales and foreclosures took center stage.  I have seen those tapering off over the last couple years, and I am starting to see 1031 exchanges again.  The cycles continue!

But before we leave short-sales and foreclosures in the dust, there is a possible silver-lining handed down by the IRS and FTB in the last few months.  Taxpayers that generated income tax as a result of a short-sale in California on their principal residence, retroactive to January 1, 2011, may be entitled to a refund.

California Code of Civil Procedure Section 580b has been dubbed California’s “anti-deficiency laws” for years.  It had a positive effect on homeowners because it basically said if you had never refinanced your home and you lost it in a short-sale or foreclosure that you could not be pursued for the balance you still owed (the deficiency), and the remaining debt would not be taxable income to you because the debt was considered nonrecourse debt.

This, however, left many people out in the cold that had refinanced.  Suddenly, it was a different ball game if you had done a refinance (and who didn’t during the run of good years up through 2007!?), and the debts were then allowed by lenders to be treated as recourse debts and they could pursue your personal assets.  Alternatively they could cancel the debt if it was not worth pursuing, leaving you with taxable income for the amount cancelled.

Congress stepped in (and California generally conformed) during the housing crisis and enacted favorable legislation which said you could exclude cancellation of debt income generated by your personal residence.  The catch, however, was that the debt had to be “qualified debt.”  In short, if you lived off the equity in your house by refinancing to pull cash out and did anything with it other than improve the property, then you were not eligible for the exclusion on that portion and would still have to pay tax.

Then, a few years ago, California passed Senate bills 931 and 458 which were codified into law as California Code of Civil Procedure Section 580e as of January 1, 2011.  This resulted because some unscrupulous lenders were entering into short-sale agreements to allow sellers to go through with the sale of their property for less than the amount owed to the bank, but then still pursuing the seller for the remaining debt after the fact (often a big surprise to the seller).  California’s enactment of this law was good news for homeowners because it basically said, even if you had refinanced, but had entered into a short-sale agreement with a lender, then you could not be pursued for the remaining balance owed and that lenders would basically have to cancel the debt.  Of course, cancelling the debt could mean tax was owed, but that was still better than being pursued for the remaining balance!

Finally, in November 2013 a letter from the Office of the Chief Counsel at the IRS written to Senator Barbara Boxer, due to an inquiry from her, stated that the IRS would treat any debt pursuant to California’s 580e as nonrecourse debt!  The Chief Counsel’s office at California’s Franchise Tax Board followed up with their own letter a month later saying they will conform to the IRS interpretation.

This means that anyone who filed a tax return in 2011 or 2012, or even this year, and reported cancellation of debt income related to the short sale of a principal residence, should consider filing an amendment for a possible refund.  It is still possible to have income tax, primarily if you did not live in the house for two of the last five years prior to your short-sale.  The reason is that when a home is disposed of with nonrecourse debt, the total amount of debt outstanding at the time of the short-sale becomes the sales price of the home.  You then subtract your cost basis, and the difference is your gain on sale.  However, if you lived in the home for two of the last five years, then you get a $250,000 gain exclusion for filing as a single status, and $500,000 gain exclusion if married filing jointly, pursuant to IRC Section 121.

You need to act on this during the next year if your short sale was in 2011 as the statute of limitations expires three years after filing.

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.

When Can I Throw Out My Tax Returns?

Originally published in the Cedar Street Times

May 3, 2013

It is time to do some spring cleaning!  Do not miss your opportunity as summer is coming quickly, at which point you will be required to keep everything for another year.  Perhaps you will find that old pair of muddy tennis shoes in the garage – now the home to three indignant spiders as you turn their palace upside down.  Or maybe you will find that half-used bottle of hotel shampoo under the sink – a small, but satisfying entitlement for a $300 room charge.  Ah, and then there are those tax returns you filed way back in April – is it time to get rid of those too?!

You can do whatever you want, but my advice is to keep them.  In fact, I would say you may want to keep every tax return (and the supporting documents) you have ever filed – I know I have.  Record retention is always an interesting debate and you hear a lot of people say three, five, or seven years as a rule of thumb for many types of documents.  Regarding tax returns, the real answer is unique to each person depending on his or her tax circumstances and risk tolerance.

Someone that works a W-2 job, has no other sources of income, no investments, contributes to no retirement plans, and files the returns correctly would have little risk if discarding the returns after four years.  If you do make retirement plan contributions, depreciate any assets, have an installment sale agreement, or a host of other things, it would not really be wise to discard the returns in accordance with a rule of thumb.

The IRS generally has three years from the later of the due date (or extended due date) or the date you file to audit your returns.  The California FTB has four years from the later of the non-extended original due date or the date you file in order to audit.  You should never throw out returns or source documents until you are outside of these statutes of limitation.  If you have understated your gross income by more than 25 percent (even if by accident), then the IRS has six years to audit you.  People can get tripped up on this pretty easily if they fail to report stock sales.  I have seen this before with people preparing their own tax returns that ignore the 1099-B issued year-after-year because they did not really understand it.  If you filed a false tax return or there was any kind of fraud, there is no statute of limitations.

Even if you are outside the statute of limitations, however, you may still need prior tax returns to support positions you are taking on current tax returns that are inside the statute of limitations.  Think about someone that has been contributing to an IRA for many years and was unable to take deductions due to income limitations.  Each of these nondeductible contributions would have created basis in the IRA which would lower the taxable amount of distributions while in retirement.  If the IRS audited your returns in retirement and questioned your basis, having all the past tax returns showing the nondeductible contributions would be a saving grace.

People that have rental properties or home offices may find tax returns from twenty-five years ago helpful in proving the basis in the property when it is eventually sells due to depreciation deductions taken on each past return.  I have also had situations where clients had no idea what their cost basis was for a stock sale, and we were able to help recreate and substantiate the cost basis by reinvested dividends reported on tax returns stretching back several decades.

The safest thing to do is just keep them, or at least scan them and maintain the electronic files through the years.

One other pointer – be sure you do not throw out purchase records, refinance documents, or receipts of improvements to any type of property you own as you will likely need this information if you ever sell it.

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.

Independent Contractor Vs. Employee: 1099s Due Jan. 31

Originally published in the Cedar Street Times

January 25, 2013

By the end of this month, business owners will have sent 1099s to their independent contractors and W-2s to their employees.  Many business owners think it is their choice, or perhaps a choice they can make together with the person performing the services on how they are to be treated.  It is not.

Business owners certainly see the savings to treat workers as independent contractors – no payroll taxes, no overtime, no break periods, no meal periods, no workers’ compensation insurance, no benefits, or a myriad of other California laws to follow.  Even if the worker gets higher pay to cover the extra taxes incurred as an independent contractor, he does not have to carry unemployment insurance or disability insurance on himself and sometimes thinks that is a personal benefit.  Of course, not having insurance is problematic for the worker and for the system as a whole, which depends on people paying premiums.

At the end of the day, people who are employees wearing the cloak of an independent contractor, are usually getting the short-end of the stick, because they really are dependent on the employer, and no longer have the ordinary benefits afforded by labor laws.  California knows this, and they come down hard on the employers when it is discovered that employees are misclassified as independent contractors.  Unfortunately, even for business owners that treat a misclassified independent contractor well, it can come back to haunt them if the individual becomes disgruntled.

Misclassification can get extremely expensive, or even sink a small business.  Besides legal fees, you could be hit with the tax liability, penalties, and interest from the IRS and FTB for all the back payroll taxes for the employee during the period misclassified.  You may also have to pay back wages and benefits the employee would have been entitled to.  The California Labor Commission can also fine you $5,000 to $25,000 per violation.

So, how do you know if someone is an employee or an independent contractor?  According to law it comes down to the right to direct and control the details and means of the work.  The IRS published Revenue Ruling 87-41 listing twenty points to consider as a guide.  They have also published their own internal auditor’s training guide, which provides more insight.  You can even file a Form SS-8 Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding to get an IRS determination in writing.  This form is most often used by disgruntled workers along with Form 8919 when they feel the employer misclassified them and they now owe tax or cannot get unemployment or disability benefits.  However, employers may also file the Form SS-8, or simply use it internally as a kind of double check to see if they feel they are classifying workers correctly.  All of these documents mentioned are available free online with a simple Google search.

Here is a simplified rundown of the twenty points from Revenue Ruling 87-41 which would help in the determination process.  You do not have to have all of them and no single one is decisive, but the first three are given a lot of weight. You may have an employee if: 1) you require the worker to follow specific instructions on when, where and how work is to do be done; 2) you provide formal or informal training for the worker; 3) the worker has predetermined earnings and always get paid for the work and does not have the ability to make a profit or incur a loss; 4) the services performed by the worker are highly integrated into your own and affect business success; 5) the worker is personally required to perform the services instead of having the option to have their own worker perform the services; 6) you hire, supervise, and pay for your worker’s assistants; 7) you have a continuous relationship with the worker – such as working with you every day; 8) you dictate the hours or days the worker performs services; 9) the worker works full-time for you; 10) you require the worker to perform services at your work site even though it could be done elsewhere;

11) you require the worker to perform services in a specific order or sequence; 12) you require written or oral reports regularly; 13) you pay hourly, weekly, or monthly versus by invoice or project completion; 14) you reimburse the worker’s travel and business expenses; 15) you provide the worker’s supplies, tools, computers, etc.; 16) you provide an office for the worker; 17)  the worker does not provide the same services to anyone else; 18) the worker does not advertise his own services to the general public, have business cards, etc.; 19) you can discharge the worker at any time instead of having to honor contract terms; 20) the worker can terminate his services without having to honor any contract terms.

Ultimately, the determination is a legal issue.  If you do not feel comfortable making the decision on your own, an attorney that focuses on employment practice matters should be consulted.

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.

Losing Your Home? Favorable Tax Provisions Expire 12/31/12.

Originally published in the Pacific Grove Hometown Bulletin

May 16, 2012

If you think you may not be able or willing to hold on to your home for the long-term, you should seriously consider your options for short sale or foreclosure as soon as possible.  At the end of this year, Internal Revenue Code Section 108(a)(1)(E) is set to expire (California tax law conforms to the expiration also).  This is the provision that allows people to possibly exclude from income, cancelled debt when recourse loans on their primary residence are higher than the value of the home.  These transactions take three to 12 months to complete, so time is of the essence.

Between foreclosures and short sales, short sales are your best option in this regard.  This is where you find a buyer and the lender accepts the buyer’s offer, even though it is less than what you owe the lender.  Current law in California forces lenders to cancel the remaining debt as of the date of the short sale and prohibits them from pursuing your personal assets if they agree to the short sale.  A foreclosure does not guarantee the lender will not pursue you for the remaining debt.  Even if they do decide to cancel the debt, it may not be until after the end of this year.

Whether debt is cancelled by short sale or possibly by foreclosure, the cancelled debt is potentially taxable income to you.  If you did not take cash out during past refinances, or to the extent you put cash-out back into improving the property, you will likely be able to exclude the cancelled debt income from your taxable income due to code section 108(a)(1)(E)…until the end of this year.  After that, you will likely only be able to exclude the debt if, and only to the extent you are insolvent (more liabilities than assets).  Bankruptcy is another option, but it must be filed before you lose the property – in other words, plan early.

Imagine $200,000 of income on your tax returns from cancelled debt, generating an extra $75,000 or more of tax.  Many people will find these transactions to be the largest potentially taxable transactions in their life, so it is important to seek competent professional advice, plan appropriately, and avoid the tax if at all possible.

Prior articles relating to foreclosures and short sales 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.

Paying the IRS: Installment Agreements

Originally published in the Pacific Grove Hometown Bulletin

May 2, 2012

Hopefully by now you have filed your tax returns.  If you decided to file for an extension, that is fine, but keep in mind you have not extended your time to pay any tax owed.  That was still due on April 17th.  Filing the extension was key, however, because a late filing penalty is assessed at five percent of the balance owed for every month the return is late (capped at 25 percent).  If you do not owe taxes, you are fine, even if you did not file an extension, since the penalty is based on the balance owed.

If you did file your return and you could not come up with enough cash to pay the IRS, you have payment options.  If you feel you can pay the IRS within 120 days, call 1-800-829-1040 and advise them of this fact and they will not harass you for payment and you can avoid the cost of setting up an installment agreement.

If you need to make payments over time by setting up an installment agreement, the IRS will generally allow this quite easily if your balance is below $25,000, you can pay it off in seven years, and you are in good standing with the IRS.  This is accomplished by filing Form 9465.  There is a $105 fee to set up an installment agreement, unless you elect electronic payment withdrawals from your bank – this cuts the fee down to $52.  Interest accrues at a variable rate which changes every quarter (currently three percent per annum) and late payment penalties may also still be assessed (1/2 percent per month, or portion thereof – approximately six percent per annum).  Other minor penalties may apply also.

In practice, I have never had an installment agreement under $25,000 turned down or even questioned by offering a monthly payment amount equal to the starting principal balance divided by 60. If you owe over $25,000, you have to provide detailed information about your financial situation through additional forms before an installment agreement is granted.  With an installment agreement in place, you avoid harassing letters and other possible collection actions such as levying bank accounts, garnishment of wages, forcing the sale of assets, etc.  (Forcing the sale of assets is rare unless you owe at least $100,000…and are obstinate!)

If you have large tax debts that may be difficult or impossible to pay there are other less friendly avenues such as offers in compromise, or even bankruptcy filing if the tax debts are at least three years old.

California has a less generous installment agreement option, but can be requested by filing FTB Form 3567.

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.

Do You Buy Online or Via Catalogs? – Use Tax – Merry Christmas to CA!

Originally Published in the Pacific Grove Hometown Bulletin

December 21, 2011

If you made any purchases over the Internet or via mail-order catalogs for your holiday shopping (or any time during the year) for business or pleasure, California does not want to be left out of the gift-getting!  Due to the strain on California’s budget over the past few years they have been looking high and low for additional revenue – including the enforcement of existing laws that have historically been quite lax.

For decades, California, and many other states have had use tax laws.  California use tax is basically sales tax imposed on all those purchases you make online or via mail-order catalogs, or while in no sales tax states like Oregon (you know – all those purchases you made so you could avoid paying sales tax!).  If you bring the goods into California and use them here (or give them to somebody in California), you owe California use tax equivalent to the sales tax rate where you reside.  This applies to individuals as well as businesses. Certain goods like cold meats, cheeses, crackers and other grocery type foods that are not subject to sales tax are not subject to use tax either.

The California Board of Equalization (BOE) has been aggressively marketing its efforts to pursue this tax including sending letters to tax professionals several times a year, hiring auditors, registering businesses, working with the Franchise Tax Board (FTB) to add a form to your 540 income tax return, and now creating safe-harbor use tax tables based on your income.  The downside of not complying is that if audited, they can go back for years looking through your bank statements and credit card statements for purchases from the likes of Amazon.com – and who knows what else they might find…

The new safe-harbor use tax tables are available for use with your individual 540 California tax return (business entities including schedule C businesses cannot use these tables).  Instead of collecting all your receipts for non-taxed purchases, California will allow you to pay a predetermined amount based on your adjusted gross income (up to $20K – $7, up to $40K – $21, up to $60K – $35, up to $80K – $49, up to $100K – $63, up to $150K – $88, up to $200K – $123, over $200K – multiply by 0.07%).

If you elect to use the tables, you will be presumed to have met your requirement and they will not ask for more, even if the actual tax based on receipts would have been much higher.  Individual purchases over $1,000 are treated separately from the use tax tables.  This can be a strategic move.  Beware, if you owe money to the FTB for any other reason such as past due taxes, the FTB will not pass the use tax paid to the BOE, and you will get a bill from the BOE with a 10 percent late penalty.  Your other option is to file a separate Form BOE-401-DS Use Tax Return, but the safe harbor tables are not available for this return.

All businesses (including schedule C businesses) that have gross receipts over $100K, and do not already have a seller’s permit with the BOE, are required to register with the BOE and file a separate use tax return.  Even if they made no qualifying purchases they have to register and file a zero return each year.  If you fail to register and file, and the BOE discovers this, they will likely require use tax returns for the past eight years.  It is probably in your best interest to register and file simply to avoid the possibility of an eight-year look-back!

So as you open gifts this year and ponder how smart you will look in that new sweater, you may also think, “I wonder if the giver has a use tax issue?!”

For more information on use tax, registering, and filing returns you can go to http://www.boe.ca.gov/sutax/sutprograms.htm.

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 Extension

Originally Published in the Pacific Grove Hometown Bulletin

April 6, 2011

 

Imagine opening a letter from the IRS assessing you an $18,000 penalty because they claim you did not file your extension on time!  I once worked with a client that was faced with this exact problem.  The irritating part is that an extension request is an arguably meaningless filing since it is automatically granted if requested. Nonetheless, the IRS takes it seriously.

So with April 18th fast approaching (taxes are not due on the 15th due to the federal observation of the signing of the Compensated Emancipation Act by Abraham Lincoln in 1862), how can you protect yourself?  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 confirmation.  What about California?  In the midst of a tiresome sea of nonconformity with the IRS, I 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, 2011 (six months) to file your returns.

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 18.  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 4 percent a year for the IRS). IRS late payment penalties are ½ percent of the balance each month (up to 25 percent).  If you fail to timely file, the IRS penalties are 5 percent of the balance each month (up to 25 percent).  You may also incur underpayment of estimated tax penalties depending on your circumstances.  California interest and penalties are similar or higher.

Oh, and remember my client with the $18,000 penalty – fortunately we were able to successfully petition to get the penalty waived!

Travis H. Long, CPA is located at 706-B Forest Avenue, Pacific Grove, CA.  Travis can be reached at 831-333-1041.