Christy Pinheiro EA

Question: We are just completing an IRS audit.  Taxpayer did not file 1099s for all independent contractors.  The IRS has informed us that they will disallow the expense for those recipients.  Does anyone know under what authority they can do this?

Answer: You won't find any authority for it, because there isn't any. There is no authority in the IRC for IRS auditors to disallow the deduction if a 1099 is not filed. The only remedy that they have is a penalty (It's gone up recently, I think it's $250 per unfiled form, last time I checked). So if you're talking about dozens or even hundreds of unfiled forms, you could potentially have a problem either way.

It's usually an empty threat. If there's anything that the IRS is good at, it's playing chicken.

On the California side, though, there is authority for the disallowance based on unfiled 1099 forms, but it is currently being litigated.

In my opinion, this is a ridiculous issue-- businesses should not be required to play such a large role in compliance. These are reporting forms, and it's an administrative burden that I don't agree with, on so many levels. That being said, we always encourage our clients to file 1099 forms.

As recently as last year, we had an IRS auditor scream "You are required to do this! This is YOUR job!" (with regards to 1099 filings), and we responded that although we offer the service, nobody in our office works for free. So, look at the situation. You can go to appeals, or agree to concede. It's usually just a numbers game. If your client is going to have a small adjustment, or has other issues that might come up once the file is moved to appeals, then you might want to consider a concession. Otherwise, this is a safe issue to fight, because the IRS has no authority to disallow the deduction.

 

The state of California, strapped for cash, has decided to go after Amazon for sales tax revenue. They do this by creating "nexus"; saying that Amazon affiliates are akin to a physical presence in the state.

This essentially forces Amazon to collect sales tax on all of its affiliate sales (interestingly, EBay seems to be immune from this, not quite sure why). Affiliates are people that earn money through adclick revenue. When you have a link on your website, and someone clicks the link and makes a purchase on Amazon, you can earn a referral fee, which is usually a percentage of the purchase.

It's a nice way to earn passive revenue.

NCIBA (a bookseller's association) has been trying to get this passed into law for over a decade, and I just got an e-mail from them about the passage of the new law, which apparently will go into effect in September.

"This afternoon, Governor Brown signed the state budget, which included a bill that requires Amazon.com and other out-of-state retailers to collect sales tax on California sales. The language closes loopholes in the existing tax code and gives the state Board of Equalization the legal cover it has been seeking.The bill contains language that deals with affiliate nexus, and Amazon today fired all of its affiliates in the state in response, but it is actually an amalgam of three separate bills that were introduced in the Legislature." -NCIBA

Unfortunately, as soon as news of the new law was made public, Amazon countered with their own news release. Amazon dumped all of its affiliates as a response. Here is the text of Amazon's response:

"Hello, For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers - including but not limited to those referred by California-based marketing affiliates like you - even if those retailers have no physical presence in the state.We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. We will send a follow-up notice to you confirming the termination date if the California law is enacted. In the event that the California law does not become effective before September 30, 2011, we withdraw this notice. As of the termination date, California residents will no longer receive advertising fees for sales referred to Amazon.com.. . Please be assured that all qualifying advertising fees earned on or before the termination date will be processed and paid in full in accordance with the regular payment schedule.You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here . And if you relocate to another state in the near future please contact us for reinstatement into the Amazon Associates Program.To avoid confusion, we would like to clarify that this development will only impact our ability to offer the Associates Program to California residents and will not affect their ability to purchase from Amazon.com.We have enjoyed working with you and other California-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to California residents. We are also working on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.Regards,The Amazon Associates Team

I am an Amazon affiliate (or at least, I WAS). My websites currently earn about $300-$400 per month on affiliate clicks. It's not a huge amount, but it's certainly not chump change, either. I'm going to be sad to see that money go.

A lot of businesses feel that Amazon gets a "free pass" somehow, because they feel that people choose to shop on Amazon because they can avoid sales tax. I disagree. I don't shop on Amazon to avoid sales tax. In fact, I report Use Tax (as people are supposed to). I shop on Amazon for ease and convenience. They carry many of the things I can't find elsewhere. If other stores made it so easy to shop, then I would buy from them this way, too.

Passkey Publications has added another live enrolled agent class. You can find out more about the class and how to sign up here. Here are the main details.

Las Vegas, NV, JULY 11-14, 2011
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The tax filing deadline is just around the corner! This year, it's April 18, 2011.  The IRS offers 10 tips for taxpayers still working on their tax returns:

1. File Electronically IRS e-file: It’s safe. It’s easy. It’s time. IRS e-file is now the norm; not the exception.
   
2. Check the Identification Numbers Carefully check identification numbers — usually Social Security numbers — for each person listed. This includes you, your spouse, dependents and persons listed in relation to claims for the Child and Dependent Care Credit or Earned Income Tax Credit. Missing, incorrect or illegible Social Security numbers can delay or reduce a tax refund.
3. Double-Check Your Figures If you are filing a paper return, you should double-check that you have correctly figured the refund or balance due.
4. Check the Tax Tables If you are filing using the Free File Fillable Forms or a paper return, double-check that you have used the right figure from the tax table.
5. Sign Your Form You must sign and date your return. Both spouses must sign a joint return, even if only one had income. Anyone paid to prepare a return must also sign it.
6. Mailing Your Return If you are mailing a return, find the correct mailing address at http://www.irs.gov.
   
7. Mailing a Payment People sending a payment should make the check payable to “United States Treasury” and should enclose it with, but not attach it to, the tax return or the Form 1040-V, Payment Voucher, if used. The check should include the Social Security number of the person listed first on the return, daytime phone number, the tax year and the type of form filed.
8. Electronic Payments Electronic payment options are convenient, safe and secure methods for paying taxes. You can authorize an electronic funds withdrawal, or use a credit or a debit card. For more information on electronic payment options, visithttp://www.irs.gov.
9. Extension to File By the April 18th due date, you should either file a return or request an extension of time to file. Remember, the extension of time to file is not an extension of time to pay.
10. IRS.gov Forms, publications and helpful information on a variety of tax subjects are available at http://www.irs.gov.

Question: Can you help me figure out how to report my royalties?Do you need to pay self-employment tax for book royalties? What is the IRS code section refering to this? Do you report your royalties on Schedule E or Schedule C?

Answer: If you are a self-employed writer, then yes, you absolutely must pay self-employment tax on your earnings. Even though the reported earnings are "royalties" they are not considered passive income if the copyright is self-produced. Self-employed writers, artists, photographers, etc, should report their income on Schedule C, subject to self employment tax. You don't have to look to the Internal Revenue Code section, it's right in IRS Publication 17 (page 89)

"You generally report royalties in Part I of Schedule E (Form 1040). However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C (Form 1040)." (IRS PUBLICATION 17)

Now, if you had inherited a copyright (such as from a deceased relative) then the earnings would not be subject to self employment tax.

Hope this helps

The IRS and U.S. Armed Forces participate in the Volunteer Income Tax Assistance program which provides free tax advice, tax preparation, return filing and other tax assistance to military members and their families. 

1. Armed Forces Tax Council The Armed Forces Tax Council oversees the operation of the military tax programs worldwide, conducting outreach with the IRS to military personnel and their families. The AFTC consists of tax program coordinators for the Marine Corps, Air Force, Army, Navy and Coast Guard.

2. Volunteer Tax Sites Volunteer assistors at military-based VITA sites are trained to address military-specific tax issues, such as combat zone tax benefits and the new Earned Income Tax Credit guidelines.

3. What to Bring To receive this free assistance, you should bring the following records to your military VITA site:

• Valid photo identification
• Social Security cards for you, your spouse and dependents or a social security number verification letter issued by the Social Security Administration
• Birth dates for you, your spouse and dependents
• Wage and earning statement(s) -- Form W-2, W-2G, 1099-R
• Interest and dividend statements (Forms 1099)
• A copy of last year’s federal and state tax returns, if available
• Checkbook to get routing number and account number for direct deposit
• Total amount paid for day care and day care provider’s identifying number
• Other relevant information about income and expenses

4. Joint returns If your filing status is Married Filing Jointly and you wish to file your tax return electronically, both you and your spouse should be present to sign the required forms. If it isn’t possible for both of you to be present, a valid power of attorney that allows tax preparation can be used to sign and file the return.

5. Special Exception There is a special exception to using a power of attorney for spouses in combat zones that permits the filing spouse to e-file a joint return with only a written statement setting forth that the other spouse is in a combat zone and is unable to sign.

For more information, review IRS Publication 3, Armed Forces’ Tax Guide, available at http://www.irs.gov or order a free copy by calling 800-TAX-FORM (800-829-3676
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Want to become an enrolled agent? Get more information about the EA exam at Passkey Publications.

Question: My problem with the internet marketing is that it's hard to tell how many clients it brings you. Is internet advertising really worth it for a tax professional?

I believe that Adwords is probably the most effective advertising that a tax preparer can use-- and it's cheap and easy. Anyone can set up their own Adwords account-- it's simple--you don't need to pay someone to do it for you (although I will admit that I have set up Adwords accounts for some tax pro friends of mine who were computer illiterate).

The big issue with using Adwords is usually the tax professional's website-- NOT the ad. If you pay for internet advertising, your website better be on-point. What I mean is that the website should be clean and have your phone number and other contact information clearly on the website. And a picture and company bio really help, too.

Now, when internet shoppers click on an Adowrds link, they usually peruse your website for only a a minute or two. And then they will call. If you don't have a live human being answering the phone, then that internet customer usually goes on to the next internet ad.

This fact pattern isn't the same for referrals-- a referral will often leave a message on an answering machine, or wait a few days-- because they were referred by a family member or a friend.

But an internet ad referral usually won't try very hard to get ahold of the preparer. In order to get the most out of internet advertising, you need to have a live person answering the phone (even if it's just a virtual secretary) and your website has to be clean and have your contact information clearly stated. Also, if you ad states that you have some sort of specialty, like estate taxes, the website should have a dedicated page that explains your specialized expertise.

Billionaire Julian Robertson just won a huge tax case that saved him 27 million dollars, by having an assistant actually track his days in the city. According to Forbes, the billionaire told his assistant to "track his days and warn him when he was using up days too quickly or nearing the 183-day limit."

The huge tax sum hinged on the clarification of just two days. The city argued that Robertson had actually exceeded the 183 day limit.

In 2005, city auditors got records, under subpoena, from his air charter company, showing his flight from Ireland landed at 1:30 A.M. July 24th. But a year later, the charter company clarified that the landing was at 1:30 A.M.  Greenwich Mean Time (a.k.a. Zulu Time) —so Robertson’s party had actually landed at LaGuardia at 9:30 P.M. July 23rd.

So the auditors actually took the time and trouble to argue this case all the way up to the New York State Tax Appeals Tribunal. Robertson won, and it was a coup for billionaires and millionaires everywhere who wish to avoid paying taxes by playing on razor-thin margins of residency.

I've got to hand it to his tax attorneys! That must have been one heck of a case to argue.

Question: I have a client who is a widower. His wife died recently, and the Husband moved out-of-state. Daughter (who doesn't want to move away and start a new school) moves in with grandma to finish high school. Father sends grandma support money each month to cover all of daughter's support. Can Dad take the deduction for the child, or is she a qualifying child of the grandma (who wouldn't benefit from the exemption)?

Answer: Father can claim the daughter under the temporary absence rules. I assume the daughter is a minor but even that doesn't have to be true, even if the daughter lives with grandma for years, the daughter may still qualify as a dependent of the father because of the relaxed rules for "temporary absences."

College students go away to school for years, and often never move back home, but that doesn't prevent the parent from claiming the child. Even a seemingly "permanent" absence can still count as "temporary" when the child is in school, hospitalized, or institutionalized.

Here's a relevant case: Hein vs Commissioner (1957) . Sister was institutionalized (permanently) the brother paid for her support, the brother claimed head of household and dependency exemption. Even though she had been in an institution continuously for seven years, and the courts were aware that she would be there for the rest of her life, the exemption and HOH was still allowed. In the Hein case, the court made a relevant distinction regarding the sister, that if she were "ever to move out of the institution, she would live with the brother" who claimed her as a dependent. I still think this case is on point.

If the daughter could no longer live with the grandmother, then she would live with the father, who is supporting her.


Best, Christy
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