Certified Public Accountants

Winter 2012 Client Newsletter

Jan 31, 2013


            As I was compiling this letter, Congress was in a lame duck session considering ways to avert the expiration of the Bush tax cuts and the so-called “fiscal cliff”, which would force automatic spending cuts throughout the federal budget. It is anyone’s guess what will happen, but we will know by the end of the year. I want to assure you that I stand ready to move on any new tax rules to avoid delays in your tax filings. The new, inflation-indexed thresholds for 2012 are given below that cover many tax provisions, including the nanny tax, the social security wage base, and retirement plan contributions. This issue also explains amended returns and taxation of social security benefits. Finally, the client advisory section covers reporting of merchant credit card receipts, concerns about making online tax payments, and the IRS’s potential reporting of tax debts to credit bureaus.






            The IRS has released the 2013 inflation-adjusted figures for a number of tax benefits, including the gift tax exclusion and the nanny tax. Notably absent from the numbers are indexed tax rates because Congress has not acted on the expiration of the current rates. Here are some of the new numbers:

 • Annual gift tax exclusion:  $14,000 per donee.

• Nanny tax reporting threshold: $1800 to any one employee per year.

• Kiddie tax: Amount used to reduce the net unearned income reported on a child’s tax return subject to the “kiddie tax,” is $1,000.

 • The foreign earned income exclusion rises to $97,600.

• Exclusion of income from U.S. savings bonds:  The income phase-out for the exclusion for taxpayers who pay for higher education begins at modified adjusted gross income above $112,050 for joint returns and $74,700 for other returns. The exclusion is completely phased out for modified adjusted gross income of $142,050 or more for joint returns and $89,700 or more for other returns.

• Medical Savings Accounts. The designation as a “high deductible health plan” for self-only coverage is a plan with an annual deductible not less than $2,150 and not more than $3,200, and under which the annual out-of-pocket expenses do not exceed $4,300; for family coverage, the annual deductible must be not less than $4,300 and not more than $6,450, and under which the annual out-of-pocket expenses do not exceed $7,850.

Social Security Wage Base

            The Social Security wage base for 2013 will be $113,700, up from $110,100 in 2012. Once taxpayers reach this income limit, they no longer have to pay social security taxes on their wages. However, income above this limit is still subject to Medicare taxes, which have no annual limit.

Did you know…Ten years ago, in 2002, the Social Security wage base was $84,900.



            The IRS has announced its yearly cost-of-living adjustments for pension plan dollar limitations that take effect in Tax Year 2013. Many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. Other limitations remain unchanged. Highlights of the changes appear below.


  • The contribution limit is increased from $17,000 to $17,500 for employees who participate in 401(k), 403(b), and 457 plans and the federal Thrift Savings Plan.
  • The catch-up contribution limit remains unchanged at $5,500 for employees aged 50 and over who participate in 401(k), 403(b), 457 plans and the federal Thrift Savings Plan.
  • The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes between $59,000 and $69,000. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer plan, the income phase-out range is $95,000 to $115,000. For an IRA contributor who is not covered by an employer plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $178,000 and $188,000.
  • The AGI phase-out range for taxpayers making contributions to a Roth IRA is $178,000 to $188,000 for married couples filing jointly. For singles and heads of household, the income phase-out range is $112,000 to $127,000. For a married individual filing a separate return who is covered by an employer plan, the phase-out range remains $0 to $10,000.
  • The AGI limit for the saver’s credit for low- and moderate-income workers is $59,000 for married couples filing jointly; $44,250 for heads of household; and $29,500 for married individuals filing separately and for singles.
  • The limitation on the annual benefit under a defined benefit plan is increased from $200,000 to $205,000.
  • The limitation for defined contribution plans is increased in 2013 from $50,000 to $51,000.
  • The annual compensation limit for determining allowable contributions is increased from $250,000 to $255,000.





            In a recent letter to congressional tax committee members, Acting IRS Commissioner Steven Miller said that failure of Congress to enact an alternative minimum tax (AMT) patch by year end would result in significant delays in the filing season. The last such “patch” expired on December 31, 2011.He stated that, without a timely patch, the IRS would have to begin the 2013 filing season processes based on the expiration of the current patch, which would result in an exemption amount reverting to 1998 levels. The exemption amount is what determines which income levels are subject to the tax.

            For tax year 2011, the AMT exemption amount (as indexed for inflation) was $48,450 for individuals and $74,450 for married taxpayers filing jointly. Because of these thresholds, only about 4 million taxpayers paid AMT for tax year 2011. Under current law, however, the thresholds revert to much lower levels for 2012 — $33,750 for individuals and $45,000 for married taxpayers filing jointly. At these levels, approximately 33 million taxpayers would pay AMT for tax year 2012 (with returns filed in the Spring of 2013). This is about 28 million more taxpayers who would pay the AMT than if the exemption amounts were increased, as in the past.

            Calculating the alternative minimum tax is time-consuming and expensive. As your tax preparer, I do not want to see Congress’s failure to act force us to both perform a dual calculation on your tax liability. The way the AMT is calculated is that first I calculate your regular tax on Form 1040. Then, I have to perform another complete calculation, adding back in disallowed deductions and applying new rates and the AMT exemption. I will be watching the situation closely. Congress has never before failed to enact the “patch” so I am hopeful that reason will prevail, and we will be able to put this issue aside for another year.


            House of Representatives member Devin Nunes, R-California, recently proposed a new tax plan that he believes would appropriately tax businesses. Nunes argues that the current debate over raising the tax rates on high-income taxpayers is not the proper focus of Congressional and Administration efforts. Instead, Nunes says chronic unemployment, a sluggish economy, and the debt crisis should be addressed by “dramatically changing the tax code so that investing is not only easier for businesses, but becomes a far better option than not investing.”

            Calling his plan the “American Business Competitiveness (ABC)” program, Nunes plans to introduce a bill in Congress soon. The ABC tax reform would replace the business tax structure with a new form of consumption tax. Nunes argues that many macroeconomists recognize consumption taxes as the best tax system for encouraging capital investment and economic growth. Nunes’ plan would encourage business investment by allowing 100 percent expensing in the current year for investments in the U.S. This means that all companies regardless of size would pay no taxes on any of their spending for personnel, equipment, property or other expenditures related to the operation of their business in the United States, Nunes states. Nunes complains that while existing tax laws provide incentives for business investments, there are too many rules and “ever-changing conditions and limits.” He wants to replace these rules with 100 percent expensing.

Lower Tax Rate on Non-Expensed Income


            Nunes’ proposal also would tax all income for businesses at one rate, 25 percent, which is lower than the current 35 percent. Credits, “special deals” and loopholes on the business side would be eliminated. Nunes argues that this plan would prevent special interests and big business from manipulating the tax code.


          Given that Congress is talking about taking up real tax reform in the new year, Congressman Nunes’ proposal may get a serious look. I would watch this one closely






            The IRS has released statistics which provide sole proprietorship data for tax year 2010.  That year, approximately 23 million individual income tax returns reported nonfarm sole proprietorship activity. Profits rose to $267.7 billion in 2010, a 9.3-percent increase from 2009. The new numbers also give partnership and sole proprietorship data by region and state. For tax years 2007-2009, partnership returns that were filed increased 3.1 percent. The total number of sole proprietorship returns filed for the U.S. fell 1.9 percent. Nationally, gross receipts reported on sole proprietorship returns decreased over the period 2007-09.



            The IRS is providing tax relief to individuals and business taxpayers affected by the extraordinary destruction of Superstorm Sandy.  Sandy was the deadliest hurricane to hit the United States since Hurricane Katrina, causing damage to thousands of homes, leaving millions without electrical power and causing severe flooding.  Relief is available to New Jersey and Rhode Island victims of the disaster beginning on October 26, 2012, and to New York and Connecticut victims beginning on October 27, 2012. 


            Taxpayers located in certain counties in Connecticut, New Jersey, New York, and Rhode Island will be given tax relief that postpones tax filings and payment deadlines until February 1, 2013.  This includes the fourth quarter individual estimated tax payment, normally due January 15, 2013. It also includes payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on October 31, 2012 and January 31, 2013, respectively. Additionally, the relaxed deadline covers tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period.


            The IRS is waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after the disaster area start date and before Nov. 26, if the deposits were made by November 26, 2012. The relief also includes relaxed deadlines for the filing of Form 5500 series returns and for some like-kind exchanges of property. 


How to Claim Casualty Losses        


            Affected taxpayers in a federally-declared disaster area have the option of claiming disaster related casualty losses on their federal income tax return either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax savings, depending on other income factors.  Individuals may deduct personal property losses that are not covered by insurance or other reimbursements.  These deductions are subject to two limitations. For personal-use property, there is a $100 per-casualty floor, and net casualty losses may only be deducted to the extent that they exceed 10% of adjusted gross income (AGI).


Payments to Hurricane Sandy Victims


            The IRS has indicated that disaster relief payments made to individuals are excludable from the individual’s taxable income because Hurricane Sandy is a qualified disaster. “Qualified disaster relief payments” include amounts to cover necessary personal, family, living or funeral expenses that are not covered by insurance.  They also include expenses to repair or rehabilitate personal residences or their contents to the extent that these payments are not covered by insurance. 


Employee Leave-Donation Programs Benefitting Hurricane Sandy Victims


            The disaster relief package put forth by the IRS also includes special relief to support leave-based donation programs to aid Hurricane Sandy victims. Under these programs, employees may donate their vacation, sick, or personal leave in exchange for employer cash payments made to tax-exempt organizations providing relief to Hurricane Sandy victims. These payments will not be treated as gross income or wages to the employees and, therefore, will not need to be deducted as a charitable contribution by the employees on their tax returns.  The payments are deductible by employers. 


Retirement Plan Loans and Hardship Distributions


            The IRS has eased administrative and procedural rules for loans from employer-sponsored retirement plans and for hardship distributions to victims of Hurricane Sandy. Plan participants may be eligible to access their money more quickly under streamlined loan procedures and liberalized hardship distribution rules. To qualify for this relief, hardship withdrawals must be made by February 1, 2013.


            Under current law, retirement plan loans are tax-free if they are repaid over a period of five years or less. Hardship distributions are generally taxable. Also, a 10 percent early-withdrawal tax applies. Please contact me before you take out a retirement plan loan or request a hardship distribution from your retirement plan. These actions have tax consequences that you should understand before you make any decisions.




            With great disasters come great heroics, generosity, and, unfortunately, clever deception schemes which prey on disaster victims. The IRS has issued a consumer alert about possible scams taking place in the wake of Hurricane Sandy. As the IRS observes, following major disasters, it’s common for scam artists to impersonate charities to get money or private information from taxpayers. Such fraudulent schemes may involve contact by telephone, social media, e-mail or in-person solicitations. Some scammers operating bogus charities may contact people by telephone to solicit money or financial information. They may even directly contact disaster victims and claim to be working on behalf of the IRS to help the victims file casualty loss claims and get tax refunds. They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Beware!


Here are some pointers to help you determine whether your Social Security benefits may be taxable. Social Security recipients receive a Form SSA-1099 from the Social Security Administration which shows the total amount of their benefits each year. Based on this information, you should consider the following factors in determining the taxability of benefits:

● Taxation of Social Security benefits depends on total income and marital status.

● Generally, if Social Security benefits are the only income you receive for the year, the benefits are not taxable and you do not need to file a federal income tax return.

● If you receive income from other sources, your Social Security benefits will not be taxed unless modified adjusted gross income is more than the base amount for your filing status.

● To give you an idea, the 2011 base amounts are shown below. This year’s base amounts have not been released yet.

  • $32,000 for married couples filing jointly.
  • $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouse at any time during the year.
  • $0 for married persons filing separately who lived together during the year.

● Your taxable benefits and modified adjusted gross income are figured on a tax worksheet. Tax software programs typically do this computation.

Planning Considerations


If you are receiving other income besides your Social Security benefits, I will be glad to run an analysis to see if a portion of your benefits will be taxable. This computation is important for your retirement planning, and I urge you to pursue these answers.



            Farmers and ranchers who were previously forced to sell livestock due to drought now have an extended period of time in which to replace the livestock and defer tax on any gains from the forced sales.  The IRS has published a list of affected counties to help livestock producers determine their eligibility for the extension.


            To qualify, the livestock must be replaced within a four-year period. The one-year extension of the replacement period applies to capital gains realized on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock are not eligible. The four-year replacement period applicable to involuntary conversions will be extended to the end of a livestock producer’s first tax year after the first drought-free year for a particular region.

If you believe this relief may apply to you, please contact me to discuss your situation.




            The IRS has issued final regulations that modify the new markets tax credit program to promote investments in non-real-estate businesses in low-income communities.  The changes are expected to improve non real-estate businesses’ access to working capital and equipment loans.

            The New Markets Tax Credit is a tax benefit intended to increase revitalization efforts in low-income and impoverished communities by giving investors a tax incentive to invest in qualified Community Development Entities. The credit equals 39 percent of the original investment amount and is claimed over a period of seven years. The program expired in December 2011. A bill to extend the credit is pending before Congress. The bill would extend the new markets tax credit for two years, permitting a maximum annual amount of qualified equity investments of $3.5 billion each year.  President Obama wants a two-year extension of the credit, through 2013, with $5 billion in annual credit allocation authority and Alternative Minimum Tax relief for investors. 

Fate of the Credit

            According to the New Markets Tax Credit Coalition, an industry trade group, (http://nmtccoalition.org) the credit has resulted in an investment of $2.3 billion in 363 businesses in 46 states and the District of Columbia in 2011, in communities hard hit by the recession. However, the program could be at risk of not being retroactively extended by Congress.


If you discover an error or omission in your tax information that could change your federal tax return after you submitted it, you may want or need to amend your return. Perhaps you are eligible for a deduction or credit for expenses you forgot the first time.

Here are some key points about filing amended federal income tax returns.

  1. Amended returns are filed on a special form, 1040X, which must be filed on paper and cannot be e-filed.
  2. Generally, you do not need to file an amended return to correct math errors. The IRS will automatically make that correction. Also, you do not need to file an amended return if forms such as W-2s were not originally attached. The IRS normally will send a request asking for those.
  3. You must file an amended return within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.
  4. If you are amending more than one tax return, you have to file a separate return for each return and they must be submitted in a separate envelope.
  5. If the changes involve another schedule or form, you must attach that schedule or form to the amended return.
  6. If you are filing to claim an additional refund, wait until you have received your original refund before filing the amended return. You may cash the refund check while waiting for any additional refund.



            New rules enacted by Congress require credit card settlement companies to file forms reporting all payment card transactions for participating merchants occurring in a tax year. The reporting is done on Form 1099-K, Merchant Card and Third Party Network Payments.  If the reporting is not done properly, merchants will be subject to backup withholding. The payment companies must withhold 28% of receipts from noncompliant merchants. To avoid this situation, you must verify your business’s legal name and your Employer or Taxpayer Identification Number (EIN or TIN). The IRS uses this information to match reported receipts with the amount reported on your business return. Backup withholding will begin January 1, 2013 and will appear on a merchant statement as U.S. federal income tax.

 New Notices Related to Form 1099-K


            The information reported on the 1099-K should already be reflected on your income tax return as part of total gross receipts, which are a combination of both payment card receipts and other forms of payment like cash and checks. The IRS has prepared new notices to send out to taxpayers if it believes the taxpayers have underreported gross receipts based on the Forms 1099-K it received from the credit card payment settlement companies. It is important that you watch for these notices and contact me promptly upon receiving one. You will be given the opportunity to offer explanations or corrections if you properly respond to a notice. There are many things that could cause a discrepancy between the amount shown on your Form 1099-K and your tax return, so it is important that you keep track of all returns, cash payments, store credits, etc., to explain any differences.




            The IRS wants to increase the use of online payments for individual taxpayers, including payments for estimated taxes, installment agreements and balance due accounts. Its Online Services office is soliciting ideas and suggestions to raise awareness, provide new payments options and increase online payments. However, preparer groups have expressed concerns about the IRS electronic payment program. Here are some of their comments, which I believe have real merit:


          • When completing the return, the taxpayer may not be ready to make a payment.

          • Account information, which must be verified, could change when it is time to make the payments.

          • There is a perception that IRS could become invasive.

          • Taxpayers are concerned about stories of IRS taking all the money in an account.

          • It is more preparer work and can be more expensive for the taxpayer when the taxpayer needs additional help with the payment.

          • What is the advantage for the taxpayer since there is a service charge to use a credit card and the Electronic Federal Tax Payment System (EFTPS) is a confusing system?

          • Put information on electronic payments on voucher coupons to help educate the taxpayer.

          • Who assumes liability if preparer inputs the data and there is an error?

          • Who would pay bank and IRS penalties?

            Please contact me to discuss your electronic payment options.


            The IRS has had in place a letter-forwarding program for a number of years that can be used by private individuals and state or federal agencies trying to locate missing individuals. The program has been used to locate individuals for humane purposes or in emergency situations and also to find taxpayers who are owed income or assets by employee benefit plans. Now, the IRS is limiting the scope of its use because alternative missing person locator resources, including the Internet, have become available.

            The IRS will no longer assist in locating taxpayers that may be owed assets by forwarding letters on behalf of plan sponsors, administrators of retirement plans, or qualified termination administrators of abandoned plans. The change applies to requests postmarked on and after August 31, 2012.

Humane Purpose Locator Program Continues

            The IRS will continue to forward letters that serve a “humane purpose.” A humane purpose is one in which a person is seeking to find a missing person “to convey a message of an urgent or compelling nature, or is seeking to find a missing person because of an emergency situation.” For example, the IRS will forward letters to notify a person of a serious illness, imminent death or the death of a close relative, or to locate a missing relative to convey an urgent or compelling message, or to help locate persons being sought for a medical study to detect and treat medical defects or diseases. Examples of matters not considered to be for humane purposes include tracing a family tree or attempting to locate individuals for reunion purposes. Letter-forwarding requests that do not serve a humane purpose, such as requests that merely provide a financial benefit, will not be processed.


            In a move that has consumer advocates worried, Congress is considering allowing the IRS to report tax debts to credit bureaus. In preparation for Congressional consideration, the Government Accountability Office (GAO) recently prepared a report analyzing factors that Congress should consider before it makes this move. Although other federal agencies report nontax debts to credit bureaus, the IRS is not allowed to do so because long-standing federal law protects the privacy of taxpayers’ information.  The IRS is, however, allowed to file tax liens on some tax debts, and these liens are public records that are picked up by credit bureaus and included in the credit history information they compile. 

Huge Inventory of Tax Debts

            The GAO found that, at the end of fiscal year 2011, individuals and businesses owed a total of about $373 billion in federal unpaid tax debts.  Most debts were relatively small, with over half of individuals and businesses owing less than $5,000. Sixty billion dollars ($60 billion) of the $373 billion was either still in the collection process (and subject to dispute by the taxpayer) or covered by installment agreements.  Of the total debt, about $110 billion was classified by the IRS as uncollectible. Over half of the $373 billion owed was subject to tax liens that credit bureaus routinely pick up and add to their data.

            Some experts have suggested that directly reporting tax debts to credit bureaus could increase revenue collected or reduce tax debt inventory. In other words, the threat of tax debt reporting would pressure taxpayers to pay up. The National Taxpayer Advocate has cautioned that direct reporting could cause some taxpayers to choose not to file or to file inaccurately if they know they owe money to the IRS, and they want to avoid a ding on their credit score.

Potential Negative Impacts on Taxpayers

            The GAO identified many concerns related to potentially serious negative consequences for taxpayers. Information about individual consumers furnished to credit bureaus will have to include sufficient identifying data to assure that the information is associated with the right person.  If reported tax debt data is not accurate and current, affected taxpayers could be denied credit, employment, or housing based on inaccurate negative information in their credit histories.  Additionally, if minimizing the negative impact on taxpayers is a primary concern for policymakers, smaller debts may not warrant reporting. Another concern is that direct reporting of tax debts to credit bureaus along with lien filings may increase the risk of reporting duplicative negative information on a taxpayer’s credit report.

            Currently, most IRS disclosures of federal tax information include strict requirements to prevent further release of the federal tax information, but reporting tax debts to credit bureaus would be different.  Tax debt information reported to credit bureaus would be redisclosed to other parties as permitted by federal law. Some specialists noted that once taxpayer information gets to a credit bureau, it is less subject to controls on its use and more open to possible misuse.

            The reporting of tax debts to credit bureaus is fraught with potential problems. It is my hope that Congress will move very carefully in taking any such action. If you have concerns as well, I urge you to make your views known to your congressional representatives.



                The Tax Foundation, a nonpartisan research organization based in Washington, D.C., has issued its new rankings of states with the best business climates based on tax policy.  Wyoming, South Dakota, Nevada, Florida, and Texas rank high among the ten best states, while Maryland, Massachusetts, New York, New Jersey, and California have a “far less pleasant tax climate to deal with,” according to the report. The ranking is not based on rates alone, but rather focuses on whether a state’s tax laws enhance or harm the competitiveness of the business environment. The states highest on the list typically do not have one of the major types of taxes–corporate income, individual income, or sales taxes.

            To see the full rankings, go to the Tax Foundation’s website at http://taxfoundation.org/article/which-states-are-best-business-0.




In this time of heavy online holiday sales, it is important to note what is going on regarding the states’ attempts to force online retailers to collect and remit sales taxes on internet purchases. Online retailers contend they do not care if states want to impose taxes on their sales to out-of-state customers. They just don’t want to collect the taxes.  At least, that’s the argument that has been in hot contention in Colorado for a number of years.  In an attempt to force retailers such as Amazon to start collecting the sales tax on sales to Colorado residents, the legislature concocted a law so that if out-of-state retailers choose not to collect the tax, they become burdened with intricate bookkeeping chores, including keeping lists of every customer in Colorado and informing both the State of Colorado and the customer of the amount owed.

Now, a federal court has thrown out the 2010 Colorado law in the case Direct Marketing Association v. Huber. The law had already been temporarily blocked in federal court last year, according to the Denver Post, but U.S. District Judge Robert Blackburn’s recent ruling permanently handcuffs it.  The law and the rules to carry it out “impose an undue burden on interstate commerce” and are unconstitutional, the Judge wrote. The Court concluded that making out-of-state retailers comply with separate and onerous paperwork requirements unfairly burdened those companies. This decision may not be the end, however. The case is on appeal to the 10th Circuit Court of Appeals. Other states will be anxiously awaiting the outcome.


A law firm has announced that the IRS awarded $38 million to one of its clients for providing information to the agency about a tax avoidance scheme perpetrated by “one of the nation’s largest corporations.” The name of the company and the name of the whistleblower were not disclosed. The award was reported by The Ferraro Law Firm, which has offices in Washington, D.C., Miami, Florida, and New York, New York.  While the precise amount of the award was $38,037,899, the amount of tax the IRS collected from the company was not revealed. However, by law, the IRS must pay an award of between 15 to 30 percent of the amount it collected from the tax whistleblower.

If you are interested in participating in the IRS whistleblower award program, I can provide you with information to get you started. You can get an award of between 15 and 30 percent of the total proceeds that IRS collects, if the IRS moves ahead on the case based on information you provided. These awards will be paid when the amount identified by the whistleblower (including taxes, penalties and interest) is more than $2 million. If the taxpayer under investigation is an individual, the taxpayer must have at least $200,000 in gross income.

Thank You for Your Business


                As your tax professional, I assure you that I will be keeping a watchful eye on Congress and on IRS actions which may affect your business and your tax filings in the New Year. I will be happy to address any concerns and answer questions you have about any of the issues covered in this newsletter. Thank you for the opportunity and privilege of allowing me to serve as your tax professional this past year.


Best regards,

Lopez, Chaff and Wiesman


“Did you ever notice that when you put the words “The” and “IRS” together, it spells “THEIRS?”

            Author Unknown