A good accountant is much more than just someone to tell you how much money you made last year and how much of it the IRS wants to take.

A good accountant is much more than just someone to tell you how much money you made last year and how much of it the IRS wants to take.

An accountant is your most intimate business relationship, someone who can help you establish realistic and challenging goals for your business, plan the steps needed to achieve those goals and monitor progress on a regular basis. Finding the right accountant for your business is critical. It is essential that your CPA be a valuable source of business support and advice to you.

First, you should look at four critical areas when searching for an accountant:

Professional competency. Most people assume that all accountants are professionally competent. For the most part, they are. But, like all industries, some are better than others. To begin with, it is important that your accountant be a certified public accountant. Not all of those practicing accounting have completed the rigorous training and passed the difficult examination to become certified. Be sure you have find one who has met this standard.

Another thing to check is the CPA firm’s performance in the “peer review.” This rigorous evaluation is conducted by another accounting firm, under the auspices of the American Institute of Certifies Public Accountants, a state society of CPAS or another group. If the firm can pass this scrutiny without receiving any demerits, it is pretty solid.

Specify industry knowledge. Most accountants are well versed in business operations and financial matters. But every industry has its own unique issues and problems. It is very important that your CPA be familiar with how your business – and businesses like yours – works. If not, the CPA may overlook critical issues or fail to recognize opportunities that may end up costing money – your money. Look for a firm that services other companies like yours, even if those companies are in your market area. Don’t worry about your CPA “leaking” propriety information to your competitors. Accountants have ethical standards and client privilege rules that are as strict as those between a doctor and patient.

Scope of services. This area has a lot to do with the structure of your accounting firm. You may want a firm that is able to offer you more services, which could help you have a more profitable business. For example, can your accountant help you put together a business succession plan that will satisfy multiple generations? If your business crosses state lines, can your CPA firm help you deal with tax and business issues in more than one jurisdiction? Can the firm help you structure major transactions, including assisting you to obtain financing? The ideal balance is an accounting firm that is able to provide all the services you may need, but small enough to maintain a high level of personal service.

Personal chemistry. This is an intangible, but an important one. Do you like working with your accountant? Do you feel comfortable with your accountant? Does your accountant listen to you? Your CPA should be deeply involved with your business, requiring you to work closely together on issues that may be sensitive. Make sure you can get along with your accountant, with a high of level trust. In addition, make certain that you have regular access to the firm’s other employees in case a problem ever arises. If you are uncertain about your choice, see how your prospective accountant copes with only a part of your work. If the relationship develops well, give the prospect more work until you are comfortable with your decision.

Now comes the hard part. Once you have selected the right accounting firm for your business, you need to make a smooth transition from your current accountant. Someone once compared this split to a divorce. After all, your accountant has shared many secrets and has been with you as you have grown your firm. In most cases, your current accountant already knows that your business has outgrown his or her ability to service your needs properly. While a split may be painful at first, it is part of being a professional.

The important thing to remember is that this is a business decision, not a personal one. Your first duty must be to your company and its shareholders, employees and customers. We are very much in favor of loyalty. Many of our firm’s clients have been with us for many years. We earn that loyalty by providing excellent service and are constantly thinking about new progressive ideas for our clients’ businesses. The old saying that a chain is only as strong as its weakest link applies to the “chain” of advisors and suppliers that support your business. Make sure that the accounting “link” is strong enough to help you grow and prosper.

Civil, Criminal and Economic Penalties Imposed for Misclassification of Workers Corporate Officers/Responsible Parties Also Liable

STRICT MASSACHUSETTS INDEPENDENT CONTRACTOR LAW ENACTED
Civil, Criminal and Economic Penalties Imposed for Misclassification of Workers Corporate Officers/Responsible Parties Also Liable

Classification of Employees under the Massachusetts Independent Contractor Law

Effective July 19, 2004 an individual performing services is generally presumed to be an employee unless:

(1)“the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in face: and

(2)“the service is performed outside the usual course of the business of the employer; and,

(3)“the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.” ~ Chapter 149, Section 148B(a), Massachusetts General Laws (Emphasis added.)

The Attorney General has taken the position that the above-quoted Independent Contractor Law requires proof that the worker meets all three of its requirements for exclusion. Otherwise the worker is deemed an employee for purpose of Massachusetts’ worker’s compensation and wage laws. ~ Page 3, Advisory from the Attorney General, Chapter 193 of the Acts of 2004, Amendments to Massachusetts Independent Contractor Law, MGL c.149 sec. 148, 2004/2. (Hereafter, “The AG’s Advisory.”)

These new independent contractor rules were enacted as part of an overhaul of laws governing the Massachusetts construction industry. There is no indication, however, that these rules will be enforced only against the construction industry. The Attorney General’s office has promised aggressive enforcement. (See The AG’s Advisory, Page 7.)

Violations/Responsible Parties

A Massachusetts employer is subject to civil and even criminal penalties under the Independent Contractor Law when misclassification is followed by violation of other Massachusetts employment laws. These other employment law violations include, and are not limited to:

* Failure to pay time-and-one half for over 40 hours in a week.

* Failure to withhold Massachusetts state income taxes from the salaries of employees.

* Failure to cover employees under the employer’s Worker’s Compensation insurance policy.

* Failure to keep true and accurate employee payroll records, and to furnish them to the Attorney General upon request.

Civil penalties include serious financial assessments and debarment from working on public construction projects. Criminal penalties include substantial fines and event prison time. In addition, workers may recoup treble damages and attorneys fees if they can establish that their employers violated the Massachusetts wage laws, such as the requirement that employers pay time-and-one for more than 40 hours of work in any week.

These penalties are imposed upon the entity that hired the misclassified the workers and upon that entity’s responsible parties who include “the president and treasurer of a corporation and any officer or agent having the management of the corporation or entity.” ~ Chapter 149, Section 148B(d), Massachusetts General Laws.

Coping Strategies

Massachusetts employers will want confirmation from the Attorney General’s Office that the new Independent Contractor Law will be enforced “across the board” and not just against the construction industry. Pending such confirmation, Massachusetts employers can adopt one of the two coping strategies:

(1)They can classify all temporary workers who perform services within the usual course of their employers’ business as employees for both Massachusetts and United States purposes; or

(2)They can classify all such temporary workers as employees for Massachusetts purposes and as independent contractors for federal purposes, provided that these workers qualify as independent contractors under the federal classification rules described in Section 530(d) of the Revenue Act of 1978, as amended, and the Twenty-Factor test of Revenue Ruling 87-41.

In either case, Massachusetts companies will want to consider adjusting their workers’ compensation packages to reflect their worker’s tentative new status as employees under Massachusetts law.

What is the difference? Here are twenty questions from the Internal Revenue Service to help you make the correct determination.

What is the difference?

Here are twenty questions from the Internal Revenue Service to help you make the correct determination.

We at Robert S. Fineman, P.C. are often asked about the difference between an employee and a subcontractor.

How can we make the determination? The following is a guideline provided by the Internal Revenue Service.

It has been estimated that hiring an employee costs at least 25 percent more than hiring a subcontractor to perform the same work. You have to match the employee's Social Security and Medicare tax, pay for workmen's compensation insurance, liability insurance, provide benefits, and the list goes on. A lot of red tape and a lot of additional cost go out the window when the "employee" can be classified as a contractor.

Many businesses have attempted to classify workers as independent contractors when they were, in fact, employees and for doing so; the Internal Revenue Service has put them out of business. If you make this misclassification and the IRS audits you, they will perform the re-class to employee and recalculate the taxes you should have withheld, calculate interest and penalties, possibly hit you and any other responsible party with the 100 percent penalty, and bill you for all of the above. It won't matter if the contractor paid the taxes or not. If they did, you will have to find them and prove that they did in order to receive credit for taxes they paid. The IRS will assume that the contractor/employees paid none of their taxes. The end result of such a reclassification is usually more than a business can bear and you can expect absolutely no mercy!

You may also run into similar problems if the contractor is hurt on your premises and wants to collect workmen's compensation or if he gets sued for damages and either doesn't have his own liability insurance or is underinsured. We think you get the picture. It can get plenty ugly!

The IRS has developed a list of 20 factors it uses to test employee or subcontractor status. The Department of Labor and state boards will normally follow these as well. Here are the twenty factors you should be aware of before deciding to call an employee an independent contractor.

1.INSTRUCTIONS. Does the business require the worker to follow their instructions on how work is to be performed? If yes, this indicates employee status. An independent contractor will generally decide how the project should be completed and use his own methodology.

2.TRAINING. Does the business provide training to the worker? If you're hiring a person for a job they are not trained for and providing them with the training to carry it out, that person is probably an employee. There can be exceptions based on the facts and circumstances, but if you fail this test, you might lose no matter how many of the others you pass.

3.INTEGRATION. Are the worker’s services a substantial or integral part of the business? This indicates employee status because it indicates the business maintains direction and control over the worker.

4.SERVICES RENDERED PERSONALLY. Does the business require the worker to perform all services personally? Independent contractors may have their own employees or at least should have the option of hiring other contractors to perform their work. Agreements for personal services indicate employee status.

5.HIRING, SUPERVISING, AND PAYING ASSISTANTS. Does the business hire, supervise and pay the worker’s assistants? If so, this is a strong indication of employee status. Let the independent contractor pay his or her own assistants.

6.CONTINUING RELATIONSHIP. Does the business have an ongoing relationship with the worker? This one is a stretch since many businesses maintain lifelong relationships with contractors whose work they like. But the IRS views this as an indication of employee status.

7.SET HOURS OF WORK. Does the business set the worker’s schedule and hours? Independent contractors generally set their own work schedules. If the contractor must work certain hours because of required interrelationships with your employees or to take advantage of down time for computer-related work, document these facts.

8.FULL TIME REQUIRED. Does the business require the worker full-time? This is an indication of employee status because the business controls their availability and prevents them from working on other clients.

9.DOING WORK ON EMPLOYER’S PREMISES. Does the business provide the workspace? Contractors who work off-site are more likely to be classified an independent contractor.

10.ORDER OF SEQUENCE SET. Does the business determine the order or sequence in which work is completed? Indicates employee status. If specific schedules are required, document them in the contract with the reasoning for doing so.

11.ORAL OR WRITTEN REPORTS. Does the business require oral or written reports? The IRS believes regular written or oral reports detailing the work completed indicates employee status. In reality, this is, and should be, expected from independent contractors as well.

12.PAYMENT BY HOUR, WEEK, MONTH. Does the business pay by the hour, week or month? This indicates employee status. See our comments at the end of this article on this issue.

13.PAYMENT OF BUSINESS AND/OR TRAVELING EXPENSES. Does the business pay expenses? This is an indication that the business is directing the Independent contractor's business activities. Make sure the independent contractor pays the expenses and bills you for reimbursement.

14.FURNISHING OF TOOLS AND MATERIALS. Does the business provide tools and equipment for the worker? Independent contractors would normally provide their own tools and equipment.

15.SIGNIFICANT INVESTMENT. Does the worker have a significant investment in his/her own facilities? If the contractor maintains his own office space, computer equipment, tools, etc., this is a good indication that they are an independent contractor.

16.REALIZATION OF PROFIT OR LOSS. Does the worker have profits and losses independent of the business? This is an indication that the contractor is running his own bona fide business and is an independent contractor.

17.WORKING FOR MORE THAN ONE FIRM AT A TIME. Does the worker have multiple clients? Working with multiple clients generally indicates independent contractor status.

18.MAKING SERVICE AVAILABLE TO GENERAL PUBLIC. Does the worker market their services to the general public? Employees do not generally market their services to the general public.

19.RIGHT TO DISCHARGE. Does the business have the right to discharge the worker at any time? This suggests employee status. An independent contractor would only be discharged for failure to meet contract specifications.

20.RIGHT TO TERMINATE. Does the worker have the right to quit at any time? An independent contractor is under contract and cannot quit until the project is completed.

The purpose of these factors is to attempt to determine whether the employer has the right to control the worker, how, when and where the work is performed, and the amount of investment the worker has in his own business. The higher degree of control the employer has over the worker, the more likely the IRS will classify the worker as an employee. As you can see, there is a high degree of subjectivity in these tests. Some consultants will tell you that you're in danger if your worker falls into the employee category on more than 7 to 9 of these guidelines. We can tell you from experience that you may be in trouble if you fail on only three or four! The test is highly subjective and an IRS agent may feel strongly that the requisite control is evidenced even if you pass most of the guidelines with flying colors.

The entire point of looking at these guidelines and applying them to your particular facts and circumstances is to determine if classification as an independent contractor is worth the risk and, if you decide that it is, to determine how to shore up your position before the work begins. At a minimum you should do each of the following to make sure your case is as strong as it can be.

1.Put your agreement with the independent contractor in writing. Include a description of the project, the expected duration, the amount to be paid and how it is to be paid, a paragraph specifically acknowledging that the worker is an independent contractor, and as many other details as can be agreed on. Specify that the worker must supply his own insurances. Ask for the insurance certificates and keep them on file.

2.Get a completed I-9 form from the worker and be prepared to issue a 1099 at year's end.

3.Save any promotional materials, proposals, etc. that the contractor has given you. Also save the promotional materials, proposals, etc. that you got from other contractors competing for your work. Document why you selected this contractor.

4.Pay only on invoices submitted to you by the contractor. Even if the contract is for an hourly rate, let the contractor maintain the records of hours worked and bill you for them. You may, of course, keep your own records to verify his.

5.If at all possible, do not pay on an hourly basis. You may have to, but if possible break down the amounts to be paid based on deliverables throughout the life of the project. You may pay periodic draws to aid the contractor's cash flow, but make sure the contractor accounts for them on his bills as draws against his billing for the deliverables.

6.If the project runs over the original budget and the original contract terms, address this issue in writing. If you're prepared to pay the extra fees, add a contract addendum to cover it. If the project scope changes and you require additional work, add a contract addendum for that as well.

Even with the above documentation there is no guarantee that you will prevail if the IRS comes knocking. But without such documentation, you may be risking your business!

If we can help with this or any other matters, please contact us at: 781-769-0111.

Article Reproduced from: The Boston Sunday Globe - Fast Track

Borrowing a leaf from David Letterman, a consultant to small enterprises has released his list of "Top Ten Reasons Why a Small Business Fails."

Michael E. Gerber, a Petaluma, Calif., consultant and author, says it's as important to know why companies fail as it is to know why they succeed.

"Most people have wrong-minded ideas about why business fail. They think it's because of lack of money. In most cases, it has very little to do with that," says the head of Gerber Business Development Corp., founded in 1977.

Here are Gerber's 10 reasons:

• Lack of management systems, such as financial controls
• Lack of vision and purpose by principals
• Lack of financial planning and review
• Overdependence on specific individuals in the business
• Poor market strategy
• Failure to establish or communicate company goals
• Competition lack of market knowledge
• Inadequate capitalization
• Absence of standards for qualify and performance
• Owners concentrating on the technical rather than the strategic

The transition from worker to owner-manager is difficult, for instance, if a person goes from being a carpenter to a contractor, or an architect to owner of an architectural firm, Gerber says.

"The owners of small businesses are technicians suffering from an entrepreneurial seizure," he quips. "They think in terms of getting their work done. They don't even think in terms of management."

And many people go into business for themselves for the wrong reasons, such as "to get rid of the boss" or to create a job for themselves after being laid off, he adds. Businesses should be started, he says, because people "see a better way to do something or see an incredible opportunity."

Gerber wrote the 1986 book, "The E Myth: Why Most Small Businesses Don't Work and What to Do About It." He says his firm, with nearly $10 million in annual revenue, typically advises businesses with fewer than 20 employees and up to $2 million in annual sales.

Our practice concentrates in working with and advising growth-oriented businesses, entrepreneurs and high net work individuals. We have a strong client base of successful, growing companies in a wide diversity of industries. We offer our clients a wide variety of services and the close personal attention that business owners need in order to make proper and effective business decisions. In effect, we function as proactive business advisors. In addition to the traditional accounting and tax services all CPA firms offer, we provide additional business services including the following which are vital to decisions in today's business environment:

• Assistance with obtaining financial approval
• Business, Management and Financial Consulting
• Business and Tax Planning
• Representation before the Internal Revenue Service and other taxing authorities
• Bankruptcy and workout Consulting
• Merger and Acquisition Analysis
• Business Valuations
• Litigation Support
• Divorce Representation

Contact Information: Robert S. Fineman, CPA 781-769-0111

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.

Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.

Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.

Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.

Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.

House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.

One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.

Extenders

The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.

President Obama’s FY 2013 proposals

President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.

Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.

On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.

If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

Previous disclosure programs

The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.

Reopened program

The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.

The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.

In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.

The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.

Quiet disclosures

One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.

Critics

The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.

If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Dependency Exemption

In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.

Child Tax Credit

Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.

Child and Dependent Care Credit

If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.

Adoption Credit

Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.

Higher Education Credits

There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.

Extended Health Care Coverage

Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.

Child Care Assistance Credit (for businesses)

Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.

If you have any questions about these provisions and how they may benefit you, please contact our office.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

Offset

If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer’s refund may be reduced by FMS and offset to pay:

• Past-due child support
• Federal agency non-tax debts
• State income tax obligations, or
• Certain unemployment compensation debts owed a state.

FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

February 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.

February 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.

February 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.

February 10

Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.

February 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.

February 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.

February 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.

February 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.

March 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.

March 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.