Archives for February 2014

Eliminating “Phantom” Income

Ponzi schemes can affect anyone, and in the last several years, the IRS has taken the initiative to help taxpayers eliminate fictitious income generated by the scheme. If the taxpayer uses the safe harbor under Rev. Proc. 2009-20, they may elect to deduct 75% of their loss in the tax year of discovery as loss a theft even if pursuing a third-party recovery. If they are not pursuing a recovers 95% of the amount can be deducted. By using this safe harbor, investors are unable to amend returns or re-characterize income reported that deal with the Ponzi scheme.

What makes income “phantom.” Income considered phantom, is only constructively received or if paid, it is  with the capital funds of the taxpayer or other investors to perpetuate and conceal the scheme. It cannot be earned as a promoter of the scheme.

There are a couple options for taxpayers if they do not use the safe harbor. The first is to deduct the theft loss under Sec. 165(c)(2). They would include the amount invested in the Ponzi scheme, including previously stated income and less cash withdrawn. The deduction can be taken in the year it was discovered, or if there is the possibility of recovery of the money, when that option no longer exists.

The second option is to amend returns for open years under Sec. 61. This allows you to remove constructively received income and treat withdrawals of cash previously reported as income as nontaxable return of capital. The taxpayer must establish the amount of fictitious income and treat the income as never occurring during the open years.

It can be a harsh reality to those involved in a Ponzi scheme. It is always important to research the investment before putting money in. Having a good financial advisor or accountant can be essential to investors making healthy choices for their portfolio.


Don’t Be a Job Hopper

Now, everyone is looking for that one job that will excel him or her to the next level, or that elusive perfect job. They are continually looking for the next big thing and may even bounce from job to job. Many recruiting experts define “job-hopping” as switching organizations every two years or less. From a business standpoint, this is a bad label to have for several reasons.

In the end, a job-hopper can cost the company money. If a person comes into the company and they invest in them time and training, the company is out money when that person takes the skills they have learned to a different company. It will also cost them more money to train and recruit another person to fill that empty spot. Research has shown that it cost on average of $12,800 to replace a worker.

While strategic job-switching can help workers advance in their careers, or stay motivated, engaged and productive, continued quick changes can be a red flag to hiring managers. Many times it is up to the candidate to justify their job history, but candidates that have gaps or regular job changes can be their own biggest obstacle to getting their desired job.

One thing that can help reverse the effects of job-hopping is career advancement. If the candidate can show that the jobs taken were to advance their career, then that can help negate the perception of job-hopping. Some job managers also take into consideration the unstable economy of the last five years, when considering a job candidate.

It is not all bad. When considering a switch in jobs, consider these few questions:

  • Why do you want the new opportunity? Is it the job you want or will it help improve you career?
  • Have you looked within your current company? The company may have a similar job opening you could try for instead of looking elsewhere.
  • Where is the greatest long-term potential and stability? Pick a job that has the best chance for you to advance and build your skills. This is where you want to be long-term.

New Guidelines for Appeals

The IRS established new guidelines for appeals, and the phase one of the new approach has been regarded as the Appeals Judicial Approach and Culture (AJAC) Project. The goal of this project is to improve both the internal and external customers’ perceptions of a fair, impartial, and independent Appeals office.

The new guidelines provide updated information on how appeal cases are handled during Collections Due Process (CDP), offers in compromise (OICs), and the Collections Appeals Program (CAP). Many of the changes had already taken place, but there are still more that will be incorporated within the next year. The most significant of these will be the general update to the Internal Revenue Manual (IRM). The new policy will be the following:

  • New issues are not to be raised by Appeals; and
  • Appeals will not raise new issues
  • Appeals also will not reopen an issue on which the taxpayer and the IRS agreement upon.

In the past, the Appeals could raise a new issue if there were substantial grounds and the impact on the tax liability was material. This does not stop the taxpayer from raising new issues, only the Appeals. Even though they may not raise new issues, they may consider alternative arguments or new arguments that support the parties’ positions.

This is not the only new guideline. The IRS has issued new guidelines for Collection Due Process and Equivalent Hearings, offers in compromise hearing, and Collections Appeals Programs. There are clarifications to procedures, and how the Appeals should examine the cases to determine an outcome.


States Talking Changes to Estate Taxes

For most of the US, Estate taxes are something only the extremely wealthy plan for, but in 16 states, mostly in the northern US, state estate taxes catch middle and upper class taxpayers. The federal exemptions for individuals are $5.34 million for individuals and $10.68million for married couple. This is indexed to inflation, so it will continue to rise, but in the 16 states the tax exemptions can be as low as $675,000 a person (New Jersey) and some of them even tack on an inheritance tax.

For many people in these states, the only solution has been to move to a state that does not have estate taxes. When they move, their home state loses other taxes, including sales tax, property and income taxes. This has caused many states including New York and Washington DC to reevaluate their estate tax laws.

The proposed change would bring the estate taxes closer to the federal government requirements. Some states, such as Indiana have eliminated the inheritance tax, while Tennessee is in the process of phasing it out. Ohio has even taken steps to end its estate tax.

If key states take action to eliminate estate taxes and inheritances penalties, this could cause other states to follow their example. Until this happens, it is important that people who have money that is more than their states exemptions, but less than the federal, take steps to protect their money from unwanted taxes.