The Act will require businesses with more than $1 million in internet sales for the previous year to collect sales tax in the various states. Even if a state is not part of the streamlined sales tax project, they can still participate in the taxation of internet sales. For a non-streamlined state to participate in the taxation of internet sales, the state would have to adopt some minimum standards as set forth in the Act.

Some businesses are fighting to increase the business threshold to $10 million of internet sales to be required to comply with the Act. One of the businesses pushing for this threshold is E-Bay. The company has indicated they have numerous small businesses that sell through E-Bay that would now be required to charge sales tax. Many small businesses have also indicated that they will limit their internet sales to keep it under the $1 million dollar threshold so that they would not have to comply with the sales tax requirement.

Note that the bill is expected to face more opposition in the House than it received in the Senate, so whether or not the bill will actually be enacted remains to be seen.

• From 2006 to 2010:
  • 104.1 percent increase in the number of Form 3520 returns reporting foreign trust transactions and certain foreign gifts
  • 84.6 percent increase in the number of Form 3520-A foreign “grantor” trust returns

• In 2010:
  •  almost $1.5 billion in assets was transferred to foreign trusts by U.S. persons
  • 7,051 foreign grantor trusts reported -
    • $35.3 billion in total assets
    • $4.0 billion of distributions
    • $1.1 billion of net income (loss)
  • $7.3 billion in gifts/bequests were received by U.S. persons from nonresident aliens, foreign estates, foreign corporations, and foreign partnerships (in transactions generally separate from foreign trust activity)

To see the most recent SOI (Statistics of Income) updates, visit the “What’s New” webpage on the IRS website.

Reasonable cause can also be used to request abatement of penalties.  To qualify for abatement under reasonable cause, taxpayers must have an excuse that indicates they had no control over the situation (e.g., sudden loss of employment, loss of their home, illness, etc.) and that the failure to pay/file was not due to willful neglect. Abatement under reasonable cause may yield better relief to a taxpayer than through the FTA. Once a taxpayer uses the FTA program, the taxpayer must maintain a clean record for another three years. If a taxpayer uses reasonable cause, there is no three year limitation and the FTA program can be saved and used in a subsequent year (provided that the penalties were fully abated under reasonable cause).

In addition, it’s important to factor in any lifecycle changes, such as marriage, divorce, the birth of a child, or a job change, as well as anticipated changes in income streams and deductible expenses. Taxpayers also need to be aware of ever-changing legislation and the effect it can have on their tax liability.

Note that employers are not required to adjust withholding for the new unearned income Medicare contribution tax of 3.8 percent, which affects higher-income taxpayers and will be calculated on individual tax returns.

Additional withholding for the 0.9 percent Medicare surtax, however, will be deducted by an employer once an employee’s wages exceed $200,000, regardless of marital status. Subject to various thresholds ($250,000 for joint returns, $125,000 for married taxpayers filing separately, and $200,000 in all other cases), any additional amount due for this tax will be reflected on taxpayers’ returns. Individual situations may warrant a closer look to avoid being underwithheld and subject to underpayment penalties. This can occur for certain taxpayers (married filing jointly) with individual wages of under $200,000 that have combined wages exceeding $250,000.  Other situations can result in an overpayment, so taxpayers should pay special attention in this area and complete a revised Form W-4 if needed.

Although some taxpayers count on having a large refund and use it as a savings vehicle, others cringe at the thought of the IRS using their money interest-free all year (even though interest rates are as low as they are!). Many taxpayers consider the best scenario to be one in which their tax withholding mirrors their tax liability, but it really is a matter of personal preference.

With the increase in tax rates, high wealth taxpayers may also be able to enjoy tax savings on their estate tax. For those individuals who are subject to estate tax, a conversion to a Roth IRA allows previously nondeductible contributions made to a traditional IRA to be nontaxable when converted to a Roth IRA. In addition, taxes paid on a Roth conversion are removed from the taxable estate, thereby helping to lower the amount of taxes due.

Eligible taxpayers include individuals living in Suffolk County, MA as well as victims, their families, first responders, others affected taxpayers living outside of Suffolk County, and taxpayers with tax preparers that were adversely impacted.

Filing and payment penalties will be waived as long as the extended July 15 deadline is met, but interest will still be applied to any payments made after April 15.

If additional time is needed, affected taxpayers have until July 15, 2013 to file Form 4868 for an extension of time until Oct. 15, 2013.

Taxpayers living in Suffolk County automatically receive this extension and do not have to do anything further. Eligible taxpayers living outside of Suffolk County should call 1-866-562-5227 to identify themselves with the IRS before filing or making a payment. In addition, eligible taxpayers can call this number to have penalties abated if they receive an IRS notice.

Exception #1: Taxpayers with modified adjusted gross income (MAGI) of less than $100,000 are allowed to use $25,000 of the net rental loss against non-passive income. The ability to claim this loss is phased out once MAGI exceeds $150,000.  To qualify, the taxpayer must actively participate in the rental activity. Active participation is a less onerous test than material participation (which has several different tests) and is considered to be met if the taxpayer:

• owns more than 10 percent of the rental property,  and
• is substantially involved in managing the property (which includes making decisions such as selecting tenants, setting rental rates, and making or arranging for repairs).

Exception #2: Meeting the rental real estate professional requirements allows the income or loss to be treated as non-passive. This is much more difficult to qualify for, especially when the taxpayer has other full-time employment. The taxpayer must meet two conditions to qualify:

1. must materially participate in a real estate business and more than 50 percent of his/her personal services must have been in a real estate business, and
2. must spend more than 750 hours during the year in the real estate businesses in which he/she materially participates, excluding time spent in the role of an investor.

Note that the IRS looks at this test on an activity by activity basis, but elections can be made to group certain similar real estate activities into one.

Note that the burden of proof is initially on taxpayers to demonstrate and provide documentation of their status as rental real estate professionals. The decision in a recent Tax Court case (TC Memo 2013-88) reinforces the IRS position that documentation to prove the hours worked (i.e., appointment books, calendars, logs, or time reports) must be tracked as the services are performed rather than estimates after the fact.

In March 2013, the IRS issued guidance allowing additional time for employers to submit required documentation to the appropriate state workforce agencies. The April 29, 2013 deadline relates to employees hired during the period when the WOTC credit was expired and before reinstatement. 

Employers are required to obtain certification that an individual is a member of a targeted group before the employer may claim the credit. Within 28 days after the eligible worker begins employment, the employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency. Without the submission of the required documentation, an employer is unable to claim the credit.  

WOTC provides a tax credit to employers calculated as a percentage of the qualified wages paid to the qualified workers in their first, and sometimes second, year of employment. This percentage credit may be calculated differently based on the target group in which the employee is categorized.

Targeted groups qualifying for the WOTC credit are as follows: 

• Qualified recipient of Temporary Assistance for Needy Families (TANF)
• Qualified veteran
• Qualified ex-felon
• Designated community resident
• Vocational rehabilitation referral
• Summer youth employees
• SNAP (Supplemental Nutrition Assistance Program) recipient receiving food stamps
• SSI (Supplemental Security Income) recipients that are disabled adults/children with limited income

For employees hired between Jan. 1, 2012 and March 31, 2013, there is still time to submit the required applications in order to obtain this valuable tax credit.

• File as soon as possible.  For taxpayers that are due a refund, there is no penalty for filing after the deadline. For those with a tax liability, it is important to pay as soon as possible to minimize penalties and interest.
• Penalties and interest may be assessed. Filing or paying late can result in additional IRS charges. Fees may be reduced, however, for taxpayers that have reasonable cause for missing the deadline. Taxpayers should contact SS&G regarding their specific situation.
• E-file is still available. This is usually the quickest and easiest option to file a tax return.
• Pay all or the most possible on any balance due. If a balance is owed on a tax return, taxpayers should try to pay as much as they can when filing their tax return, even if it is less than the total amount due. Paying the remaining balance as soon as possible will help to reduce interest and penalties.
• Installment agreements are a payment alternative. The IRS provides for installment plan agreements as an option for those taxpayers that cannot pay when a large balance is due on their tax return. Eligible taxpayers may apply for a payment plan with the IRS online.  
• Be aware of outstanding refunds. Taxpayers should keep in mind that they could be entitled to a refund even if they are not required to file a tax return. Note that the refund could be forfeited after three years, so it is important that tax returns be filed as soon as possible.

Questions about the new Form I-9? Contact your SS&G tax professional.