Category Archives: Industry News

What Happens if a Trustee Commits Fraud?

What Happens if a Trustee Commits Fraud?

If you are beneficiary of a trust, it is sometimes practically impossible to obtain information about the trust or the trustee’s activities. This may not be because of the trust’s terms or statutory requirements, but because the trustee believes it is unnecessary to respond to every beneficiary request. Trustees are given discretion in handling the assets and may not receive much oversight. In the worst-case scenario, this could lead to the trustee committing malfeasance and/or fraud.

This article reviews a trustee’s responsibilities and what a beneficiary can do if the trustee is committing fraud — or is suspected of it.

Trustee’s Responsibilities

When a grantor forms a trust, it is because the grantor intends that the assets will be handled and distributed as he or she intends. The terms of the trust should mirror the grantor’s intent. The most important point a trustee must remember is that he or she must follow the terms of the trust on behalf of the beneficiaries. In other words, the interests of the beneficiaries must be placed before the interests of the trustee.

The trustee is a fiduciary with respect to the beneficiaries of the trust. This includes both the current beneficiaries and any parties named by the trust to receive the remaining property (called remaindermen). These parties (individuals or organizations) receive trust assets upon the death of those entitled to income or principal now.


  • A trustee must keep accurate records that support income and payments made from the trust.
  • Federal tax returns are not an adequate way to account for trust income and disbursements since the requirements for tax filing are different from the requirements for trust recordkeeping.
  • Trust administration costs must be reasonable.
  • A trustee should not mix trust assets with his or her own assets. They should be kept separate.
  • If a trustee does not keep proper records, courts are likely to rule against the trustee.

A Trustee’s Troubling Actions

There are various ways a trustee can get into trouble. One way is to fail to account for the assets and income of the trust in the proper way. There may not be any intent to defraud or any self-interest involved. The trustee may just be lackadaisical or unable to effectively manage the trust.

In other cases, trustees act in their own self-interests. This usually occurs if the trustee is also a beneficiary. The trustee may be inclined to act in his or her best interest versus all the beneficiaries and remaindermen.

In some situations, trustees may use trust funds for themselves. A typical scenario would be a trustee who “borrows” money from the trust for his or her own purposes. Perhaps he or she is having financial difficulties and intends to return the money but is not able to pay it back.

The worst case would be when the trustee blatantly takes money from the trust with no intention of returning it.

Claims Against a Trustee

If a beneficiary believes that a trustee is committing malfeasance or fraud, the first step is to request or demand an accounting of the trust from the trustee. A trustee is required to maintain accurate records (see right-hand box). If the trustee fails to provide an accounting — or fails to provide a legal justification why one does not need to be given — the beneficiary will have to seek judicial intervention.

What if the malfeasance or fraud occurred years before it is discovered? A trustee has a continuing duty, so the statute of limitations may not be an issue. A beneficiary’s attorney would make the argument that the statute of limitation has not expired while the trustee is continuing in the role.

What if the trustee claims that the statute of limitation has expired? A court would take seriously the argument that the claim is still valid or even consider an extension of law if there was blatant fraud. Case law research would provide further support and in most states, the statute of limitations for fraud is the later of when it occurred or when it was discovered. So, if the fraud was recently discovered, the claim would likely still fall within the time period for filing.

In addition, even if there was not fraud, an accounting of the trust could show the trustee used money for the trustee’s own benefit and the court would require the trustee to turn over the money.

Lastly, if the fraud is so egregious, it may arise to the level of a crime.

Speak with your attorney about these issues so you have a full understanding your rights in this matter.

Court: Student Athletes Aren’t Employees Under the Fair Labor Standards Act

Court: Student Athletes Aren’t Employees Under the Fair Labor Standards Act

Courts have consistently found that student athletes aren’t employees who are required to be paid under federal law — and a U.S. Appeals Court came to the same conclusion in a new case.

Facts of the Latest Case
The U.S. Court of Appeals for the Seventh Circuit has upheld a lower court decision finding that National Collegiate Athletic Association (NCAA) athletes aren’t “employees” of their colleges, and, therefore, aren’t entitled to receive the minimum wage rate for their services. (Berger v. National Collegiate Athletic Association, et al., CA 7, Dkt. No. 16-1558, 12/5/16)

The case began when two former student athletes from the University of Pennsylvania sued the school, the NCAA, and more than 120 other NCAA Division I universities and colleges alleging that student athletes are employees who are entitled to a minimum wage under the Fair Labor Standards Act (FLSA).

The two former students participated on the women’s track and field team. Like many collegiate athletic teams across the country, Penn’s women’s track and field team is regulated by the NCAA. The NCAA is a member-driven, unincorporated association of 1,121 colleges and universities. It’s divided into three divisions — Divisions I, II, and III — based roughly on the size of the schools and their athletic programs with Division I being the largest.

The Law

The FLSA requires employers to pay its employees a minimum wage rate of $7.25 per hour. (If state law has a higher minimum wage, an employer must pay the higher rate.) The law defines “employee” as “any individual employed by an employer” and broadly defines “employ” as “to suffer or permit to work.” Thus, to qualify as an employee for purposes of the FLSA, one must perform “work” for an “employer.” The FLSA doesn’t define the term “work.”

The Ruling

The Seventh Circuit noted that a majority of courts have issued rulings, albeit in different contexts, that student athletes aren’t employees. For example, most courts have held that student athletes aren’t employees in the workers’ compensation context and thus, aren’t entitled to compensation from their schools for injuries they suffer while playing their respective sports.

Note: More than 50 years ago, two courts reached the opposite conclusion that athletes were employees, but they did so, at least in part, because the student athletes in those cases were also separately employed by their universities. This was not the case in the current ruling.

The court stated: “The long tradition of amateurism in college sports, by definition, shows that student athletes — like all amateur athletes — participate in their sports for reasons wholly unrelated to immediate compensation.”

The court added that it had no doubt that student athletes spend a tremendous amount of time playing for their respective schools, as they’ve done for more than a hundred years under the NCAA but “student-athletic ‘play’ is not ‘work,’ at least as the term is used in the FLSA.”

DOL Handbook

In addition, the Seventh Circuit cited the Department of Labor’s Field Operations Handbook (FOH), which states that student athletes aren’t employees under the FLSA. The Department of Labor believes that the athletic activities are conducted primarily for the benefit of the participants as a part of the educational opportunities provided to the students by the school or institution, and are not work of the kind contemplated by the FLSA.

“We find the FOH’s interpretation of the student-athlete experience to be persuasive,” the court stated.

However, the FOH does state that students who participate in a work-study program and, for example, “work at food service counters or sell programs or usher at athletic events, or who wait on tables or wash dishes in dormitories in anticipation of some compensation” are “generally considered employees under the FLSA.”

4 Tips for Claiming Higher Education Credits

4 Tips for Claiming Higher Education Credits

The Internal Revenue Code offers two federal income tax credits for post-secondary education expenses: the American Opportunity credit, and the Lifetime Learning credit.

While these credits aren’t new, you should be aware of several recent developments that might affect your 2016 federal income tax return if you have students in your family who may be eligible for these credits. In light of these developments, here are four tips to help preserve and maximize your credits.

The Basics of Higher Education Credits

The American Opportunity credit can be up to $2,500 per eligible student per year. More specifically, the credit equals:

  • 100% of the first $2,000 of an eligible student’s qualified expenses, plus
  • 25% of the next $2,000 of qualified expenses.

So, the maximum annual credit for an eligible student is $2,500. Families with several eligible students can claim multiple American Opportunity credits. However, the credit can be claimed only for the first four years of a student’s undergraduate education. Also, this credit is phased out at higher income levels. Finally, 40% of the allowable American Opportunity credit is generally refundable, which means that amount can be collected even if the taxpayer has no federal income tax liability.

The Lifetime Learning credit can be up to $2,000 per year. More specifically, the credit equals 20% of the first $10,000 of an eligible student’s qualified expenses. However, only one Lifetime Learning credit can be claimed on your return, regardless of how many students in your family may be eligible for the credit. The Lifetime Learning credit is also subject to a phase-out rule that takes effect at much lower income levels than the American Opportunity credit phase-out rule.

1. Don’t Claim Computer Costs Unless Required by School

The U.S. Tax Court recently decided that the cost of a computer isn’t eligible for the American Opportunity credit unless the school specifically requires the student to have one. In this case, the taxpayer bought a computer for his college English class, because he needed the computer to prepare a paper while he was traveling. According to the Tax Court, the cost of the computer wasn’t a qualifying expenditure for the American Opportunity credit, because having a computer wasn’t a condition of the student’s enrollment. (Djamal Mameri v. Commissioner, T.C. Summary Opinion 2016-47)

2. Claim Credits When Tuition Is Paid (Not When It’s Billed or Due)

In another recent Tax Court decision, the taxpayer was a student at Arizona State University. In December 2011, the taxpayer prepaid his tuition for the spring semester of 2012. The tuition bill wasn’t actually due until January 2012. The taxpayer then claimed a $2,500 American Opportunity credit on his 2012 federal income tax return, based on the tuition for the 2012 spring semester. (Lucas McCarville v. Commissioner, T.C. Summary Opinion 2016-14)

The IRS disallowed the taxpayer’s credit for 2012, citing tax code provisions that stipulate that tuition payments made in the current year (2011 in this case) for educational sessions that begin in the first three months of the following year (2012 in this case) are eligible for the American Opportunity credit only in the current year (the year of payment, which was 2011 in this case).

The taxpayer had already claimed the maximum $2,500 American Opportunity credit on his 2011 return. So he was attempting to include the payment for the spring 2012 semester tuition (paid in 2011) on his 2012 return in order to claim a $2,500 American Opportunity credit for that year. The Tax Court agreed with the IRS, requiring credits to be claimed in the year in which a bill is paid, regardless of when it’s due.

3. Ask a Tax Pro to Help Reconcile Credits with Tuition Statements

Tax law requires post-secondary educational institutions to supply annual Form 1098-T, Tuition Statement, to taxpayers and the IRS. Taxpayers are supposed to use the amount of qualified tuition and related fees reported on these forms to calculate their allowable education credits. In turn, the IRS can use the same information to see if taxpayers got it right. But this common-sense provision won’t work the way it is supposed to anytime soon. As a result, there will be ongoing confusion about tuition and fee information reported on Form 1098-T.

For pre-2016 years, Form 1098-T issued by educational institutions could report either:

  • Payments received by the institution during the year for qualified tuition and related fees, or
  • Amounts billed by the institution during the year for qualified tuition and related fees.

Many institutions chose to report amounts billed, because that information was more easily retrieved from their accounting systems. However, the amount billed during the year isn’t what a taxpayer needs to know to calculate the allowable credit for that year. Instead, taxpayers need to know the amount paid during the year. Therefore, the information reported on Form 1098-T can be misleading to both taxpayers who claim education credits and to the IRS when reviewing the credits.

Congress attempted to correct this situation by requiring educational institutions to report qualified tuition and related fees paid during the year, starting with Form 1098-T issued for 2016. However, many institutions complained that they didn’t have time to reprogram their accounting systems to provide that information. The IRS caved by giving institutions the option to continue reporting amounts billed during the year on Form 1098-T issued for both 2016 and 2017.

Therefore, Form 1098-T issued for both 2016 and 2017 can report either:

  • The total amount billed by the institution during the year for qualified tuition and related fees, or
  • The total amount paid to the institution during the year.

Taxpayers must base their education credit calculations on amounts paid during the year, but Form 1098-T for 2016 and 2017 may not supply that information. As a result, reconciling credit amounts claimed on tax returns with tuition and fee amounts reported on Form 1098-T will continue to be problematic for many taxpayers.

4. Beware of Fraud Prevention Measures

Fraudulent claims for higher education tax credits have become common. So, Congress enacted two anti-fraud controls that apply to 2016 returns:

First, you can’t claim the American Opportunity credit for a student who doesn’t have a federal tax identity number (TIN) issued on or before the due date of the return for that year. For a U.S. citizen, the TIN is his or her Social Security number (SSN). Noncitizens can obtain TINs that aren’t SSNs.

Second, when you file your tax return, you must include the educational institution’s employer identification number (EIN) on Form 8863, Education Credits, for each student for whom you claim the American Opportunity or Lifetime Learning credit.

Need Help?

College is expensive. So, why not let Uncle Sam help make it more affordable via higher education tax credits? Contact us about navigating the rules to ensure you maximize the credits that are currently available under the tax law.

Year-End Reminder: Don’t Forget FSAs

Year-End Reminder: Don’t Forget FSAs

The holidays can be a joyous — but hectic — time of year. While you’re juggling shopping for gifts, decorating your home and planning get-togethers with friends and family, it’s easy to forget to spend any remaining funds in your Flexible Spending Accounts (FSAs) before New Year’s Day. However, if you fail to observe the “use-it-or-lose-it rule,” you could forfeit any money left over in your accounts, unless a special provision applies.

In addition to spending what’s left of last year’s FSA balance, November is the time of year when you need to decide on the types of spending/savings accounts and monthly contributions you want for 2017. Maintaining the status quo may seem like an easy choice — but is it the right choice? After reviewing the pros and cons of each, you may decide to take advantage of new benefits options offered by your employer, switch plans or contribute more (or less) to your account than in previous years.

Upsides for Employees and Employers

FSAs can be a win-win situation to employees and employers. From an employee’s perspective, FSAs are funded with pretax dollars, allowing individuals to reduce their overall income tax liability, as well as payroll taxes.

For example, if you’re in the 25% tax bracket and contribute $5,000 to your FSA, you save $1,250 (25% of $5,000) in income tax, plus as much as $382.50 in payroll tax (7.65% of $5,000), for a maximum total of $1,632.50. Distributions made for qualified expenses are exempt from tax. The use of FSAs can also help you maintain detailed records of expenditures.

From the employer’s point of view, there aren’t any payroll taxes due on the amounts employees contribute to their FSAs. Thus, if a firm has ten employees in the same situation as described above, it saves as much as $3,825 (10 × $ 382.50) a year. In addition, offering these tax-savings accounts may boost morale, while enabling a firm to attract and retain more top-quality workers.

Two Options

There are two main types of FSAs offered by employers:

Health care FSAs. Here, you arrange to have amounts deducted from your paycheck and deposited in your personal account. Then, the money can be used throughout the year to pay for qualified health care expenses. Generally, you’ll either use a debit card to pay for the expenses or submit receipts or other documentation for reimbursement. The account can be used for expenses incurred by an employee, a spouse, and dependents age 26 or younger.

Prior to 2013, there was no annual limit on annual contributions to a health care FSA. However, the Affordable Care Act (ACA) imposed a limit of $2,500, subject to inflation indexing. The limit was $2,550 in 2016 and increases to $2,600 for 2017.

The list of qualified expenses is extensive and generally mirrors what would be deductible as medical expenses on your tax return. Examples of expenses that you can pay with your health care FSA include:

  • Co-payments, co-insurance and deductibles,
  • Dental and vision care,
  • Prescription drugs and insulin,
  • Birth control pills and pregnancy tests,
  • Breast pumps,
  • Bandages,
  • Crutches and wheelchairs,
  • Acupuncture,
  • Chiropractors,
  • Psychological treatment, and
  • Physician-approved smoking-cessation programs.

An FSA can’t be used to cover health insurance premiums, however. As with medical deductions for income tax purposes, qualified expenses don’t include payments for over-the-counter drugs, vitamins, gym memberships or cosmetic surgery. Distributions paid for those items are taxable and subject to a 10% penalty if you’re under age 59½.

Don’t confuse health care FSAs with Health Savings Accounts (HSAs). These accounts are similar, but there are some critical differences.

Dependent care FSAs. These accounts operate just like health care FSAs, except that distributions must be used for qualified dependent care expenses. The funds may cover expenses of caring for a child under age 13 or a dependent who is physically or mentally incapable of self-care (for example, an elderly relative with Alzheimer’s Disease).

The annual limit for contributions to a dependent care FSA is $5,000. (This figure isn’t indexed for inflation.) Unlike health care expenses, which generally aren’t easily predictable, you’ll probably have a better idea of your dependent care expenses for the year. For instance, if you regularly pay $100 a week for care of your children with two weeks “off” for vacation, you might contribute the maximum $5,000 to your account.

For this purpose, qualified dependent expenses generally include those allowing you (and your spouse, if married) to work, such as the following:

  • Fees for day care centers or adult care facilities,
  • Amounts paid for babysitters and nursery schools,
  • Placement fees for a dependent care provider,
  • Summer day camp,
  • Before- and after-school programs, and
  • Wages paid to a housekeeper who also watches the children.

Conversely, you can’t use the FSA to pay for food, clothing and entertainment, child support, educational supplies, overnight camp, or cooking and cleaning services not provided by a caregiver. You also can’t just pay your older child for watching the younger kids out of your dependent care FSA.

Have you considered an HSA?

Health Savings Accounts (HSAs) are similar to IRAs that can be used to pay health care expenses before retirement. Individuals may deduct contributions to an HSA or an employer can make tax-deductible contributions to HSAs on behalf of its employees. As with FSAs, distributions for qualified expenses are exempt from tax.

Who’s Eligible?

You may be eligible for an HSA if:

  • You aren’t eligible for Medicare,
  • You participate in a “high-deductible health insurance plan,”
  • You don’t receive coverage under another health plan.

For 2017, a high-deductible plan for individuals has a deductible of at least $1,300 and an out-of-pocket maximum of $6,550. For families in 2017, a high-deductible plan has a deductible of at least $2,400 and an out-of-pocket maximum of $13,100. (These figures are the same as they were in 2016.)

How Much Can You Contribute?

The HSA contribution limits are $3,400 for individuals (up from $3,350 in 2016) and $6,750 for family coverage (the same as in 2016). In addition, a “catch-up contribution” of $1,000 is permitted for individuals age 55 or older. (This figure isn’t indexed for inflation.)

Finally, unlike a health care FSA, there’s no use-it-or-lose it rule for HSAs. The money contributed to your account is yours to keep.

Special FSA Provisions

It may not be necessary to empty out your FSAs by year end if your employer has authorized a special grace period or carryover. The grace period can last for up to 2½ months. For example, you might be allowed to use the balance in your accounts at the end of 2016 as late as March 15, 2017. Alternatively, an employer may allow you to carry over up to $500 of unused funds to next year. But any excess is then forfeited.

Note that this is an “either-or” proposition. An employer can allow employees to benefit from either the grace period or the carryover rule — but not both.

Year-End Spending and Budgeting Strategies

If you have a balance in your FSAs and must use the funds before year end or lose them, consider accelerating elective expenses you had earmarked for 2017. For example, if you were intending to buy new eyeglasses next year, order them before year end. Similarly, you could reschedule a physical exam or a dental cleaning from January to December. However, with medical expenses, you rarely have control over the timing of most items.

It’s also critical to make a reasonable estimate of your costs for next year. As mentioned above, this may be relatively easy to do for dependent care expenses, especially if your costs are fixed. For a health care FSA, look back at your past history to get a rough idea of your annual out-of-pocket costs and factor in anticipated expenses, such as a surgery for a chronic hip problem or prescription sunglasses. Many people choose to err on the high side, especially if their employer has authorized a grace period or carryover.

Ready, Set, Enroll

After you submit the necessary paperwork to your human resource department or enroll online, you can relax and enjoy the holidays. If you have questions about these accounts during the enrollment process, contact your tax and financial advisors.

True or False: Tax Returns Have Always Been Due on April 15th

True or False: Tax Returns Have Always Been Due on April 15th

The answer is FALSE!

Until 1955, returns were due on March 15. From 1913 to 1918, they were due even earlier, with taxpayers scrambling to meet a March 1 deadline.

In 1954, Congress changed the date to give IRS employees a break, because most returns were coming in near the deadline, swamping the agency. Lawmakers hoped a later deadline would encourage taxpayers to file earlier.

No such luck. Human nature being what it is, returns continued to flood the agency right up to the deadline. In recent years, about 20 percent of returns are filed in the last week of the filing season and the IRS reports that 10 million more taxpayers request extensions.

And a few years ago, the IRS made it even easier to get an extension. Most taxpayers who need more time to file their returns are granted an automatic six month extension, without stating a reason or providing a signature. Here’s a rundown of how the rules have changed:

Old Rules: Taxpayers could obtain an automatic four-month extension from April 15th to August 15th by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Then, those who needed more time had to send another form to the IRS by August 15th. But second requests weren’t automatically granted. Form 2868 required taxpayers to provide a reason why they needed more time. If a request was granted, a taxpayer could get another two months to file, until October 15th.

New Rules: Taxpayers can now request an automatic six-month extension to file. To get the extra time, you only need to file the new Form 4868 by April 15th. This gives taxpayers until October 15th, eliminating the need to interrupt their August vacations to think about taxes.

(However, if the dates fall on a weekend, taxpayers are given until the next business day to file.)

FBI Case Exposes Massive Telefraud Scheme

FBI Case Exposes Massive Telefraud Scheme

Do you dread getting phone calls from unfamiliar sources? It seems that callers are more likely to be aggressive solicitors, pushy telemarketers or even devious con artists than legitimate business people. Criminals typically target the elderly, disabled people or immigrants, threatening them with fines, penalties or deportation if they don’t make payments to the callers. In some cases, unsuspecting victims lose their entire life savings.

The FBI recently exposed a telephone scam involving dozens of individuals and entities that were indicted by a grand jury in Texas. The defendants were allegedly involved in a transactional organization that victimized tens of thousands of U.S. residents through frauds that caused hundreds of millions of dollars in losses.

Fraud by Phone

Unfortunately, telefraud remains a common and persistent problem in this country. Victims are often reluctant to report such fraud, due to embarrassment and/or fear. So, any statistics are likely to underestimate its true prevalence.

Elderly people represent an estimated 80% of the victims of such scams — a disproportionate amount of the population, according to recent research by the Federal Trade Commission (FTC). They’re attractive to scammers who assume that they’re trusting, too polite to hang up or easily duped. What’s more, senior citizens may be sitting on a sizable retirement nest egg.

Several branches of the federal government — including the IRS, the FBI and the FTC — have established websites that provide information about fraud detection and reporting scams. Ultimately, however, it’s important to use common sense and handle unknown callers with a healthy dose of skepticism.

How to Handle Suspect Calls

The FTC has some concrete advice to follow when a telemarketer calls. Ask yourself the following questions:

Who’s calling…and why? By law, telemarketers must tell you that they’re making a sales call, the name of the seller and what they’re selling. If you don’t hear this information, get off the phone.

What’s the hurry? Fast talkers using high-pressure tactics could be hiding something. Take your time. Most legitimate businesses are willing to provide written information about an offer before asking you to commit to a purchase.

If it’s free, why do I have to pay? Be suspicious if you’re asked to pay to redeem a prize or gift. Free is free. If you have to pay, it’s a purchase — not a prize or a gift.

Why do I have to “confirm” my account information? Some callers have your billing information before they call you. They may be trying to get you to say, “OK,” so they can claim you approved a charge.

What time is it? Legally, telemarketers can call only between 8 a.m. and 9 p.m. A seller calling earlier or later is ignoring the law.

Do I want to stop these calls? If you don’t want a business to call you again, say so and register your phone number on the National Do Not Call Registry. If they call back, they’re breaking the law. Of course, they still may not be deterred, so follow up with the FTC.

Case Facts

The FBI recently unsealed its indictment against 61 individuals and entities that were charged in connection with the massive telefraud scheme. Currently, 20 individuals have been arrested, while 32 individuals and five call centers in India have been charged. An additional U.S.-based defendant is in the custody of immigration authorities.

The defendants are charged with conspiracy to commit identity theft, impersonation of an officer of the United States, wire fraud and money laundering. One defendant has been separately charged with passport fraud.

“The indictment we unsealed and the arrests we made today demonstrate the Justice Department’s commitment to identifying and prosecuting the individuals behind these impersonation and telefraud schemes, who seek to profit by exploiting some of the most vulnerable members of our communities,” said Assistant Attorney General Leslie R. Caldwell in a press release. “This is a transnational problem, and demonstrates that modern criminals target Americans both from inside our borders and from abroad. Only by working tirelessly to gather evidence, build cases and working closely with foreign law enforcement partners to ensure there are no safe havens can we effectively address these threats.”

According to the press release, the defendants perpetrated a sophisticated scheme organized by conspirators in India, including a network of call centers in Ahmedabad. Using information obtained from data brokers and other sources, the call center operators allegedly called potential victims while impersonating IRS or U.S. Citizenship and Immigration Services agents. These call center operators would threaten arrest, imprisonment, fines or deportation if the victims didn’t pay the requested taxes or penalties.

The Mechanics

When someone agreed to make payment, the call center would then immediately turn to a network of U.S.-based co-conspirators to liquidate and launder the extorted funds as quickly as possible, using prepaid debit cards or wire transfers. Prepaid debit cards were often registered through misappropriated information of identity theft victims. Wire transfers were handled by associates using fake names and fraudulent IDs.

To direct funds into accounts of U.S.-based individuals, the co-conspirators allegedly used “hawalas.” With these, money is transferred internationally outside of the formal banking system. According to the indictment, the co-conspirators kept a percentage of the proceeds for themselves, but they weren’t aware of the illicit nature of the operation.

The Victims

According to the indictment, one of the call centers reportedly extorted $12,300 from an 85-year-old victim in San Diego by threatening her with arrest if she didn’t pay fictitious tax violations. On the same day that she was scammed, one of the U.S defendants used a reloadable debit card loaded with her funds to purchase money orders in Texas.

In another instance, the defendants extorted $136,000 from a victim in Hayward, Calif. The scammers called this person multiple times over a period of 20 days, fraudulently representing to be IRS agents and demanding payment for alleged tax violations. The victim was instructed to purchase 276 stored-value cards, which the defendants then transferred to reloadable debit cards. Part of the victim’s money ended up on cards, which were activated by using stolen personal information.

At times, the call center operators would offer small short-term loans or advise targets that they were eligible for grants. Then the conspirators would request a “good faith deposit” to demonstrate the ability to pay back the loan, or payment of a fee for processing the grant. Victims never received any money after making the requested payment.

The Department of Justice has established a website to provide information about the case to victims, as well as the general public. Anyone who believes they have been scammed, or is a victim of fraud or identity theft relating to another telefraud, may contact the FTC at this website.

Protect Your Assets

Telefraud is ongoing and prevalent. Every year, scammers seem to get craftier and bolder with telephone fraud schemes. Regardless of your station in life, you can’t be too careful when you’re answering the phone. If you receive a call from an unfamiliar number, evaluate the caller with skepticism and common sense.

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Debt or Equity? New Guidance Helps You Decide

Debt or Equity? New Guidance Helps You Decide

Corporations can generally deduct interest on debts for federal tax purposes. A valid obligation exists if the parties intended to create a debt, and the debt is enforceable and unconditional. In contrast, a capital contribution is a direct or indirect contribution of cash or other property to the capital of a business entity. Generally, a contribution to the capital of a corporation isn’t treated as taxable income to the corporation, and the contributor can’t deduct the payment for tax purposes.

The issue of whether certain corporate instruments should be classified as debt owed by the corporation or as an equity interest in the corporation (the equivalent of stock) has been around for many decades. Internal Revenue Code Section 385, which was put in place in 1969, authorizes the IRS to issue regulations to address this question. However, no final regulations have ever been issued. So the debt vs. equity issue has evolved based on court decisions issued over the years.

There are two recent developments on this issue: 1) a recent U.S. Tax Court decision, and 2) long-awaited Sec. 385 regulations that will generally take effect for tax years ending on or after Jan. 19, 2017. Here are the details.

8 Factors to Consider

If the American Metallurgical Coal decision is appealed, that taxpayer’s fate will be in the hands of the U.S. Court of Appeals for the Fifth Circuit. That court has identified the following factors to consider when distinguishing bona fide debt from a capital contribution:

1. The names given to the documents purporting to establish the debt,
2. The presence (or absence) of a fixed maturity date,
3. The right to enforce the payment of purported debt principal and interest,
4. The failure of the purported borrower to pay amounts due on time or seek a postponement,
5. The status of the purported debt in relation to debt owed to other corporate creditors (if the purported debt is last in line, it indicates an equity interest),
6. The intent of the parties,
7. The purported borrower’s ability to obtain loans from outside lending institutions, and
8. The extent of the purported creditor’s participation in management of the purported borrower.

Court Decision

In a recent decision, a corporate subsidiary of a U.S. corporation purchased a partnership interest from a Liberian corporation in exchange for a 10-year note. The note had a fixed interest rate of 12%. It also provided for additional interest based on cash flow from the partnership interest.

At the time of the purported purchase, the taxpayer’s corporate subsidiary had no assets and required an advance of the entire purchase price from the seller (seller financing). In reality, the purported fixed interest payments were solely dependent on cash flow from the partnership interest (the asset that was purportedly purchased with the seller financing). The terms of the note were later amended to provide for a reduced interest rate.

The IRS denied the taxpayer’s interest expense deductions, claiming that the purchase of the partnership interest by the subsidiary was financed with equity rather than debt. In other words, the partnership interest was contributed by the Liberian corporation to the capital of the subsidiary.

The court agreed, holding that the parties created the transaction to reduce their respective tax liabilities and didn’t create a bona fide debtor-creditor relationship. (American Metallurgical Coal Co., TC Memo 2016-139.)

New IRS Regulations

The IRS has never issued final regulations under Internal Revenue Code Sec. 385 even though it has been around since 1969. However, in corporate inversion transactions (which have become popular amid heavy criticism from some quarters), multinational corporations often use a technique called “earnings stripping” to minimize U.S. taxes. Specifically, the taxable income of the domestic corporation is stripped away by payments of deductible interest to the new foreign parent or one of its foreign affiliates domiciled in a country with lower tax rates. Needless to say, the IRS doesn’t like this strategy.

In April 2016, the IRS issued proposed regs to clarify when to treat an instrument as corporate debt or corporate equity in certain transactions between related corporations. After receiving numerous comments, the IRS issued final and temporary regulations in October 2016.

The new regulations are included in a Treasury Decision, which is a daunting 518 pages long. But, in a nutshell, they essentially restrict the ability of corporations to engage in earnings stripping by treating financial instruments that are purported to be corporate debt as corporate equity in certain circumstances involving loans between related corporations. In addition, the new regulations require borrowing corporations that claim interest expense deductions for certain loans from related corporations to provide documentation of the loans.

Because the ability to minimize income tax liabilities through the issuance of related-party financial instruments isn’t limited to cross-border scenarios, the new regulations also apply to related U.S. affiliates of a corporate group. The updated rules generally go into effect for tax years ending on or after Jan. 19, 2017, subject to certain transition rules.

Limited Scope

The debt vs. equity issue has heated up. But most of the heat focuses on purported debt transactions between related corporations, especially when the purported lender is a foreign corporation. Therefore, many corporations won’t be affected by the new regulations. If you have questions or want more information on this important issue, contact your tax advisor.

© Copyright 2016. All rights reserved.
Brought to you by: Caler, Donten, Levine, Cohen, Porter & Veil, P.A.

Employers: You Are Now Required to Use the New Form I-9

Employers: You Are Now Required to Use the New Form I-9

Employers must now use the new version of Form I-9, “Employment Eligibility Verification.”

U.S. Citizenship and Immigration Services (USCIS) issued the new version on November 14, 2016. Employers had until January 22, 2017, to begin using the new version of Form I-9. Through January 21, 2017, employers could still use the version of Form I-9 dated March 8, 2013.

The instructions have been separated from the November 14, 2016 form, in line with other USCIS forms, and include specific instructions for completing each field. Other changes to the form include:

  • The addition of prompts to ensure information is entered correctly,
  • The ability to enter multiple preparers and translators,
  • A dedicated area for including additional information rather than having to add it in the margins, and
  • A supplemental page for the preparer/translator.

USCIS says that the new version of Form I-9 is easier to complete on a computer. Enhancements include drop-down lists and calendars for filling in dates, on-screen instructions for each field, easy access to the full instructions, and an option to clear the form and start over. When the employer prints the completed form, a quick response (QR) code is automatically generated, which can be read by most QR readers.

The expiration date for the new version of Form I-9 is August 31, 2019.

Spotlight On Business Tax Trends

Spotlight On Business Tax Trends

The Joint Committee on Taxation (JCT) is a nonpartisan Congressional committee that, among other things, assists in the analysis and drafting of proposed federal tax legislation and prepares reports that interpret newly enacted federal tax legislation. The JCT recently issued the Overview of the Federal Tax System as in Effect for 2016. Here are the details of that report, including some interesting trends about business taxes.

Background on Business Taxes

The federal income tax treatment of a domestic business operation — one that’s domiciled in the United States — depends on how it’s set up. A business’s “choice of entity” has broad implications, including:

  • Whether there’s an entity-level federal income tax,
  • How much flexibility (if any) the entity has to allocate its taxable income among its owners,
  • Whether individual owners are subject to the self-employment tax, and
  • Whether the owners are liable for the entity’s debts and the entity’s access to capital.

When deciding how to set up a business, you have five basic options:

1. Sole proprietorship. This is the most basic way to operate a business. For tax and legal purposes, a sole proprietorship is one and the same as its owner. So, a sole proprietorship’s tax results are reported on the owner’s personal return. A major downside with operating a sole proprietorship is that the owner’s personal assets are generally exposed without limitation to any liabilities related to the business. Sole proprietors also owe self-employment tax on net income from a nonrental business.

2. C corporation. Businesses that incorporate are treated as separate legal and taxable entities apart from their owners. So, a C corporation owes corporate-level federal income tax on its taxable income (and possibly state income tax, too). If after-tax amounts are distributed to shareholders, the distributions may constitute dividends that are taxed again at the shareholder level, resulting in double taxation.

A major advantage of C corporation status is that the shareholders’ personal assets are generally protected from liabilities related to the corporation’s activities. In addition, C corporations face no tax-law restrictions on the type and number of shareholders it can have, the citizenship of its shareholders or the classes of stock it can issue.

3. S corporation. This refers to a closely held corporation that elects to be treated as a pass-through entity for federal income tax purposes. While an S corporation is still a separate taxable entity from its owners and must file a corporate return (on Form 1120-S), pass-through status means the S corporation’s income, gains, losses, deductions and credits are passed through to its shareholders and reported on their returns. In general, there is no entity-level federal income tax on an S corporation’s earnings.

Several requirements must be met to qualify for S corporation status: The corporation must be a U.S. entity, it can have only one class of stock, and there are limitations on the type and number of shareholders it can have. As with a C corporation, the personal assets of an S corporation’s shareholders are generally protected from liabilities related to the S corporation’s activities.

4. Partnership. This is a joint venture between at least two partners. Partnerships enjoy the benefits of pass-through tax status, including substantial flexibility to arrange transactions to reduce taxes. A partnership’s income, gains, losses, deductions and credits are passed through to its partners and reported on their returns. However, a partnership can (within limits) make disproportionate allocations of tax items (so-called special allocations).

For example, a 25% partner can be allocated 50% of partnership tax losses during the start-up period when losses are expected and then 50% of partnership income when the partnership goes into the black. After making up for the earlier special allocation of losses, the partner’s share of income can go back to 25%.

There’s no partnership-level income tax. In addition, there aren’t any tax-law restrictions on who can be a partner. In many cases, partnerships and partners can find ways to swap cash and other assets back and forth without triggering taxable gains or other adverse tax consequences.

The extent of a partner’s liability for debts of the business, if any, depends on the type and structure of the partnership. With a generalpartnership, all partners are exposed to partnership liabilities without limitation. But with a limited partnership, limited partners aren’t exposed to partnership liabilities (unless they guarantee them). General partners are exposed without limitation to partnership liabilities unless another partner guarantees them.

5. Limited liability company (LLC). Single-member LLCs (SMLLCs) have only one member (owner) and are generally disregarded for federal income tax purposes. The tax items of a disregarded SMLLC owned by an individual taxpayer are reported on the owner’s personal return (same as with a sole proprietorship). The tax items of a disregarded SMLLC owned by a corporation are reported on the corporation’s return (same as with an unincorporated branch or division).

Multimember LLCs have more than one member (owner) and are generally treated as partnerships for federal income tax purposes. As such, they have the same tax advantages as partnerships.

LLC members (owners) generally aren’t personally liable for the LLC’s debts, unless they guarantee them.

Important note: LLCs can elect to be treated as corporations for federal income tax purposes, but that’s rarely done unless it’s followed by an election to be treated as an S corporation.

JCT Findings

The JCT report includes statistics on the number of federal income tax returns filed by the different types of business entities and the share of federal income taxes they pay. The statistics cover 1978 through 2013 in five-year increments.

Here’s a summary of the returns filed for each of the five types of business entities:

YearSole proprietorships*C corporationsS corporationsPartnerships*
19788.9 million1.9 million479,0001.2 million
198310.7 million2.4 million648,0001.5 million
198813.7 million2.3 million1.3 million1.6 million
199315.8 million2.1 million1.9 million1.5 million
199817.4 million2.3 million2.6 million1.9 million
200319.7 million2.1 million3.3 million2.4 million
200822.6 million1.8 million4.0 million3.1 million
201324 million1.7 million4.3 million3.5 million

* The statistics for sole proprietorships include SMLLCs taxed as sole proprietorships but exclude farms. The statistics for partnerships include LLCs taxed as partnerships.

The following trends have been observed from the JCT report:

  • The number of businesses operating as sole proprietorships (or as SMLLCs treated as sole proprietorships for tax purposes) has increased by 270% over the last 35 years.
  • The number of businesses operating as C corporations has actually declined over the last 35 years. This is a reaction to the 35% federal income tax rate that profitable C corporations have to pay and the dreaded double taxation threat that they face.
  • The number of businesses operating as S corporations has increased by almost 900% over the last 35 years. This may be because S corporations currently receive much more favorable treatment than C corporations under the Internal Revenue Code.
  • The number of businesses operating as partnerships and as LLCs taxed as partnerships has almost tripled over the last 35 years. This reflects the fact that partnerships get favorable treatment under the Internal Revenue Code.

The JCT report also includes statistics showing federal income tax receipts by type of entity as a percentage of total receipts. Corporate receipts over the 35-year period dropped from 15% to 10.6%, which is nearly a 30% drop. The drop is even more dramatic looking back to 1952, when the corporate income tax generated 32.1% of federal income tax revenue.

Implications for Business Tax Reform

The rise of sole proprietorships and pass-through entities (S corporations, partnerships and LLCs) shows that an increasing share of economic activity is being conducted by these forms of businesses. It also shows that an increasing share of business income is being reported on individual tax returns rather than on corporate returns where it’s potentially subject to high rates and double taxation. Some commentators have speculated that this makes tax reform even more challenging because there’s not a clear separation between business and individual taxation. In other words, it’s difficult to reform business taxes without also reforming personal taxes (and vice versa).

Business tax reform proposals often focus on the corporate federal income tax and the fact that the U.S. statutory rate (35% for a highly profitable corporation) is significantly higher than the rates in most other developed countries. Reform proposals tend to call for lower corporate tax rates and a broader tax base. However, some business groups assert that lowering the corporate rate without a corresponding decrease in the individual rates on pass-through business income would be unfair.

Tax Reform Proposals

Several business tax reform proposals have been floated as attempts to deal with the friction between corporate income tax rates and individual income tax rates on pass-through business income. These proposals include:

  • Taxing pass-through entities with gross revenues in excess of $50 million as C corporations.
  • Eliminating the double taxation threat by taxing C corporation income only at the corporate level. As a result, corporate dividends would be tax-free to recipients.
  • Establishing a “Growth and Investment Tax” that would tax all business income (regardless of the type of entity used by the business) at 30% and taxing dividends and capital gains at a flat 15% rate.
  • Providing pass-through entities with more generous tax breaks while leaving the rate system unchanged.
  • Establishing a deduction equal to 20% of active business income for certain small businesses, and/or allowing this deduction for pass-through entities in conjunction with lowering the corporate rate.

As a result of the election, we’re likely to see major tax changes in 2017. Congressional Republicans are eager to implement tax reforms within the first 100 days after President-elect Trump’s inauguration. At this point, however, it’s uncertain exactly which changes will make it through Congressional negotiations — or when the changes will go into effect.

Uncertainty Ahead

From high corporate tax rates to double taxation, today’s existing tax laws generally treat C corporations unfavorably. Over the last 35 years, this situation has led many businesses to rethink how they’re operated and switch to alternative pass-through structures, including S corporations, partnerships and LLCs. Additionally, many sole proprietorships have shied away from incorporating to avoid unfavorable tax treatment.

However, corporate tax reform could change the trends reported by the JCT in the future. As you plan for next year, discuss the latest tax reform proposals with your tax advisor. It’s important to be nimble and knowledgeable in today’s evolving tax environment.


© Copyright 2016. All rights reserved.
Brought to you by: Caler, Donten, Levine, Cohen, Porter & Veil, P.A.

IRS Extends Deadline to Provide 2016 ACA Forms to Recipients

IRS Extends Deadline to Provide 2016 ACA Forms to Recipients

The IRS announced that it is extending one of the deadlines for providing 2016 Affordable Care Act (ACA) information statements to recipients.

Specifically, the due date for furnishing to individuals the 2016 Form 1095-B (Health Coverage) and the 2016 Form 1095-C, (Employer-Provided Health Insurance Offer and Coverage) is extended from January 31, 2017, to March 2, 2017.

Q&As about the Process and Extended Due Date

What about filing these statements with the IRS? Is there an extension? No. The deadline for filing the forms with the IRS is not being extended. The IRS has determined that there’s no similar need for additional time for employers, insurers, and other providers of minimum essential coverage to file 2016 Forms 1094-B, 1095-B, 1094-C and 1095-C with the IRS. The filing deadline for these returns remains February 28, 2017, if not filing electronically, or March 31, 2017, if filing electronically.

However, the extension in IRS Notice 2016-70 doesn’t affect the provisions regarding automatic and additional extensions of time for filing information returns, which remain available under the normal rules by submitting Form 8809, Application for Extension of Time to File Information Returns.

Who must furnish these statements? Health insurance issuers, sponsors of self-insured health plans, government agencies that administer government-sponsored health insurance programs, and other providers of “minimum essential coverage” must generally file annual returns reporting information for each individual for whom such coverage is provided. An entity filing an information return reporting minimum essential coverage to the IRS must also furnish a written statement to each individual listed on the return that shows the information that must be reported to IRS for that individual.

The ACA also requires applicable large employers (generally, employers with at least 50 full-time employees, including full-time equivalent employees in the previous year) to provide the individuals with Form 1095-C.

Why are these statements provided to employees? The purpose of this reporting is to allow taxpayers to establish, and for the IRS to verify, that the taxpayers were covered by minimum essential coverage and their months of enrollment during a calendar year.

Why is the deadline being extended? The IRS decided to extend the deadline following consultation with stakeholders and the Department of the Treasury, as a substantial number of employers, insurers and other providers of minimum essential coverage need additional time. The extension is automatic.

Do businesses and others need to do anything to take advantage of the extension? No. The extension is automatic. No documentation needs to be submitted to receive the extension from the IRS.

Penalty Relief

The IRS is also providing the same penalty relief that it provided with respect to 2015 returns. IRS Notice 2016-70 extends the good-faith penalty relief from penalties for failure to timely furnish and file the information returns from the 2015 tax year to the 2016 tax year. In determining good faith, the IRS will take into account whether an employer or other coverage provider made reasonable efforts to prepare for reporting the required information to the IRS and furnishing it to employees and covered individuals.

Examples of good faith include gathering and transmitting the necessary data to an agent to prepare the data for submission to the IRS, or testing the ability to transmit information to the IRS. In addition, the IRS will take into account the extent to which an employer or other coverage provider is taking steps to ensure that it will be able to comply with the reporting requirements for 2017.

The IRS is encouraging employers and other coverage providers that don’t meet the relevant due dates to still furnish and file. The IRS will take such furnishing and filing into consideration when determining whether to abate penalties for reasonable cause.

The Future

IRS Notice 2016-70 states the tax agency doesn’t anticipate extending this transition relief — either with respect to the due dates or with respect to good faith penalty relief — to reporting for 2017. However, as indicated in presidential election campaign promises, there could be major changes to the ACA under the Trump administration.

If you have questions about your ACA responsibilities under the Affordable Care Act, contact your tax, payroll or employee benefits advisor.

© Copyright 2016. All rights reserved.
Brought to you by: Caler, Donten, Levine, Cohen, Porter & Veil, P.A.