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McFarlane Law

A Tax Law Firm - 480.991.0032

Is your Business Subject to a Transaction Privilege (Sales) or Use Tax Audit?

States are increasingly looking to audits and enforcement to raise much needed revenue, and Arizona is especially aggressive. The State is employing newly acquired technology and new audit methodologies to find delinquent or noncompliant business taxpayers. Auditors and supervisors are taking increasingly aggressive positions on tax matters and documentation requirements.

If this is a concern, or if you have been contacted by the ADOR, call
McFARLANE LAW – Your Tax Law Firm at T.480.991.0032

We represent businesses and individuals before the ADOR and all administrative levels, and before he Arizona Tax Court. We can help you better prepare for sales and use tax audits in the current tax climate. While you may wish to handle the matter yourself, there are significant advantages in hiring a tax attorney from the very beginning of your case. We have decades of experience dealing with the personalities and intricate procedures. Going alone and thinking your case will be resolved is a mistake. If you seek to streamline the audit process, call McFARLANE LAW. We can help you achieve better results.

14500 N. Northsight Blvd., Ste. 217
Scottsdale, AZ 85260
T. 480.991.0032 / e: [email protected]

The $10,000 Federal Tax Deduction Limit on Payments for State & Local Taxes

The Treasury Department and the IRS intend to propose regulations addressing the federal income tax treatment of certain payments made by taxpayers for which taxpayers receive a credit against their state and local taxes. The IRS does not like the fact that some state legislatures are trying to circumvent the tax deduction restriction.

Section 11042 of “The Tax Cuts and Jobs Act,” Pub. L. No. 115-97, limits an individual’s deduction under § 164 for the aggregate amount of state and local taxes paid during the calendar year to $10,000 ($5,000 in the case of a married individual filing a separate return). Normally those state or local tax payments are fully deductible on an individual’s Schedule A. However, with the new tax law, state and local tax payments in excess of the $10,000 limit are not deductible. This new limitation applies to taxable years beginning after December 31, 2017, and it sunsets January 1, 2026. This may affect many taxpayers who otherwise would have been able to file a Schedule A, Itemized Deductions, and claim greater state/local tax payments as well as other deductible expenses.

In response to this new limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay. The aim of these proposals is to allow taxpayers to characterize such transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes. If taxpayers claim additional state/local tax payments as “charitable contributions,” the IRS may disallow the deduction. This could open an audit.

In an attempt to curtail the legislative activity, the Treasury Department and the IRS intend to propose regulations addressing the federal income tax treatment of transfers to funds controlled by state and local governments (or other state-specified transferees) that the transferor can treat in whole or in part as satisfying state and local tax obligations. The proposed regulations will hopefully make clear that the requirements of the Internal Revenue Code, informed by substance over-form principles, govern the federal income tax treatment of such transfers. The proposed regulations will hopefully assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.

If you have a tax problem, contact McFARLANE LAW – A Tax Law Firm at 480.991.0032.

McFARLANE LAW, PLC
14500 N. Northsight Blvd., Ste. 217
Scottsdale, AZ 85260
[email protected] / www.taxlawaz.com

Considerations for Taxpayers Who Need to Amend a Return

Taxpayers who discover they made a mistake on their tax returns after filing can file an amended tax return to correct it. This includes changing the filing status and dependents, or correcting income, credits or deductions. What you may not know is that every amended return gets a set of eyes – this is different from filing your initial return, in which the computer scans the informational entries. By filing an amended return, you subject your return to a higher scrutiny, and therefore a greater likelihood that the return may be picked up for other items. So be aware of this process and potential for greater scrutiny, and be wise in your decision to amend. Here are some considerations:

    • Taxpayers should not file an amended return to fix math errors, because the IRS computers will correct those and send out a notice to the taxpayer.
    • Aside from math errors, taxpayers also do not need to amend their return if they forgot to include a required form or schedule. The IRS will mail a request to the taxpayer, if needed.
    • Taxpayers filing an amended return because they owe more tax should file Form 1040X and pay the tax as soon as possible. This will limit interest and penalty charges.
    • Wait to file an amended return until your initial return is processed. You have a three-year time limit to file for a refund. Generally, to claim a refund, taxpayers must file a Form 1040X within three years from the date they timely filed their original tax return or within two years from the date the person pays the tax – usually April 15 – whichever is later.

If you want or need to amend a return, it is best to discuss the matter with your tax professional.

Contact Tax Attorney Stephen McFarlane at McFARLANE LAW – A Tax Law Firm
T. 480.991.0032 or [email protected]

Missed the 2017 tax return filing or payment deadline? Here is what you need to do

The 2017 federal income tax-filing deadline has passed for most people who did not extend the filing date for the 2017 tax return. So, the people who still haven’t filed a return or an extension to file, and those who also haven’t paid their 2017 taxes (there is no extension permitted to late-pay the 2017 tax due) need to address their non-compliance. Failing to file a return (when required under the law) or pay the tax is a misdemeanor crime.

Didn’t file by April 18? There is no penalty for filing a late return after the tax deadline if a refund is due. Penalties and interest only accrue on unfiled returns if taxes are not paid by April 18. The IRS provided taxpayers an additional day to file and pay their taxes following system issues that surfaced early on the April 17 tax deadline. Anyone who did not file and owes tax should file a return as soon as they can and pay as much as possible to reduce penalties and interest. Contact your tax professional for assistance.

Filing soon is especially important because the late-filing penalty on unpaid taxes adds up quickly. Ordinarily, this penalty, also known as the failure-to-file penalty, is usually 5 percent for each month or part of a month that a return is late. It maxes-out at 25%, but quickly, so file sooner than later. Again, your tax professional can assist you.

If a return is filed more than 60 days after the April 18 due date, the minimum penalty is either $210 or 100 percent of the unpaid tax, whichever is less. This means that if the tax due is $210 or less, the penalty is equal to the tax amount due. If the tax due is more than $210, the penalty is at least $210.

Is there penalty relief? In some instances, a taxpayer filing after the deadline may qualify for penalty relief. If there is a good reason for filing late, an explanation should be attached to the return. Contact your tax attorney for optimal language to use in that explanation.

Taxpayers who have a history of filing and paying on time may qualify for “first-time penalty abatement” relief. A taxpayer will usually qualify for this relief if they haven’t been assessed penalties for the past three years and meet other requirements. Contact your tax attorney to assist with this relief.

House-keeping items: Changing your withholding. Because of the 2017 tax changes taking effect in 2018, if you are a Form W-2 employee, including if you have other sources of income, you need to perform a paycheck checkup now. Doing so now (it is already May!) will help avoid an unexpected year-end tax bill and possibly a penalty. It may also reveal you are withholding too much tax. Contact your tax professional for advice as to changing your withholding.

Do you owe taxes or need to make installment payments? If you owe taxes and cannot full pay, but need to pay over an extended period of time, contact your tax attorney for assistance in obtaining the best payment arrangement.

Do you need to fix an error on a return? After filing your return, if you find an error or omitted something from their return (a late arriving or revised Form 1099), you may need to amend your return. This is not preferable and you should seek advice from an experienced tax attorney. You don’t want to file an amended return as such amended returns are scrutinized by IRS agents. Often, an amended return is not necessary if a taxpayer makes a math error or neglects to attach a required form or schedule. Normally the IRS will correct the math error and notify the taxpayer by mail. Similarly, the agency will send a letter requesting any missing forms or schedules. If you need to file an amended return, Form 1040X, Amended U.S. Individual Income Tax Return, must be filed by paper. Those expecting a refund from their original return, should not file an amended return before the original return has been processed. File an amended tax return to change the filing status or to correct income, deductions or credits shown on the originally-filed tax return. It takes the IRS up to 16 weeks for processing amended returns.

Remember the IRS will not call you – they write correspondence. If you receive a telephone call from a person claiming to be an IRS agent, it is a scam. Do not speak with that person and insist they communicate with you by mail. If you receive mail from the IRS and need help responding to an IRS notice or letter, call your tax attorney for advice and an analysis of your case facts. While the IRS notice or letter might explain the reason for the contact and give instructions on how to handle the issue, you should seek experienced legal tax advice on how to respond. Do not delay as there are often short response periods, that if missed, curtail any right to contest the proposed action. Do not rely solely on the internet for answers. The IRS procedures are intricate. An improper response can result in IRS taking draconian actions that could have been avoided, or lessened.

Contact McFARLANE LAW–A Tax Law Firm to help resolve your tax issues.
T. 480.991.0032 or e-mail: [email protected]

How Long Should I Maintain My Tax Records?

I am often asked, “how many years of records do I need to keep?” As a general rule, I advise clients to keep seven (7) years of tax records. Other records you may want to keep longer, for both tax and non-tax reasons. So, before you throw all of your tax documents up in the air to celebrate the passing of the 2017 Tax Season, put those documents and info in a safe and secure place.

The Three-Year and Six Year Limitations for the IRS to audit and assess more tax against you:

When we talk about tax documents, we’re talking about a signed copy of the return that you filed, along with W-2s, logs for mileage, 1099s, receipts for charity, receipts for unreimbursed business expenses, and any paperwork that supports your tax deductions or credits that you may have claimed on the return. This includes anything that you used to prove the state of your finances on your tax return. Put it in a folder(s) and store it in a file cabinet or a storage box.

Often with e-filing, tax return preparers do not require the taxpayer(s) to sign the actual return. Rather, an authorization to e-file is normally signed by the taxpayer(s) and the return is electronically “signed” and e-filed. It is good practice to review and sign a copy of the return that was e-filed for future reference or inquiries by a friendly IRS agent. Your tax attorney will appreciate that proper record-keeping as well.

So, the general rule states that the IRS can audit and assess additional tax up to three years from the date of filing (some states, like Arizona, have four (4) years to audit and assess). However, if you omit income (or state deductions that are disallowed by an IRS agent) that results in a tax deficiency in excess of 25% of the tax that you should have paid, the law allows the IRS to go back six (6) years from the date of filing.

If you are required to file, but do not file, a return at all, the law keeps that tax year open until a return is filed – either by the taxpayer(s) or the IRS may prepare a return for the taxpayer(s). If you file a fraudulent return, the statute also remains open until that tax year reporting is resolved.

The three-year time frame was put in place to benefit both you and the IRS. You can benefit from the 3-year timetable because you have a set amount of time to claim any tax refund that is owed to you. On the flip side, the IRS has three or six years to levy another tax if you made a mistake while reporting your income, depending on the degree of your “oversight.”

Other documents May Need to be Kept Longer

Some documents should be kept longer than seven years. For example, documents concerning a home purchase or business transaction should always be kept until the asset is disposed. You should also add the signed documents to that file supporting any additional capital investment that you do not write-off (“expense”) on your returns. These capital investments increase your cost basis in the asset, which you may have to prove-up in the future when you sell the asset. Such things like adding a new roof onto a structure or adding onto the structure itself. Other documents you should keep for seven years are stock account and retirement account documents. You should plan to keep your retirement account statements for seven years after the funds have been completely withdrawn. You should also hold on to your documentation that long if you claim a bad debt deduction or a loss on securities that you labeled as worthless.

How Does the TCJA Effect the 2018 Tax Year Inflation Adjustments

The Internal Revenue Service has updated the tax year 2018 annual inflation adjustments to reflect changes from the Tax Cuts and Jobs Act (TCJA). The tax year 2018 adjustments are generally used on tax returns filed in 2019, but it is good that you know about these changes now.

The tax items affected by TCJA for tax year 2018 of greatest interest to most taxpayers include the following dollar amounts:

  • The standard deduction for married filing jointly rises to $24,000. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,000; for heads of households, $18,000.
  • The TCJA reduced the personal exemption.The personal exemption for tax year 2018 is $0.
  • TCJA reduced tax rates for many taxpayers. The new tax rates are: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and a top rate of 37 percent.For tax year 2018, the highest tax rate will apply to married individuals filing jointly and surviving spouses with taxable incomes over $600,000, to single taxpayers and heads of households with incomes over $500,000, and to married taxpayers filing separately with incomes over $300,000.
  • The TCJA eliminates the limitation for itemized deductions.
  • The Alternative Minimum Tax exemption amount for tax year 2018 is greatly increased under TCJA. For tax year 2018, the exemption amount for single taxpayers is $70,300 and begins to phase out at $500,000, and the exemption amount for married couples filing jointly is $109,400 and begins to phase out at $1 million.
  • For estates of any decedent passing away in calendar year 2018, the basic exclusion amount is $11,180,000.

Certain items had minor adjustments. TCJA requires a different method for adjusting for inflation.

  • For 2018, the foreign earned income exclusion will be $103,900.
  • The maximum earned income credit amount will be $6,431 for taxpayers with 3 or more qualifying children, for 2018. Other earned income credit amounts are detailed in Revenue Procedure 2018-18.
  • For tax year 2018, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,300, but not more than $3,450. For self-only coverage, the maximum out-of-pocket expense amount is $4,550. For tax year 2018, participants with family coverage, the floor for the annual deductible is $4,550; however, the deductible cannot be more than $6,850. For family coverage, the out-of-pocket expense limit is $8,400 for tax year 2018. (Only the “$4,550” amount differs from what was in the IR-2017-178).

Items Unaffected By The TCJA

The dollar amounts for the following items remain unchanged under the new method for adjusting for inflation required by the TCJA:

  • For tax year 2018, the annual exclusion for gifts is $15,000.
  • For tax year 2018, the monthly limitation for the qualified transportation fringe benefit is $260, as is the monthly limitation for qualified parking.
  • For tax year 2018, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $114,000.

For calendar year 2018, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is $695.

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