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US Tax Issues: Deadline looms for 2012 tax return

With the automatic extension of time until June 17, 2013 in which to file your 2012 US tax return looming individuals must decide whether they can file in time or obtain an automatic extension of time until October 15, 2013 in which to file their 2012 US tax return. It is important to remember that your return must be received by June 17, 2013. The IRS will not recognise a foreign postal stamp as being timely filed.

President Obama’s 2014 Budget Call for Higher Taxes On the Wealthy: Despite obtaining a sizable tax increase on the wealthy just five months ago President Obama wants more. The proposal is to have individuals with gross income over $2 million pay a 30 percent minimum tax commencing in 2014, with a phase in for individuals with gross income between $1 million and $2 million. Individuals with IRAs, 401(k)s and other pension plans would be barred from having over $3,400,000 in their pension plan. Lastly, single individuals with gross income over $185,000 and married filing joint with income over $225,000 (President Obama’s revised definition of who is wealthy) would have the tax benefit of itemised deductions capped at 28 percent. In addition, there would be a tax of 11.6 percent on tax-exempt interest and the value of employer provided health coverage.

IRS and the Tea Party: As you have likely heard or read that head of the IRS was recently fired as the result of actions taken by IRS personnel based in Cincinnati with respect to Tea Party applications for exempt status. An article in the New York Times, who interviewed retired IRS agents who worked in the group and attorneys who had contact with the group were of the opinion that nothing nefarious had taken place. The explanation was that some, if not all, of the IRS personnel dealing with this matter were actually ignorant of the law that they were attempting to enforce.

Quiet Tax Filings: Participation in an IRS amnesty programme requires an individual to forfeit five percent to 27.5 percent of the highest unreported amount in a foreign financial account, in addition to the normal penalties and interest. Many taxpayers have decided not to volunteer for the amnesty programme and have simply filed amended tax returns without the IRS imposing back penalties and interest. After several thousand individuals did so it finally caught the IRS’s attention. Now, amended tax returns are getting extra scrutiny.

District Court Rules for Incompetent Tax Preparers: The IRS initiated a programme in 2012 that required tax return preparers who were not CPAs, attorneys or enrolled agents to pass a competency test and to take continuing education. With tens of thousands of people flunking the test a suit was filed against the IRS and a District Court held that the IRS did not have the authority to mandate a competency test. The Appeals Court denied an IRS request to lift the injunction but did agree to hear the case on an expedited basis.

Internet Sales Tax: A recently passed Senate Bill that President Obama endorses requires sellers to collect state sales taxes from buyers living in states with sales taxes. The bill creates a simplified structure for satisfying various states laws and tax rates. The House is not yet ready to act on this bill and as the effective date is six months after enactment, this likely will not become law until 2014.

2015 Tax Changes: Senator Baucus, the head of the Senate Finance Committee, announced he will retire next year and it is expected that revamping the tax code will be his legacy. With the ongoing call for additional revenue it is likely that the preferential 15 percent and 20 percent tax rate for long term capital gains and qualified dividends will disappear and that these items will again be taxed as ordinary income.

Sequester: The entire IRS will be closed on May 24, June 14, July 5, July 22 and August 30. All employees will be on unpaid leave.

Divorces and Dependent Children: It is not unusual for divorced parents to both claim their children as dependents. The IRS will not act as arbiter in these cases and will likely rule in favour of the custodial parent. If the non-custodial parent intends to claim the children as dependents this should clearly be stated and agreed to in the divorce decree. In addition, the custodial parent must sign and date Form 8832 certifying that the children are not being claimed as dependents and the Form 8832 must be included in the non custodial parent’s tax return.

Unreported Foreign Bank Accounts: To date, the IRS has investigated banks in Switzerland, Liechtenstein, Israel, India and Hong Kong for assisting US citizens in hiding their money from the IRS. A Federal court has recently approved a summons to the CIBC First Caribbean Bank that has a corresponding account with Wells Fargo.

Autofill Act of 2013: The Act would create a voluntary tax filing programme that would allow individuals to log in to a secure IRS website and download a tax form automatically populated with information the IRS collects from employers, social security and financial institutions. At first glance this programme would likely work for more than 75 percent of US taxpayers. The IRS has gotten a copy of your Form W-2 so they know who you were employed by, how much you made and how much tax was withheld. Social Security knows your correct names and Social Security numbers. The Form 1099s give the IRS information regarding interest, dividends and capital gains and Form 1098 reports mortgage interest and likely real estate tax. What are left for most individuals are charitable contributions and medical expenses. Such a bill, if passed, would likely put entities such as H&R Block and other tax preparation services out of business.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of ETS Ltd, PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com

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Published June 04, 2013 at 9:00 am (Updated June 03, 2013 at 6:45 pm)

US Tax Issues: Deadline looms for 2012 tax return

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