Estimated Tax Payments

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Many of our clients find themselves burdened with a tax debt because they did not keep up on their Estimated Tax Payments (ETPs).  Most people think that ETPs are only for the self-employed.  But did you know that you may be required to make ETPs even if you are a wage earner and your employer withholds taxes from your pay?

According to IRS Form 1040-ES, “Estimated tax is the method used to pay tax on income that is not subject to withholding.”  You must pay estimated tax in 2012 if both of the following apply:

  1. You expect to owe at least $1,000 in tax for 2012, after subtracting your withholding and refundable credits.
  2. You expect your withholding and refundable credits to be less than 90% of the tax on your 2012 return or less than 100% of the tax on your 2011 return, whichever is smaller.

This is just the general rule. Special rules apply to farmers, fishermen, household employers, and higher income taxpayers.  The instructions for Form 1040-ES explain how to calculate the amounts of your ETPs and the due dates are as follows:

  • 1st Payment – April 17
  • 2nd Payment – June 15
  • 3rd Payment – September 17
  • 4th Payment – January 15

Are Frequent-Flier Miles Taxable?

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Frequent-flier miles definitely provide a financial benefit, but are they taxable? Don’t even bother reading this post if you are hoping to find an answer to this tax problem.  There is no answer here.

Today the LA Times reported that a number of folks were offered frequent-flier miles as an incentive for opening up checking and savings accounts with Citibank last year. What they weren’t told is that Citibank would be reporting the miles to the IRS as income — 2.5 cents per mile, to be precise. Getting a 1099-MISC (miscellaneous income) in the mail was a shocker for these Citibank customers, but tax professionals found it odd as well.

It is not clear where the IRS stands on this issue. The 2012 instructions for Form 1099-MISC, state that income tax must be paid if at least $600 in “prizes and awards” is received. However, a 2002 policy statement suggests otherwise:

[The IRS] has not pursued a tax enforcement program with respect to promotional benefits such as frequent-flier miles. Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.

Citibank is clearly just protecting itself due to the lack of clarity in the law.

F.C. Manager on Trial for Tax Evasion

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Harry Redknapp, former manager of the Tottenham Hotspur F.C., was recently accused of tax evasion related to a bung he received for player transfers. What!?  I know, English news articles are fun, but sometimes difficult to decipher.

Translation for American readers:

  • Harry Redknapp is the current manager of the Tottenham Hotspur Football Club. The spherical kind of football, not the prolate spheroid with pointed ends so popular around this time of year in the United States.
  • Tottenham Hotspur has been around since 1882, often referred to as the “Spurs.”
  • A “bung” is an English word used to mean a BRIBE.

Redknapp allegedly hid his bonuses in an offshore account in Monaco which he named “Rosie 47″ after his dog and his own birth year. Once again we see that people will do whatever it takes to find tax relief these days, even if it means resorting to nefarious tricks and schemes. Full story here.

Norris Likes Newt for President

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Chuck Norris may be able to cut through a hot knife with butter and a million other fantastic feats, but he still only gets to cast his vote once. And this time around he’ll be voting for Newton Leroy Gingrich.

Yes, today the legendary martial artist, actor, author, and political activist, Chuck Norris announced his endorsement of Newt Gingrich for president.

“I’m tired of watching our country being torn to shreds by those who think the answer is more government debt and control. I’m tired of being in bondage to a tax system that robs U.S. citizens like the King of England did before the Revolution. I’m tired of watching our sovereignty being sold by foreign loans and loose borders. And I will not sit back and merely watch this decay and degradation of the U.S. and then hand it over to my children and grandchildren to deal with.

~ Chuck Norris

Newt is obviously thrilled by the endorsement. Doesn’t the Chuck Norris endorsement pretty much guarantee he’ll win the nomination? See full story here.

Cat Lady is Better with Taxes than with Cats

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Oakland’s “Cat Lady” may have found tax relief by beating the IRS, but now the Alameda County District Attorney is pursuing felony animal cruelty charges against her.

You may remember the story of Jan Van Dusen and all her cats. She, at one time, was keeping nearly 100 cats in a 1,500 square foot home in West Oakland. Her tax case was focused on the $10,000/year expenses for cat food, shots, cleaning, etc. that she claimed to be tax exempt. The IRS refused to allow her deductions at the  administrative level. But a Tax Court overturned the IRS in finding that Van Dusen did in fact qualify for her claimed charitable contribution deductions.

Allegedly her foster pets were not being cared for properly, which is no surprise — how could one person take care of so many cats? Local animal control officers confiscated her pets in October and the district attorney’s office is now pursuing the uncommonly severe felony animal abuse charge. More details here.

The Cat Lady faces up to 3 years in prison and a $20,000 fine if convicted. She has pleaded not guilty.

Our Next President Shouldn’t Be a Tax Schmuck

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When Mitt Romney announced that he would probably follow tradition by disclosing his tax return sometime in April, he also confirmed that his effective tax rate is around 15%.  Yes, it is low.  Yes, Romney takes full advantage of every opportunity available to him within the Tax Code to pay less taxes.  Isn’t that what anyone would do?  Here is the Tax Girl’s view:

“The thing is, I want my President – no matter who it is – to either know enough about fiscal and tax policy to make smart decisions or to surround himself (or herself) with people who can make those smart decisions. Having someone who consistently makes poor decisions about their own taxes directing tax policy seems like, I don’t know, asking Newt Gingrich for relationship advice.

~ Kelly Phillips Erb, Forbes writer / blogger

I guess the Gingrich comment was added for a little extra spice.  Ouch.

Romney Will “Probably” Release Tax Returns in April

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I’m not sure what people are hoping to see on Romney’s tax return. Everyone already knows he is very wealthy. Are they hoping to find that he owes the IRS or has other tax problems? He’s probably just waiting for the last possible minute to file (that would be 11:59pm on April 17th this year) like any other tax-loathing American would do. If it’s prior year tax returns that they are hoping to see then he still has some time before he could be criticized for going against history and tradition.

Romney’s running mates are pushing him to release his tax records sooner than later because they think that whatever is revealed  in his taxes may have an influence on how people vote. Presidential candidates are not required to make their tax returns public, but they have traditionally done so . . . usually around tax time.

I looked at what has been done in campaigns in the past . . . They have tended to release tax records in April or tax season . . . And if I become our nominee, and what’s happened in history is people have released them in about April of the coming year, and that’s probably what I would do.

~ Massachusetts Gov. Mitt Romney, speaking at a Republican presidential debate on January 16, 2012

See CNN story for a list of party nominees in the last few elections and when they released their tax records.

MLK’s Tax Case

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Some people and organizations in positions of power tried to debunk the efforts and mission of Martin Luther King, Jr. with false accusations. Even some state and local governments wanted to silence him. For example, did you know that King was indicted for income tax fraud in February 1960? These tax problems eventually led him to court.

The state of Alabama had charged King with signing fraudulent 1956 and 1958 tax returns. Specifically he was charged with failing to report income from the Montgomery Improvement Association (MIA) and the Southern Christian Leadership Conference (SCLC), that his actual income was up around $45,000 in 1958, and that he owed the state more than $1,700.

King’s attorneys characterized the state’s position as a “gross misrepresentation of fact.” They argued that the money received from SCLC was expense reimbursement, not income, and thus not taxable. The all-white jury deliberated nearly four hours before returning a ‘‘not guilty’’ verdict.

IRS Seeks to Cut Spending with Employee Buyouts

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The National Taxpayer Advocate released its annual report to Congress earlier this week. Their top complaint is that the IRS is severely underfunded, which is causing a number of problems, including an erosion of customer service and a dwindling of taxpayer rights.

One way the IRS is dealing with a smaller budget is by offering early retirements and employee buyouts. This practice really illustrates the IRS’ dilemma. The more seasoned, higher-paid IRS employees are the only ones being offered buyouts because they are the only ones that qualify for early retirement, and the IRS can make a bigger dent in their payroll by shedding tenured employees. So the IRS will be losing some of their best people and filling empty spots with new employees. I know that the TAS is of the opinion that the problems at the IRS are primarily due to them being understaffed, but I have to believe that part of it is due to a large number of new employees who are still learning their job duties.

It seems like a lose-lose situation for the IRS. Under current budget constraints, if they keep their seasoned employees then they can’t afford to hire enough staff. But if they allow them to retire early then they would be, in effect, trading their MVPs for rookies.

Another Tax Preparer Fraud Case

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A Cincinnati man has proven there is more than one way to cheat on your taxes. And now, in addition to his huge tax debt, he has criminal charges levied against him.

Yesterday John Humphrey, III, 46, was sentenced to 12 months of home confinement and ordered to pay more than $65,000 in restitution to the IRS. Humphrey, a tax preparer by trade, pleaded guilty to filing false tax returns for both himself and his clients.

His own returns appear to be a mixed bag of illegal tax tricks:

  • 2004 – failed to report wage income
  • 2005 and 2006 – claimed niece as a dependent to claim a false exemption deduction
  • 2007 – omitted more than $100,000 in gross receipts from his business, The Tax Place
  • 2008 – claimed a false “Contract Labor” business expense

Besides the 12 months of home confinement, Mr. Humphrey will also have 3 years of probation and will likely have to find a new profession. His sentencing included a prohibition from preparing his own tax return and from working at a tax preparation firm.