With the automatic extension of time until June 17, 2013 in which to file your 2012 U.S. 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 U.S. tax return. It is important to remember that your return must be received by June 17, 2013. The IRS will not recognize 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 5 months ago President Obama wants more. The proposal is to have individuals with gross income over $2,000,000 pay a 30% minimum tax commencing in 2014, with a phase in for individuals with gross income between $1,000,000 and $2,000,000. Individuals with IRA’s, 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 itemized deductions capped at 28%. In addition, there would be a tax of 11.6% 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 program requires an individual to forfeit 5% to 27.5% 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 program 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 program in 2012 that required tax return preparers who were not CPA’s, 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 6 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% and 20% 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 Aug. 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 favor 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 U.S. 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 program that would allow individuals to log in to a secure IRS web site and download a tax form automatically populated with information the IRS collects from employers, social security and financial institutions. At first glance this program would likely work for more than 75% of U.S. 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 1099’s 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.