A federal judge has struck down as uncontitutional an Internal Revenue Service exemption that gives clergy tax-free housing allowances.  The exemption, whose origins go back to 1921, is currently claimed on tax returns by approximately 44,000 ministers, priests, rabbis, imams and others around the country who could experience an estimated 5 to 10 percent cut in take-home pay.

In an action brought by the Freedom From Religion Foundation, U.S. District Court Judge Barbara Crabb (for the Western District of Wisconsin) ruled against the IRS on Nov. 22, 2013, stating the exemption violates the establishment clause because it “provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.”

Although the Justice Department has not commented, it is likely the case will be appealed to the the 7th Circuit, which could reverse the decision. If the 7th Circuit lets the ruling stand, then it could become precedent for courts in Wisconsin, Illinois and Indiana.

If the court decision stands, it could have a significant impact on clergy income. For example, if a clergy earns $70,000 per year, and receives another $20,000 from a tax-free housing allowance, essentially earning $90,000, the ruling would cost that clergy an additional $5,000 in taxes, which would mean a 5.6 percent cut in compensation.

The exemption is worth about $700 million per year, according to the Joint Committee on Taxation Estimate of Federal Tax Expenditure.  Judge Crabb ruled that the law provides that the gross income of a “minister of the gospel” does not include:

“the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”

It is unclear what Congress will do in this instance, although the judge has issued a stay until the appeals are exhausted.  There are strong lobbying influences representing this issue, so there is a reasonable chance that Congress will take up the matter during the current session.

If you have any questions regarding this matter, please contact Steve Siesser at ssiesser@verizon.net

“Refund fraud caused by identity theft is one of the biggest challenges facing the IRS today,” Danny Werfel, Principal Deputy Commissioner of the IRS, told the House subcommittee of the Oversight and Government Reform panel.

Werfel recently spoke before the 2013 IRS Nationwide Tax Form saying that more than 3,000 IRS employees are currently working on identity theft – more than double the number at the start of the previous filing season. Another 35,000 employees have been trained to work with taxpayers to recognize identity theft and help victims. So far this calendar year, the IRS has worked with victims to resolve more than 565,000 cases. This is more than three times the number of identity theft victim cases that we had resolved at the same time last year.

The IRS has also expanded it’s fraud detection efforts by increasing the number and quality of identity theft screening filters, and have suspended or rejected more than 4.6 million suspicious returns so far this calendar year. The number of identity theft investigations by the Criminal Investigation division continues to rise, with more than 1,100 investigations opened so far in FY 2013.

Criminals with access to taxpayers’ identifying information—sometimes from death records or employer payroll files—can create fraudulent tax returns and obtain refunds before the actual taxpayer is aware of the theft.

Thieves normally file early in the tax-filing season, often before the IRS has received Forms W-2 or 1099, to thwart information matching and avoid receiving duplicate return notices from the IRS. Taxpayers sometimes discover they are victims of identity theft when they receive a notice from the IRS stating that “more than one tax return was filed with their information or that IRS records show wages from an employer the taxpayer has not worked for in the past”

Obama’s 2014 budget plan included proposals to curb a rise in identity theft occurring through tax returns. It called for a $5,000 civil penalty for tax-related identity theft, restricting access to Social Security death records and allowing employers to avoid putting Social Security numbers on W-2 wage reporting forms.

If you believe you are a victim of identity theft, please contact Steve Siesser at ssiesser@verizon.net

Simplified Option for Home Office Deduction

Beginning in tax year 2013 (returns filed in 2014), taxpayers may use a simplified option when figuring the deduction for business use of their home.

Note: This simplified option does not change the criteria for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements of the allowable deduction.

Highlights of the simplified option:

• Standard deduction of $5 per square foot of home used for business (maximum 300 square feet).
• Allowable home-related itemized deductions claimed in full on Schedule A. (For example: Mortgage interest, real estate taxes).
• No home depreciation deduction or later recapture of depreciation for the years the simplified option is used.

Comparison of methods

Selecting a Method

• You may choose to use either the simplified method or the regular method for any taxable year.
• You choose a method by using that method on your timely filed, original federal income tax return for the taxable year.
• Once you have chosen a method for a taxable year, you cannot later change to the other method for that same year.
• If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table. This is true regardless of whether you used an optional depreciation table for the first year the property was used in business.

If you have any questions regarding the home office deduction or which method to choose, contact Steve Siesser at ssiesser@verizon.net or 240-463-1898.

I am often asked by clients how long they must keep tax and financial records.  Below are some of the key rules about the statute of limitations for US federal returns which can provide some guidance:

1. For most tax returns the statute of limitations is three years from the date the return was filed, including extensions.  There are some very important exceptions to this general three year statute of limitation.

2. The statute of limitation never starts if a tax return is fraudulent or if no tax return is filed. This means the IRS can come after you “forever” with regard to that particular tax year.

3. The IRS gets a longer time to come after you with regard to a filed tax return if there is unreported income that exceeds 25% of the gross income shown on the return. In such a case, the IRS has six years from when the return is filed to make a tax assessment.

4. Beginning in 2010, the tax law was amended to extend the statute of limitations to six years if you omit over $5,000 from gross income that is attributable to certain kinds of foreign financial assets.  Taxpayers with offshore financial accounts or assets must be particularly diligent in record-keeping.

5. Under other tax rules enacted in 2010, the statute of limitations does not begin to run until the taxpayer has complied with all mandatory foreign reporting requirements. This reporting can include information returns regarding ownership in foreign corporations, foreign partnerships, foreign trusts, information concerning “specified foreign financial assets” and many other transactions in the offshore context. Only when proper reporting is made will the statute of limitations begin. Furthermore, even though the statute starts to run, the entire tax return will remain open for IRS adjustments for a period of three years (rather than only for the portions of the return relating to the foreign reporting that had been missing).

6. A taxpayer who is required to file the FBAR (“Report of Foreign Bank and Financial Accounts” /Form TD F 90–22.1) must keep certain records about the foreign financial account for five years from the due date of the report (June 30 of the year following the year to which the FBAR report relates).  Records may need to be maintained for a longer period by persons who have been formally charged with a criminal tax violation.

7. If you are filing an amended return to claim a credit or tax refund, you generally have three years from the date the original return was filed to make the claim, or two years from the date the tax was paid, whichever is later.

In certain cases, record retention beyond the time periods of the statue of limitations will be necessary. For example, it is important to retain supporting documentation for the cost basis for any securities or real estate and any adjustments to basis (e.g., depreciation of real property).  Generally, brokerage firms are now required to maintain this information for you, but there may be situations where the brokerage firm is unable to provide such basis information.

State and local statute of limitation rules should also be checked before destroying any tax files since their rules can differ from the federal rules.  Often, certain documents should be kept for reasons other than tax.  For example, making insurance claims or dealing with a decedent’s assets.  Before destroying anything about which you are unsure, please contact Steve Siesser at ssiesser@verizon.net

Late spring and early summer are popular times for weddings. Whatever the season, a change in your marital status can affect your taxes. Here are several tips from the IRS for newlyweds.

• It’s important that the names and Social Security numbers that you put on your tax return match your Social Security Administration records. If you’ve changed your name, report the change to the SSA. To do that, file Form SS-5, Application for a Social Security Card. You can get this form on their website at SSA.gov, by calling 800-772-1213 or by visiting your local SSA office.
• If your address has changed, file Form 8822, Change of Address to notify the IRS. You should also notify the U.S. Postal Service if your address has changed. You can ask to have your mail forwarded online at USPS.com or report the change at your local post office.
• If you work, report your name or address change to your employer. This will help to ensure that you receive your Form W-2, Wage and Tax Statement, after the end of the year.
• If you and/or your spouse work, both of you should check the amount of federal income tax withheld from your pay. Your combined incomes may move you into a higher tax bracket. Use the IRS Withholding Calculator tool at IRS.gov to help you complete a new Form W-4, Employee’s Withholding Allowance Certificate. See Publication 505, Tax Withholding and Estimated Tax, for more information.
• If you didn’t qualify to itemize deductions before you were married, that may have changed. You and your spouse may save money by itemizing rather than taking the standard deduction on your tax return. You’ll need to use Form 1040 with Schedule A, Itemized Deductions. You can’t use Form 1040A or 1040EZ when you itemize.
• If you are married as of Dec. 31, that’s your marital status for the entire year for tax purposes. You and your spouse usually may choose to file your federal income tax return either jointly or separately in any given year. You may want to figure the tax both ways to determine which filing status results in the lowest tax. In most cases, it’s beneficial to file jointly.

For more information about these topics, contact Steve Siesser at ssiesser@verizon.net