Monthly Archives: June 2016

Tax compliance costs $409 billion a year

By Bankrate

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

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The Internal Revenue Service is up front about the hassles of filing your annual tax return. In the instructions for Form 1040, the tax agency breaks out its estimates of taxpayer filing burden.

According to the IRS, it takes the average taxpayer 13 hours to fulfill his or her annual filing responsibility. That covers filling out the forms, records keeping, tax planning and other miscellaneous tax tasks.

Now the Tax Foundation has taken a macro look at the compliance costs of IRS regulations.

Billions of hours and dollars

The Washington, D.C.-based tax policy think tank says Americans will spend more than 8.9 billion hours complying with IRS tax filing requirements in 2016. And those hours will cost the U.S. economy $409 billion this year, says the Tax Foundation.

While the ever-growing tax code is a major factor, an equally annoying problem is the amount of regulations the IRS issues in connection with those tax laws.

“The tax statutes passed by Congress are only the tip of the iceberg when it comes to tax complexity,” says Tax Foundation President Scott Hodge in the report. “There are roughly 7.7 million words of tax regulations, promulgated by the IRS over the last century, which clarify how the U.S. tax statutes work in practice. On top of that, there are almost 60,000 pages of tax-related case law, which are indispensable for accountants and tax lawyers trying to figure out how much their clients actually owe.”

Or, as the old Capitol Hill saying goes, the tax code is the ultimate “keep tax professionals employed” law.

A big business burden

The Tax Foundation study, using data from the Office of Information and Regulatory Affairs and the Bureau of Labor Statistics, calculated the productivity costs of IRS paperwork.

Topping the list of 50 forms is the business income tax return.

Companies spend 2.8 billion hours completing their tax forms at a total annual cost of more than $147 billion.

Individual taxpayers burdened, too

We individual taxpayers are close behind. Filing of individual tax returns takes more than 2.6 billion hours, coming to a dollar cost of $98.7 billion.

Rounding out the top 5 most costly tax filings are tax returns for an S corporation, Form 4562 to claim depreciation and amortization (personal aside: the first time I filed this form in pre-software days, I got so frustrated I cried) and employers’ quarterly federal tax returns.

Also in the top 10 are filings for estates and trusts and Schedule C, which is filed by entrepreneurs operating their own businesses.

Time is tax money

“Time is the most valuable thing we have, and we should not be forced to waste it complying with IRS forms,” says Hodge, who encourages Congress to keep the Tax Foundation findings in mind when considering tax reform.

Do you feel overwhelmed when you do your taxes? How long does the process take? Or do you hand your tax duties over to a professional?

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Some tax refunds in 2017 to be delayed

By Bankrate

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

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If you file your federal tax return early every year to get an expected refund quickly, you could be disappointed in 2017.

A provision in the Protecting Americans from Tax Hikes Act of 2015, or PATH Act, that became law last December will push refunds until mid-February next filing season for folks who claim the earned income or additional child tax credits.

Fighting tax credit fraud

Both the earned income tax credit, or EITC, and additional child tax credit are refundable.

This means that the credits will reduce any tax you might owe and when the credit amount is greater than your tax bill, you will get the excess as a refund.

However, many lawmakers have argued that these tax credits are frequently abused, with the IRS issuing billions in fraudulent refunds on improper EITC and additional child tax credit claims. To reduce the fraud, numerous bills have been introduced in Congress in recent years to make it more difficult to claim these credits.

Supporters of the 2 credits, which are designed to help lower-income taxpayers, acknowledge that there is some tax fraud related to the tax breaks. However, they contend that many of the improperly paid refunds are related to the credits’ complexity. People who depend on the added tax credit money need help in properly applying for the tax breaks, not added obstacles.

A compromise on the refundable credits was reached late last year in the PATH Act.

The new mandated refund issuance delay should give the IRS additional time to review and confirm that the claims are legitimate and accurate. The IRS and PATH provision supporters say the delay will help prevent, or at least reduce, the amount of money the U.S. Treasury loses each year to fraudulent credit claims based on fabricated wages and withholding.

Still available, just later

The annual tax-filing season typically begins around the third week of January. The IRS says that even with increased security procedures to fight tax identity theft and refund fraud, it usually will get refunds to taxpayers in 21 days or less.

Filing electronically and having your refund directly deposited will speed up that turnaround, says the IRS.

If you e-file, for example, on Jan. 17, 2017, then you could expect your refund to show up in your bank account by Feb. 7.

However, if next year you claim the EITC or the additional child tax credit on your Form 1040, then you’ll have to wait another 8 days for your refund.

Get your tax money now

So plan accordingly.

And maybe think about adjusting your payroll tax withholding now.

That way, you’ll get your expected tax refund amount incrementally for the next 6 months instead of letting the Bank of Uncle Sam hold your cash, interest-free, until mid-February 2017.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Bill would make some forgiven student loans tax-free

By Bankrate

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

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Owing a debt you can’t repay is bad. Owing federal taxes on that debt amount even after you no longer have to pay it back is even worse.

Federal tax law, however, requires in most cases that when a loan is forgiven, the amount that is written off by the lender is taxable income to the previous debtor.

Sen. Debbie Stabenow, D-Michigan, thinks that’s wrong when the debt was incurred under fraudulent circumstances, specifically to pay for college. Stabenow has introduced the Student Tax Relief Act, a bill that would protect defrauded borrowers from being taxed on their forgiven student loans.

Corinthian College cause

Her bill, S. 3008, was drafted in the wake of the federal investigation into Corinthian Colleges, Inc. and its associated schools.

The Department of Education found that the now-defunct for-profit chain run by Corinthian defrauded students at more than 100 schools in more than 20 states across the country.

Following the fraud finding, the Education Department told students who borrowed money from Uncle Sam to attend Corinthian classes that they would not have to repay those loans. Affected students can apply for loan forgiveness through the department’s Federal Student Aid division.

That’s a welcome step for the bilked students. The Education Department says that as of March 1 it had processed almost 9,000 claims from former Corinthian students nationwide, totaling more than $132 million.

Canceled, but taxable, debt

The forgiven debt provisions of the Internal Revenue Code generally require that such canceled debt is taxable. For example, folks who are able to negotiate down or away debt owed on credit cards face the same tax due on what is called phantom income.

A notable exception is in the case of some residential foreclosures or mortgage renegotiations, where a special, temporary law allows certain home-related canceled debt amounts to be tax free.

The Corinthian students also were provided special tax relief on the amounts cleared by the Department of Education.

Stabenow’s bill, which has 7 Democratic cosponsors in the Senate, would give the same tax relief to students in similar educational fraud cases.

“When students take out loans to attend college, they should get a fair deal and a fair shot,” said Stabenow in announcing the introduction of the Student Tax Relief Act. “No student should be the victim of false advertising from a college that promises skills or job placement. And the last thing they deserve is to be hit with an enormous tax burden on their forgiven loans.”

Time running out

Stabenow’s bill might be able to garner some additional support. The issue of burdensome student debt in general already is under a spotlight, thanks in large part to Vermont Sen. Bernie Sanders’ campaign to be the Democratic nominee for president.

But time is not on the side of Stabenow’s effort. The tax-writing Senate Finance Committee, where the bill is pending, has not scheduled any hearing on S. 3008.

And with the upcoming November elections, the House and Senate aren’t going to be in session much. The chambers’ schedules are reduced so that Representatives and Senators can return home to make their reelection cases.

If, however, enough constituents let lawmakers know of their student debt concerns, both on a wider scale and in connection with cases like Corinthian, there might be some action on Stabenow’s bill this year. That would be a welcome development for former students facing an unexpected tax bill next filing season on their forgiven school loans.

Have you ever faced a tax bill on forgiven debt? Do you agree with Stabenow’s proposal? Do you think the tax code is right, or should all forgiven debt be tax-free?

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.