Explore this blog post for detailed information on the new postponed deadline, estimated tax payments, Special IRA and 401K distributions, and other valuable tax insights.

Deadline Postponed

Hurricane Beryl has caused significant damage in 67 Texas counties. The list includes Harris County and Montgomery County (for more counties click here).

In response, the IRS has announced it will postpone various tax filing and payment deadlines that occurred from July 5, 2024, through February 3, 2025.

This means that if you filed an extension for your 2023 individual or business tax return, now you have until February 3^rd 2025 instead of September 16^th or October 15^th, 2024 to file your 2023 return.

Estimated Tax Payments

Keep in mind that payments on these returns are not eligible for the extra time because they were due last spring before the hurricane occurred. But the quarterly estimated income tax payments due on Sept. 16, 2024, and Jan. 15, 2025 do qualify for the February 3^rd 2025 deadline.

There is nothing you need to do to get this hurricane relief if your IRS address of record is located in the disaster area.

Claiming The Losses

And if you suffered uninsured or unreimbursed hurricane losses, you can choose to claim them on either the 2024 return or on the 2023 return. You have until Oct. 15, 2025 to make the election. If you have already filed your 2023 tax return, you can file a 2023 amendment to claim the hurricane Beryl losses.

No 10% Penalty for Special IRA and 401K Distributions

In addition, you can take money out from your IRA or 401K without incurring the 10% early penalty withdrawal if you are younger than 59 ½. And you can spread the income over three years, instead of reporting the entire distribution on your 2024 tax return.

Maximum Distribution Limit

1.  Qualified disaster recovery distributions are limited to $22,000 per disaster for any qualified individual (across all plans and IRAs).
2. Timing of distributions: The window to take a disaster recovery distribution opens on the first day of the incident period for that qualified disaster (July 5th) and closes 180 days after the latest of (1) the first day of the incident period (July 5th) or (2) the date of the disaster declaration (Jul 9, 2024) (https://www.fema.gov/disaster/4798);
3. Tax treatment: Qualified disaster recovery distributions will not be subject to the 10% penalty tax on early distributions. For individuals, federal income taxes will be assessed over a three-year period starting in the year the qualified individual receives the distribution, unless the qualified individual elects to be taxed in full in the year of receipt.
4. What does it mean for an individual to sustain an economic loss by reason of a qualified disaster (Beryl)?
   Examples of an economic loss include, but are not limited to:
   Loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause,
   Loss related to displacement from the individual’s home, or
   Loss of livelihood due to temporary or permanent layoffs.

For more information about this tax relief you can click here.

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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

The Shoebox Method Does Not Substantiate a Deduction

When it comes to substantiating business expense deductions, meticulous record-keeping is essential. You should not rely on what the Tax Court has aptly dubbed the “shoebox method.” Let’s explore what this method entails and why it falls short in the eyes of the court.

What Is the Shoebox Method?

The shoebox method involves collecting receipts, invoices, and other financial documents related to business expenses. Rather than organizing and categorizing these records, people simply toss them into a shoebox or similar container. When tax time arrives, they present this collection as evidence to support their deductions.

The Tax Court’s View

In a recent case, Carol A. Wright and others v. Commissioner, the Tax Court rejected the shoebox method. The court emphasized that taxpayers must substantiate deductions by keeping clear and organized records. The shoebox approach, with its jumbled mess of receipts, fails to meet this requirement.

The Balancing Act: Clear Evidence

To substantiate deductions successfully, you need more than a shoebox full of receipts. Instead, they must provide clear and organized evidence that directly ties each expense to their business activities. In the Wright case, the court found that thousands of individual receipts, without proper organization, were insufficient to prove the amounts claimed.

Takeaway

As taxpayers, we should heed the lesson from the Wright case. Proper record-keeping is not just a formality; it’s a critical part of supporting our deductions. Whether you’re a business owner, freelancer, or investor, invest the time to organize your financial records. Avoid the shoebox method, and instead, create a system that allows you to correlate receipts with specific expenses. Your tax position will be stronger, and you’ll avoid unnecessary disputes with the IRS.

Remember, the shoebox may be handy for storing old sneakers, but it won’t help you win a tax deduction battle!

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Please note that this blog post is for informational purposes only and does not constitute tax, legal or accounting advice.

The Internal Revenue Service (IRS) recently issued Notice 2024-55, providing guidance on new exceptions to the 10% additional tax on early distributions from retirement plans. This notice is part of the SECURE 2.0 Act of 2022, which aims to make retirement savings more accessible and flexible for you if you are facing unforeseen financial challenges.

What is the 10% Penalty?

Typically, early distributions from retirement plans, such as 401(k)s and IRAs, are subject to a 10% additional tax if taken before the age of 59½. This penalty is intended to discourage you from using your retirement savings prematurely.

New Exception to 10% Penalty for Emergency Personal Expenses

Under Notice 2024-55, the IRS has introduced an exception to this penalty for distributions taken to cover emergency personal expenses. This exception to 10% penalty allows you to access your retirement funds without incurring the 10% penalty, if you met certain conditions.

Key Points of the Exception

1. Definition of Emergency Personal Expenses: The notice describe emergency personal expenses as unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. An emergency personal expense distribution is includible in gross income, but it is not subject to the 10 percent additional tax under IRC section 72(t)(1).
2. Unforeseeable financial expenses: Are those expenses that are related, but not limited to medical care, accident or loss of property due to casualty, imminent foreclosure or eviction from a primary residence, the need to pay for burial or funeral expenses, auto repairs, or any other necessary emergency personal expenses.
3. Eligible Plans Examples: 401(k) plans, 403(a) annuity plans, 403(b) plans, governmental 457(b) plans, IRAs are eligible to permit these distributions.
4. Limitations: There are limitations on the dollar amount and frequency of these distributions. For instance, you can only treat a distribution as an emergency personal expense once every three calendar years unless you fully repay the previous distribution or your contributions to the plan equal the amount of the previous distribution.
5. Repayment Option: If you take emergency personal expense distributions, you are permitted to repay these amounts to certain plans, allowing you to restore your retirement savings.

Impact of the New Exception

In summary, this new exception provides a safety net for you if you are facing unexpected financial hardships, allowing you to access your retirement savings without the added burden of a penalty. Also, it reflects a more flexible approach to retirement savings, acknowledging that emergencies can arise and providing a means to address them without putting at risk your long-term financial security.

Additionally, for more detailed information, you can refer to the full text of Notice 2024-55 on the IRS website.

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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

$350 million in income is what a defense contractor allegedly tried to hide from the IRS. Although unsuccessful, since he was arrested this July of 2024 in Ibiza, Spain.

The Story

Edelman became a millionaire during the United States’ post-9/11 military efforts in Afghanistan and the Middle East. His defense contracting business received more than $7 billion from contracts with the U.S. Department of Defense to provide jet fuel to U.S. troops in Afghanistan and the Middle East.

He tried to use Delphine, his French wife to escape US taxation. He tried to say that Delphine founded and owned the defense contracting business. And because she was a French citizen residing abroad, she did not have U.S. tax obligations. Although he was a 50% owner of the defense contracting business. Edelman told this false story of Delphine’s ownership to various arms of the U.S. government, including to a Subcommittee of the U.S. House of Representatives during a 2010 Congressional investigation, to the Department of Defense during contract negotiations, to the Internal Revenue Service in a 2015 application to the Offshore Voluntary Disclosure Program, and to the Department of Justice in a 2018 presentation.

Edelman Used Foreign Banks And No FinCEN Reporting Was Done

In addition, the IRS says that he tried to hide his defense contracting profits into foreign banks. He used banks who were known to shield account holder identities from U.S. authorities. Edelman used banks in Switzerland, the Bahamas, Singapore, and the United Arab Emirates. And on top of that he held the accounts in the name of non-U.S. entities that were created in other foreign countries, Panama, Belize, and the British Virgin Island.
Well, this didn’t stop the IRS Criminal Investigation Division, who, in collaboration with Britain, Spain, and The Joint Chiefs of Global Tax Enforcement (known as the J5) caught up on his scheme. If you didn’t know, the J5 brings together the taxing authorities of Australia, Canada, the Netherlands, the United Kingdom, and the United States.
Edelman used these funds he tried to conceal from the IRS to fund his other business ventures around the world. He also had a business selling internet services to U.S. troops and contractors at Kandahar Air Base in Afghanistan. Also, he had a Mexican fuel infrastructure project, and a music television franchise in Eastern Europe. He allegedly also used the money to buy a ski chalet in Austria. Plus, he bought a house in Spain and a townhouse in London. He also bought multiple yachts—all of which were purchased in the name of nominees.

FinCEN Requirements

Now, if you didn’t know, if you have or control foreign bank accounts and assets or foreign business interests you might need to report them not only to the IRS, but also, to the Financial Crimes Enforcement Network (FinCEN).
You can see some of the rules and IRS forms regarding foreign assets here: form 8938, form 8858, form 8865, form 5471, form 3520 and form 8621. But you should consult with a tax professional if you have such assets.

Conclusion

Edelman and Delphine are charged with conspiring to defraud the United States and 15 counts of tax evasion. Edelman also is charged with two counts of making false statements to the United States, and 12 counts of willfully violating his foreign bank account reporting obligations, as part of a pattern of unlawful activity. They both face many years of prison.

Now keep in mind, the defendants are presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

IRS Chief Counsel Margie Rollinson announced the creation of a new Associate Office that will focus exclusively on partnerships, S-corporations, trusts and estates.

During the last decade of IRS budget cuts, the pass-through entities like S Corporations and partnerships have not seen too many audits or scrutiny. But this change is imminent because, as we discussed earlier, the IRS will receive an infusion of $60 billion over the next ten years, in addition to its annual appropriation. So now it has enough funding and it’s moving fast.

The IRS also plans to bring in outside experts with private-sector experience regarding pass-throughs to work alongside the expert in-house knowledge of current IRS employees.

Plus, the Internal Revenue Service now is paying a lot more than in the past and it’s attracting more mid-career professionals, so that the Service can increase its compliance enforcement fast and not spend a lot of time on training its employees.

S Corporations

If you have an S Corporation, make sure you have all owners pay themselves reasonable salaries for their work. Pay attention to properly calculate your basis in your S Corporation. When owners take distributions make sure that these are made according to the ownership percentages, so that you do not lose your S Corporation status. Make sure you have the proper support for your deductions, especially in hot areas like vehicle expenses, meals, uniforms, donations. Properly reconcile your books. Do your bank and credit card reconciliations.

Partnerships

If you have a partnership, pay attention to the basis calculation. Another hot are here is the income flowing to the owners that is subject not only to income tax, but also to self-employment tax. Pay attention to the status of the partners, if they are truly limited partners or are they involved in the management of the business? Pay attention to how you deduct your out-of-pocket expenses. And of course, do your reconciliations and have the proper support for your deductions.

Conclusion

If you need tax advice regarding your business or if you are opening a new business, we offer comprehensive business advisory services that help our clients not only avoid IRS headaches, but also save on taxes by having the right tax set-up and strategy. If you are in need of a good CPA firm contact us!

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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

The IRS is evolving fast! The IRS that you are dealing with today or dealt with last year is not the same IRS that you’re going to be dealing with in 2 – 3 years.

Over the next ten years, an infusion of a whopping $60 billion will be allocated to the IRS, in addition to its annual appropriation. This isn’t just a minor adjustment; it’s a major financial influx that’s enabling the agency to transform how it operates.

What Does This Mean For You And Me?

The IRS now has enough money that it can hire more people.  And we’re not talking fresh graduates, but mid-career professionals who can really hit the ground running. This is evident from the job postings on their website, which now offer significantly higher pay than in the past.
And with these new hires, the IRS is ramping up its audit activities of everyone, which are going to hit pretty soon.
Last year alone, they increased the number of revenue agents by about 9%.

IRS Commissioner Danny Werfel said in March that the Service has focused enforcement on high-income groups by serving notices to 125,000 people who have not filed a federal income tax return since 2017, including 25,000 with incomes over $1 million; conducting audits focused on the use of corporate jets; and collecting $520 million since mid-2023 in taxes owed by millionaires.
But it’s not just millionaires in their sights. Pretty soon they will expand their audit activities to all individuals and businesses. Because now the IRS doesn’t have to pick and choose among whom to audit anymore.

With new technology that the IRS is putting in place and with increased audit workforce they will have the capacity to significantly increases its examinations.

You can check our YouTube channel for more subjects that you might find useful. If you are in need of a good CPA firm contact us!

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.