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Especially if you have a business, it’s a good idea to every so often evaluate your exposure to various risks, and in that context, to also evaluate the extent you have that risk covered by insurance. Often this type of risk assessment can be done by your insurance agent. By way of example, especially of course with a business, have you addressed what your exposure/risk is as to for instance losing the data on your server (do you have it backed up?); is your insurance coverage for disasters adequate; do you have an alternative plan if for instance your office building or factory were to catch fire? There are a multitude of very important issues that need to be considered – and for that, especially if you have a business, you may want to engage a risk specialist to evaluate your situation.

Were it only possible for any of us as individuals to live and spend as if we were the federal government, it would be such a different world. The current year budget deficit for the US is somewhere in the trillions. The cumulative budget deficits – often referred to as the national debt – is somewhere in the 30 trillion dollars or more range. Truly numbers that boggle the mind. Before anyone jumps on a political platform, this horrendous situation has been created by both parties (for the moment accepting that there are only 2 parties of any relevance). It used to be that the Democrats were the big spenders and taxers, whereas the Republicans were the small spenders and low taxers. That’s no longer the case – but we kind of have the worst of both worlds. The budget deficit and the debt has soared – with it being bad under #45, worse under Biden, and absolutely atrocious currently. Both parties have consistently misled and lied to the public.    In my humble (not so humble?) opinion, there are 2 absolutely critical steps that must be taken to rectify this abominable situation. They are:   Raise taxes – yes, stop jerking everyone around, and raise taxes. This needs to be done on all levels of income (except for the lowest level where you are not going to be able to get any more taxes), and especially from the upper middle class and higher. There is simply not enough depth in the tax base to raise taxes to the level we need them to cover the budget deficit without reaching into at least as low as the upper middle class (whatever that is). By the way, this also will likely mean greatly reducing the estate tax exclusion, which right now is so high, almost no one pays an estate tax,    The other critical step sounds initially almost counter-intuitive – and that is, we need to spend more. However, we need to focus that spending – giving it to the IRS. I may not make any friends with this, but funding the IRS at the level it needs to be funded is what we need. The IRS is the one department in the US government (I believe the passport department is another, but we’re talking small potatoes there) that really makes money. The ratio varies but think in terms of 5 to 10 times. That is, for every billion dollars we spend on the IRS, we get back something between 5 and 10 billion dollars in increased tax revenue. And these revenue increases are just a matter of enforcing the existing tax laws – it’s not taking from anyone something to which they are entitled to keep. By not funding the IRS, the politicians are giving away money to the tax evaders. It is nonsense to restrict the IRS funding the way it has been over the last X number of years. That has only encouraged more tax avoidance – and more tax evasion.   Until the politicians accept the reality, and until the general public accepts the reality and demands recognition of same by its representatives, our deficit situation will only get worse. At some point, to use an overused expression, “all hell will break loose”.

One of the many startling facts of our current tax regime/system is that there are so few audits by the IRS. The basic reason is simple – the IRS for many years has been starved for funds (it is underfunded). As a result, its computer systems are a couple of generations old, and it simply doesn’t have the manpower or the technical power to do the number of audits that it should be doing.    All that said, I trust you will find it interesting to realize just how infrequent IRS audits are. Based on 2021 stats (the most current available – what do you expect after all?), the following are the audit rates (expressed as a percentage of the returns that were examined/audited), based on their income levels: There are a number of things you can learn from the above. For example:   The rate of audits is barely perceptible,   If you’re fortunate enough to have income in excess of 10 million dollars per year, you’ll get audited about once every 34 years,   However, if your income is only in the one million to 5 million dollar category, you’re going to get audited only once every 200 years,   If you are in the kind of sweet spot of income (between $50,000 and $500,000 per year), you’re going to get audited once every 1,000 years,   If you make virtually nothing, you’ll get audited as often as those people making between one and 5 million dollars a year,   If you actually make nothing, you’ll get audited as often as those making between $500,000 and one million dollars per year.   Yes, there is certainly something wrong with this. While these are stats from the tax year of 2021, which is already a few years stale, there is no reason to believe the stats for 2022 or 2023 would be appreciably different. And, my gut tells me that the stats for 2024 and perhaps 2025, etc., will show an even lower rate of examinations. If you have any questions please contact Kal at kal@barsongroup.com

The IRS estimates there is a whole lot of refund money out there waiting to be claimed by the appropriate people. Despite what you might think, the IRS does not want to hold your money. The latest stats available are from 2021 (if you want more current stats, I suggest you tell your politicians to fund the IRS appropriately). From that year alone, the IRS estimates there is in excess of one billion (1,000,000,000,000) dollars in outstanding refunds that are unclaimed. They further estimate that is due to about 1.1 million taxpayers – and this is only federal tax refunds. The IRS doesn’t have any stats on states.    Based on the IRS’s reckoning, there are refunds due to many taxpayers in every state, with in general of course the more populace states having the more people due refunds (no real surprise there). The estimated median likely refund varies, but not by that much – and is unrelated to the size of the state. What we typically see is the IRS estimates the typical unclaimed refund is between $700 & $900.   The reference here is to unclaimed refunds – as contrasted with people who haven’t cashed in their checks or whatever. The typical situation here is that these estimates are based on what the IRS perceives to be people who have simply not filed their federal income tax returns – which obviously is a requirement to get a refund if you are in fact due a refund. Generally speaking, you have 3 years to file and claim a tax refund. After that, you have forfeited the money – it has become the property of the US government. If you have any questions please contact Kal at kal@barsongroup.com

In general, and regardless of the type of plan, distributions prior to reaching age 59 ½ (other than if you die) are subject to a 10% early distribution penalty. There are a number of exceptions – most are for any type of plan, some are more limited. The following, in no particular order, should give you a pretty good idea of the range of exceptions to the age 59 ½ (or death) general threshold. For this purpose, there are 2 types of plans (there are many more, but for this purpose – as to early withdrawal penalties – there are 2 types) – qualified plans (generally speaking anything from an employer), as contrasted with IRA/SEP/SIMPLE.           Medical – if used to pay unreimbursed medical expenses in excess of 7.5% of your income; HOWEVER,   Medical – used to pay health insurance premiums while unemployed – exception does not apply as to qualified plans,   Domestic relations/divorce – when paid to an alternate payee (typically a spouse) under a QDRO, or, as part of a divorce agreement direction to distribute some part of an IRA,   Domestic abuse – when paid to a victim of domestic abuse, up to the lesser of $10,000 or 50% of the account,   Homebuyers – for a qualified first-time homebuyer, up to $10,000 (does not apply to a qualified plan),   Birth or adoption – when used to pay for qualified birth or adoption expenses, up to $5,000 per child,   Terminal illness – when made to a terminally ill employee, so certified by a physician (does not apply to IRA and similar type plans)   Disability – if paid due to total and permanent disability,   Military – when paid to qualified military reservists called to active duty,   Education – when paid for qualified education expenses (does not apply to qualified plans),   Disaster recovery – distributions paid following an economic loss by reason of a federally declared disaster up to $22,000,   Emergency personal expenses – used to pay personal or family emergency expenses, up to the lesser of $1,000 or the vested account balance over $1,00,0   Separation from service – when paid to an employee following separation from service during or after the year that employee reached age 55 (in some limited cases, age 50) (does not apply to IRAs and similar).   You will note from the above there are a number of words that require much more explanation and definition – such as qualified and emergency. This restates a caution we often express – there are many ideas and thoughts presented herein, but many of them require a more significant effort to understand the underlying tax rules than merely taking at face a brief, summarized sentence. That by the way is a fancy way of saying – get professional advice. If you have any questions please contact Kal at kal@barsongroup.com

No, this has nothing to do with the potential for the US to acquire Greenland, the Panama Canal, or even St. Petersburg (Russia?/Florida?). Nor does it have anything to do with our firm reaching out (in a more economically viable form) for us to acquire let’s say Roatan. Rather, this article focuses on 2 areas of tax return reporting that involve having a nexus internationally. One of these 2 points is fairly well-known to many people and relatively common; the other is less well-known and less common.    While many people are aware of the requirements to declare when you have foreign bank accounts (FinCen forms that go with your tax return) and that there can be severe penalties for failure to comply with the rules, it doesn’t hurt to briefly reiterate the basics. And those basics are fairly straight-forward – putting aside any confusion and complicating factors, if you at any time in the year have at least $10,000 cumulatively in total, in any number of foreign bank accounts, you are required to report same with your tax return. It doesn’t matter if it’s spread over several bank accounts, none of which even gets close to $10,000; nor does it matter if you peak at $10,002 once in the year, but all the other time during the year you are under $100. None of that matters. The qualifying benchmark is having $10,000 or more (in US money) in any single or combination of foreign bank accounts, anytime during the year.   The less common situation, but one which can be far more complicated in terms of responding as required, is if you own or control 10% or more of any foreign company, or have a significant role in running/managing/directing that company. Thus, any US citizen or resident who owns or controls more than 10% of a foreign entity; or, controls 10% or more of the voting power or value of a company; or is a (high level) director, officer, etc. (generally someone with a level of control and major influence) qualifies for this filing requirement. In addition, for this purpose, a US citizen also includes not only individuals, but a partnership or a corporation that is a US based entity. Similarly as to an estate or a trust. To put it more simply, if you as a US citizen or resident have a significant involvement in a foreign entity, very likely you are required to file Form 5471 each year. The issues involved therein and the form are far more complex than we could ever do justice to in this article. For instance, that Form has sub-schedules b through r – yes, this can get out of hand. Suffice it to say that if you are in this position, or think you are, you must discuss this with your tax professional.   Obviously, expanding your financial reach into the international arena, has the potential to cause you to be required to file any number of forms and reporting that would not otherwise be the case. By the way, this has nothing to do with whatever else might be required of you by the foreign country. For the more paranoid among us, this may compel you to stick to home base. If you have any questions contact Kal Barson at kal@barsongroup.com

Some of you might have noticed a recent uptick in unsolicited pen pal correspondence. The unfortunate reality is that there indeed has been a recent increase, actually a significant increase, in the frequency of Notices from various federal and state tax authorities. Those Notices sometimes also wind up having rather a severe sounding, aggressive follow up communication when you either don’t respond quickly enough or they simply cannot handle the responses. What is happening?   Firstly, understand that it is almost always nothing you’ve done, or even that you failed to do. What we CPAs (and we’ve gotten feedback from a number of our peers) are seeing is that there has been a combination of 2 negative factors (we will explain further immediately below) that have caused this more than annoying recent uptick. These 2 factors are:   Inadequate staffing – and while we’d like to say this is related, in theory it has nothing to do with whether or not the IRS has been recently defunded or will get its funds back. This has been an ongoing issue, at least as to the IRS, and has certainly expanded itself to various states. The unfortunate reality is that too many of those in power are too involved or obligated to the wealthy, and thus they would prefer to keep severely underfunded taxing authorities so that audits are rare, ineffectual and minimally invasive. Directly connected to that is – and we’ve heard this outpouring of grievances from a number of tax agents – inadequate staffing has led to often onerous production requirements and quotas. These requirements often fly in the face of sound and intelligent operational procedures. As a result, the life of tax agents has become more and more uncomfortable – causing them in many cases to seek employment elsewhere. That further compounds the inadequate staffing – making it not only inadequate but also inexperienced.   Indirectly connected to the preceding, we have the ever-expanding use and abuse of mindless computers. Forget the current talk about AI and the genius its capable of accomplishing. The harsh reality when it comes to taxes, is that so much of the responses and contact with the general public have been relegated to computers, that what happens is they simply kick out one Notice after another. To compound that, when you respond, there is often a lag with the infamous, well-known “crossing in the mails”; as well as the above-referenced inadequate staffing precluding the proper inputting of information so that the mindless computers continue with their games.    Is there a resolution to these problems? Is there a way to fix the situation? The answer is yes – but it will require a significant boost in the funding and staffing of the taxing authorities. That’s the harsh reality, and no degree of bloviating will change that.

I have long argued that one of the financial banes (wastes) of the middle class is the cost of cars. More pointedly, the issue of replacing cars. I know that I’m stepping on the feet of people who like to have a new car every 3 years or so. However, frankly, that is a very expensive way to manage your car dealings. I would suggest to you that keeping a car for say 10 years (and just about any decent car made nowadays will last at least that long) will save you a lot of money as compared to say a 3 or 4 year turnover. But, let’s assume for the moment you’ve done what I just said, and now it’s 10 years that you have a car and you’re contemplating its replacement. Do you replace it?   This article will provide a numerical exercise about whether it makes sense to replace an otherwise good 10 year old car. Let’s assume for this purpose you have a car that is 10 years old, with 100,000 miles on it. There is no loan, the car is worth $10,000 on the used car market, and you’re pretty sure you could get another 10 years out of this car – but it will cost you an increasing amount starting at about $2,000 a year and going up to $3,000 a year as the years go along, to maintain the car. Let’s further assume that your use of money carries with it a 5% ROI; that a new car would cost you $60,000; or alternatively you could buy a “slightly” used car that would cost you $30,000. And, in all cases, we’re looking at a 10-year horizon going forward.    Further assume that the new car at $60,000 would have a value of $10,000 after 10 years; its maintenance cost for years 1 - 3 would be zero; years 4 & 5 at $500; years 6 & 7 at $750; and years 8 – 10 at $1,000. Or, if instead you were to buy a $30,000 used car, after 10 years it would be worth $5,000; maintenance for years 1 – 5 would be $1,000; years 6 & 7 at $1,500; and years 8 – 10 at $2,000 per year. Also assume that in terms of auto insurance, a new car would cost you $500 a year more than your current car; and another used car (of more recent vintage) would cost you an extra $300 a year in insurance. You will notice we’re ignoring for this purpose various intangibles such as the pleasure of having a new car, and we’re further assuming there are no safety type issues.    With the above assumptions, let’s lay out the cost issues.   Keeping the existing car. It’s now worth $10,000, and after 10 years we’re assuming it will be worth nothing. As we premised, the annual maintenance costs are going to run from $2,000 a year to $3,000 a year over those 10 years, with incremental increases each year. In other words, about $2,500 a year on average. Thus, in this scenario, the costs specific to this car over the next 10 years will be $35,000 – the loss of the $10,000 current value and an average of $2,500 a year in maintenance. Keep in mind we’re not worrying here about gas, oil changes, or insurance – because we’re only dealing with the differential between this and the other alternatives.   New car purchase at $60,000. Firstly, with the assumption of a 5% ROI, laying out $60,000 for a new car (buying on a loan doesn’t change this scenario at all – it probably makes it a bit worse) means it’s going to cost you $3,000 a year to have that money tied up in a new car. Over the next 10 years that’s $30,000. The maintenance costs premised above amount to $5,500. And, the extra insurance cost over 10 years would be $5,000.  At the end of the 10 years, that car would be worth $10,000. Thus, the cost of buying this new car can be roughly assumed to amount to $50,000 loss on value, plus $30,000 of lost ROI, plus $5,500 of maintenance, plus $5,000 for insurance equals $90,500.   Used car purchase for $30,000. Again, with an ROI of 5%, that’s gong to cost you $1,500 a year – or $15,000 over the 10 years. The extra maintenance as premised above amounts to $14,000. And, the extra insurance amounts to $3,000. At the end of the 10 years, that car would be worth $5,000. Thus, your cost for the used car is $25,000 loss in value, plus $15,000 lost ROI; plus $14,000 maintenance; plus $3,000 insurance, equals $57,000.   In this imperfect, but sincerely done analysis, and allowing for a whole bunch of assumptions etc., you can readily see that there is absolutely no contest in terms of the relative costs. For the next 10 years, in cumulative total as to the differential in these three options, keeping the existing car will cost you $35,000. Contrast that with buying a new car for which the differential will be about $90,500. Or, a somewhat newer used at a differential of $57,000. While this exercise can be done in a much more sophisticated fashion, and of course using specific examples and real cost numbers, I’m pretty confident that the concept here will not change – that is, if you are in the position of having a 10 year old car that’s been doing well and you have no particular fears of it falling apart, then it is a no-contest financial decision that keeping that 10 year old car for another 10 years will save you a considerable amount of money as compared to replacing it now with a new car or a somewhat newer used car. And besides, how much of that new car smell can you take? If you have any questions contact Kal Barson at kal@barsongroup.com

I was thinking of titling this article something along the lines of “It’s not your father’s wash sale”, but I figured that would be too obtuse. The issue here is the possible combination or overlap of taking a gain on a stock and buying it back with an eye towards the wash sale rule. While a lot of people who invest have heard of the wash sale rule, many don’t realize that it applies only where you have a loss. That is, to oversimplify, if within the 30-day period before, or the 30-day period after, the sale of a stock in which you lock in a loss, you buy it back, then that loss is not immediately recognized, but rather kind of banked and saved for another time. However, that does not apply where you lock in a gain. In other words, you could sell a stock at a gain and buy it back one minute later – and you’ve locked in the gain, and you’ve started the clock ticking anew on the new position.    So obviously a quick question may come up – why would you do that? One very good reason would be if you already had losses during the year, and you wanted to be able to take some gains at effectively no tax cost. You could do that by selling a stock at a gain to whatever extent you want to cause a recognized (realized) gain that would in turn be offset by already incurred (or possibly anticipated to be incurred) losses. And, you would buy it back because you still like the stock. Nowadays, with effectively for many stock transactions there being no transactional cost, it in turn costs you nothing to sell a stock and buy it back.   Why would you do that since any currently unused losses can be carried forward for quite a number of years (technically until you die), so that you would in that sense have no pressure to take a gain to offset losses. That is true at the federal level. However, using our home state of New Jersey as an example, New Jersey does not allow for losses. Thus, as an example, if you have stock market losses of $20,000, New Jersey won’t allow you to use any of them – except against taking gains in other stocks, and it must be within the same year. Thus, if you’ve already incurred some substantial losses in the stock market in a particular year, if you do nothing about it (in line with this article), for New Jersey purposes, those losses are wasted. On the other hand, if you were to sell some stocks at a gain, then for New Jersey purposes, that gain will be tax-free. If you have any questions contact Kal Barson at kal@barsongroup.com

Under limited circumstances, the cost of clothing, as well as the cost of cleaning it, can be a deductible business related expense. The most commonly experienced such situation is where it involves a uniform. Generally, it’s clear cut – if clothing is truly a uniform, then the cost of buying, maintaining, and cleaning it is a deductible expense – to the extent not reimbursed by the employer. The classic losing attempt to claim clothing as a uniform is the “professional” who has to wear either a suit or perhaps even a collared shirt, and who argues that were it not for the mandates of my employer, I would never wear such clothing – and in fact, I only wear such clothing to go to work. While those claims/positions may indeed be quite true, they fail when it comes to being sufficient support to allow for the deduction of such clothing as a business expense.   While there are numerous cases involving this area, and a variety of issues and points to be considered or challenged, the simplistic basic test, benchmark, is whether or not such clothing can be worn (is suitable for wearing?) outside of, other than for, business. Thus, the classic uniform (think for instance in terms of UPS) really qualifies as strictly a business item, not suitable for wearing other than for employment. On the other hand, a suit or dress, tie, collared shirt, etc., are all clearly suitable for general purpose wearing, even if for you personally it is not something you would do. The classic “test” applied to a female performer a number of years ago, when she claimed a dress that she wore on stage as strictly business, was whether or not she’d be able to walk normally and sit down wearing that dress. As I recall, it was so tight (intended for the appropriate impression on stage) that there was no way she would be able to use that dress in general, and thus it qualified as a business item. If you have any questions contact Kal Barson at kal@barsongroup.com

There is often a hidden surprise (not in a good way) when we talk about the sale of rental or otherwise business real estate. The typical type of question I get from clients is along the lines of “I bought this rental property 10 years ago for $300,000, and I am going to be selling it for $500,000. Obviously I have a $200,000 gain – what’s my tax”? Ah, were life only that simple. In almost all likelihood, what my client left out (probably really didn’t know) was the issue of the extent of the depreciation taken on that property over those past 10 years. So, the rental property cost $300,000; let’s assume that $100,000 was assigned to the value of the land, and $200,000 was assigned to the building. That property was rented, and reflected on the tax returns of the individual. One of the expenses taken against that property, allowed under our tax laws, is something called depreciation (essentially the writing off of the cost of the property). Let’s assume that over those past 10 years depreciation has been taken to the extent of say $80,000. Now you're selling the property. This is when those previous tax write-offs come back at you. From a tax point of view, writing off $80,000 for depreciation means that you lowered your cost in this property for tax purposes by $80,000 – which means that you’ve got $80,000 more of gains than you thought you did. Thus, you don’t have $200,000 of taxable gains – you have $280,000 of taxable gains. And, to make matters somewhat worse, while the $200,000 of gain is taxed at capital gains rates, the $80,000 is taxed at special depreciation recapture rates – which are better than the regular rates but worse than the capital gains rates. Finally, a few words relevant to cash flow from the sale. From a tax point of view, there is absolutely no connection between the cash you get from the sale and the taxable issues. A common situation is a property has been mortgaged, remortgaged and refinanced. The property is sold, and net of the mortgages of course, you get your cash. It is not unusual for the mortgage at that time to have exceeded your cost basis in the property – and thus the cash you get can be considerably less than the gain. In some extreme cases, we have people selling real estate with an income tax bill exceeding the cash flow. If you have any questions contact Kal Barson at kal@barsongroup.com

The IRS is an easy whipping post, an organization that most people simply don’t like – and that is because the IRS’ job is to enforce the collection of taxes. Let’s accept for the moment that like it or not, that really is an important function in this country – simply put, very little would run without the support of taxation. From my experience, most of us don’t object to taxation per se , but object more to various unfair elements of same, and sometimes the absurdity and unreasonableness of how the IRS (to say nothing of various State tax collection organizations) operates. Frankly, the IRS could (and probably wants to) operate much better than it does – but the problem, plainly and simply, is that Congress does not give it the respect it deserves, it keeps it severely underfunded. Arguably, underfunding the IRS makes people happy in that it cannot do the job it’s supposed to do; it cannot conduct the number of audits it’s supposed to. However, that same underfunding also means that it doesn’t operate efficiently and effectively, and many times operates in a fashion that is simply inappropriate and offends a lot of people. As contra to many people’s preference as this may sound, the way to fix the IRS is to give it a lot more money, so that it could coordinate its computer systems, operate at a more professional level, and do its job. If that happened, what we would probably see is the IRS auditing more well off operations and more exotic situations –and maybe even auditing (going after) Senators and Congress people, and various big ticket people. Thus, one angle, it makes you think, is the underfunding of the IRS a deliberate attempt (and you have to admit it’s pretty successful) by Congress -and now most deliberately by the president- to keep the IRS off its back?