Friday, October 31, 2014

Form 5500-EZ Pilot Penalty Relief Program

Learn about the pilot penalty relief program for late filed Form 5500-EZs. To get even more in depth information, go to and type "form 5500 corner" in the search bar.

Tuesday, October 28, 2014

IRS Commissioner: What to Expect at Tax Time

Learn how the Affordable Care Act will affect you when you file your tax return. For even more in depth information, go to

Friday, October 24, 2014

What Does Extending Your Taxes Mean to You?

As the tax filing deadline is quickly approaching, many procrastinators and those who legitimately are just not ready to file their returns become stressed out and frantic, trying to meet what may virtually be an impossible deadline. Many would rather rush to get their returns prepared than file an extension. Common concerns include, but are not limited to, being flagged as a late filer, being assessed penalties, or being more likely to be audited. If you are one of these individuals, I hope that I can put your mind at ease and inform you of what it really means to extend your tax return and the benefits of doing so.
A few notes before getting started:
  • This article is written assuming a tax year that is the same as the calendar year, which is the case for most individual taxpayers.
  • If a tax deadline noted falls on a holiday or weekend, the deadline is actually the next business day.
  • The focus of this article is on the filing of federal individual extensions except where noted otherwise.
  • "Tax professional" as opposed to "tax preparer" is referred to in this article. My definition of "tax professional" is someone who has extensive knowledge, education, and experience in taxation and can provide tax consultation and planning services in addition to preparing returns. Two commonly recognized credentials held by tax professionals include CPA (Certified Public Accountant) and EA (Enrolled Agent). CPAs and EAs are by no means the only tax professionals out there and not all CPAs do tax-related work.
With those preliminary notes out of the way, I will now discuss what you should know about extensions.
What is an extension?
First and foremost, it is important to know that an extension is an extension of time to file an income tax return, not an extension of time to pay the tax due. Unfortunately, many taxpayers miss the part about it not being an extension of time to pay, perhaps due to wishful thinking.
There are two federal individual income tax extensions that can be filed. The first extension, which is "automatic," is due by the April 15th tax deadline and is a four month extension of time to file. Thus, if you file this first "automatic" extension, you will have until August 15th to file your income tax return. Your best estimate of the tax that will be due with the actual return is still due by April 15th.
As for the first extension being "automatic," that does not mean it just happens - you need to actually file the extension. There are various ways to do so which are convenient and are discussed later. The reason it is referred to as "automatic" is that you do not need to provide an explanation for why you need additional time to file.
The second extension is not "automatic" like the first one. If you cannot complete your returns by the August 15th first extension deadline, you can "apply" for an additional two months. The second extension is considered an "application" because you need to provide a good reason why you need the additional two months to file. You need to demonstrate that you made a reasonable effort to get your returns completed within the first four month extension period or that you had extenuating circumstances. If the reason is merely for your convenience, your request can be denied. If your application is denied, your return will be due immediately or within a 10-day grace period. If you did not timely file a first extension, a second extension will only be approved in cases of undue hardship.
Between the two extensions, that gives you up to six months additional time to file beyond the April 15th tax filing deadline. Six months is generally the maximum total time a return can be extended by law.
Why should I extend?
The Internal Revenue Service prefers that you file a complete and accurate return. A return you have to rush through, do not have all information for, or make estimates of figures for is unlikely to be complete and accurate. Thus, it is better to file an extension if you are approaching April 15th and you do not have all information needed or otherwise cannot file complete and accurate returns.
If you use a tax professional and you are getting your tax information to him or her just a few weeks or so before April 15th, do not be surprised if he or she indicates an extension will need to be filed. You are more likely to have a complete and accurate return if your tax professional is not trying to rush to make the April 15th deadline.
A few more comments for those of you who use tax professionals. If it is approaching the tax deadline and you have not yet contacted your tax professional, do not be surprised if he or she is unable to speak with you when you call his or her office. Also, do not assume that just because you used his or her services last year they will file an extension for you without you specifically requesting it. Tax professionals are very busy dealing with many clients and working long hours all of tax season and they get even busier as April 15th approaches. Moving forward, you should consider getting in contact with your tax professional's office well in advance of the tax deadline to determine what he or she needs to file an extension, if necessary, and prepare your taxes.
In addition to having a complete and accurate return, there are certain planning opportunities that can be taken advantage of if you or your tax professional is not forced to rush through your return. One example is funding certain retirement plans such as SEPs and Keogh Plans - these can be funded for the prior year through the extended deadline of the return that falls in the current year. Some plans, such as a SEP, can actually be established for the prior year up through the extended due date of the tax return. It is important to note that traditional and Roth IRAs need to be funded by April 15th to qualify as contributions for the prior year. For more information on such planning opportunities for the year just past as well as the current and future years, you should consult with your tax professional.
What are common concerns over extending?
As referenced earlier, many individuals are adverse to even the idea of extending due to concerns such as being "flagged" as a late filer, being assessed penalties, or being more likely to be audited. Filing an extension in and of itself is not going to raise any "red flags" or cause problems as long as your extension is timely filed and the tax due is paid by April 15th. As for being audited, you are more likely to be audited if your return is incomplete, includes estimated figures, or is inaccurate.
Another concern individuals have is that it will cost them more to file an extension. The IRS does not charge for filing an extension. Your tax professional may charge you for doing so, but the fees charged most likely will be far outweighed by the benefits of the return being complete and accurate. Incomplete and/or inaccurate returns can result in you being contacted by the IRS and generally require that an amended return be filed. Your tax professional will likely charge you for preparing an amended return. If additional tax is due, penalties and interest may be assessed. A complete and accurate return is much less likely to result in any correspondence from the IRS. Additionally, it includes an accurate tax liability, which means lower taxes or reduced penalties and interest as related to an understated tax liability. Like with many things in life, it is better to do something right the first time as there is more time, effort, and expense associated with having to correct something later.
Yet another reason that some individuals do not want to extend is because they are in the process of buying a new home or refinancing and their lender is requesting a copy of their tax return. Many lenders will accept a copy of an extension along with copies of documents substantiating income (W-2s, 1099s, K-1s, etc.) and copies of the prior year tax returns.
What information is needed to file an extension?
You will need your general taxpayer information, which includes your name, name of your spouse if married and filing a joint extension, your social security number, your spouse's social security number (if applicable), and your complete address. To avoid potential delays in the processing of your extension, special attention is required if any of the following apply: your name has changed due to marriage, divorce, etc.; your address has changed since you last filed a tax return; or you want to have correspondence related to your extension sent to your tax professional or otherwise. You should refer to the instructions for the extension form to properly address any of these items.
There is not much other information needed. The items needed for the tax year that the extension is for are an estimate of your total tax liability and the total tax paid. The estimate of the total tax liability is the more difficult of the two. You need to come up with your best estimate of what the tax liability is. The IRS instructions for the completion of Form 4868, "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return" clearly state: "Make your estimate as accurate as you can with the information you have. If we later find that the estimate was not reasonable, the extension will be null and void." If that were to be the case, your return would be considered late. A late filed return is subject to late filing and late payment penalties and interest.
How do I file an extension and, if applicable, pay the (estimated) tax due?
Either you or your tax professional can prepare and file your extension. The methods for filing it include e-file by phone, e-file by computer, or filing a completed paper Form 4868. Regardless of who is going to prepare and file your extension, the information discussed in the previous section will be needed. Thus, if you use a tax professional, you need to get in touch with him or her in advance of the tax deadline to ensure that he or she has that information.
E-file by phone is a very convenient option if you are going to file your own extension. The Form 4868 and its instructions can be easily downloaded from the IRS' website. After reviewing the instructions for the form, use Form 4868 as a worksheet and then call the toll free number in the instructions. You will be prompted for the information from the completed form and given a confirmation number at the conclusion of the call. In order to e-file by phone, you must have filed a federal return for the prior tax year.
As for paying the (estimated) amount due, you can do so via electronic funds withdrawal (EFT, from a checking or savings account), credit card, or check. The EFT option can be used if you e-file by phone or e-file by computer. You will need to enter additional information when filing the extension to include AGI (Adjusted Gross Income) from your prior year tax return and the routing and account numbers for your bank account. Payment by credit card can be done via one of several service providers, each of which charge a convenience fee based on the amount of the tax payment being made. Payment by check can be made if you e-file by phone, e-file by computer, or file a paper extension form. More detail about these payment options is included in the instructions for Form 4868.
It should be noted that if you are a taxpayer that makes or should be making estimated tax payments, you should compute and timely make those payments for the current year even if you filed an extension. The federal income tax system is a "pay as you go" system and if you are self-employed or otherwise have income that results in a tax liability that is not paid via withholding, you may be required to make estimated tax payments throughout the year. If you are not sure if this applies to you, it is recommended that you research this topic or consult with a tax professional.
For further information about filing a second extension, please refer to the instructions for Form 2688, "Application for Additional Extension of Time to File U.S. Individual Income Tax Return" which can be easily downloaded from the IRS website as
What about state, local, and other income tax returns?
Some states will accept the federal extension while others require that you file an extension document with them. Ohio accepts the federal extension and does not require that you send them a copy of it, though you do need to send in the tax due, if applicable, by the April 15th deadline. If you live in a state with municipal or other local income taxes, you may need to file an extension with the locality (or localities) that you have a filing responsibility with. Further discussion about state and municipal filing requirements are beyond the scope of this article as they vary from state to state. Check with the respective department(s) of taxation or your tax professional for more detail. Like with the federal extension, you generally need to pay any state or local tax due at the time the extension is filed.
In Conclusion
Whether you prepare your own taxes or work with a tax professional, I hope that you have a better understanding of what an extension is, when it should be considered, and what is involved in completing and filing one. If it is close to the April 15th filing deadline and you have not finished or even started preparing your returns, you should consider filing an extension. This will allow additional time to ensure that the returns are complete and accurate and, in turn, should reduce the stress associated with filing your taxes.

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Monday, October 20, 2014

About Our Company

ATS was first conceived on the 4th of July 1985 in the historic Benicia City Park landmarked by the gazebo pictured here to the left. On this day, numerous townspeople came together to picnic in the park, enjoy the entertainment in the gazebo and wait for the waterfront fireworks that night. Amongst the many picnickers were a few members of a local church discussing some community needs. One of these subjects was the need for a local full-time tax office. At that time both Frank and Sylvia Barata were employed as tax specialists with the IRS and intrigued by the idea of fulfilling this need.
Within a few weeks Sylvia chose to leave her ten year IRS career and take on the challenge while Frank kept a foothold at the IRS. With the financial support of Gene and Nancy Duplin, active ATS partners for the first two years, an office was secured in August and the Benicia phone number 745-1040 was captured.
Unlike many established tax practices, ATS had no clients. By way of advertising with mailers, articles, commercials, live radio call-in talk programs and many personal presentation, ATS began to grow. Many of the first comers are still with us today and we continue to strengthen our relationships. The confidence, trust and loyalty portrayed by ATS clients, old and new, is an affirmation that the idea conceived on July 4, 1985 was a true inspiration and reminder of our original purpose.
ATS has become a growing family serving clients coast to coast. Over the years, the clients have given us the name "Tax Angels". The "Tax Angels" continue to live up to this calling. They remain true and loyal to these clients by providing quality tax services.
The "Tax Angels" thank you for your confidence and trust, and value your referrals.

Friday, October 17, 2014

Changed Your Name After Marriage or Divorce?

Find out what you need to do if you have changed your name due to marriage, divorce or some other reason.

Tuesday, October 14, 2014

The History of Income Taxes in the US

1913 celebrates the 16th Amendment to the constitution of the United States marking the beginning of income taxes. The tax code is more complicated than anyone can imagine and a look at the major events over the past 100 years might help you understand how we got to where we are today.
In researching for this article, I kept looking for a single word or phrase that could easily describe the "History of Taxes". The only thought that kept popping into my head was... "Schizophrenia". Defined by Webster: schiz·o·phre·ni·a Noun; 1) A long-term mental disorder of a type involving a breakdown in the relation between thought, emotion, and behavior, leading to faulty... 2) A mentality or approach characterized by inconsistent or contradictory elements.
Today's tax code is made up of perhaps the most complex assembly of contradictory rules, regulations, and laws on earth. For the sake of this article, I'm only going to touch on the key factors and point out how to make your way through this maze. Even the most respected authorities on the topic of taxes are confused by the nearly 10,000 pages of tax code.
There were many taxes before the 16th Amendment. To help fund the War of 1812 there was a tax on gold, silver, jewelry, and watches. Once the debts from the war were completely settled, the taxes were halted in 1817. Revenue to operate the government was adequate with tariffs and fees on traded goods until the Civil War. In 1862 Congress enacted the first income tax law to support the costs of the Civil War. The tax rate was at 3% and higher on some luxury items. Then in 1868 Congress enacted a new tax on tobacco and distilled spirits. This is the first sign of a 'parallel' tax along with an income tax. Revenue was the highest ever achieved at $310 million and quickly settled all debts of the country, so in 1872 Congress eliminated the income tax.
Following the Civil War, America experienced a great economic boom with the 'Reconstruction Era'. In the years from 1870-1900 the benefits from the Industrial Revolution were put into action. Chicago hosted the World's Fair in 1893, celebrating the 400th anniversary of Columbus' arrival in the new world in 1492. In 1894, Congress revived the income tax law and looked to aggressively grow revenue. Just one year later on May 21st 1895 the Supreme Court Ruled that income taxes were 'unconstitutional'. The 5/4 decision stated that a direct tax on the income of real and personal property was unconstitutional and void. In the years that followed this Supreme Court decision the economy once again grew rapidly. The very wealthy became wealthier and there were jobs for everyone. The good life in America was celebrated with growing immigration from Europe bringing tradesmen looking for a better life. In 1904, Saint Louis hosted the World's Fair celebrating 100 years of the 1803 Louisiana Purchase. This event showed the world how abundant every aspect of life was in America.
In 1907, only three short years later, America faced a huge crisis. The economy of America fell to a point where the average family income fell by 40%. A panic set in because many banks closed and people lost trust and hope. Times were difficult for average families. When banks closed, hardworking people lost their savings. President Taft addressed Congress in 1909 proposing a 2% federal income tax on corporations (for the privilege of doing business). On July 12, 1909, Congress passed a resolution proposing the 16th Amendment. This amendment to the constitution allows Congress to levy an income tax. Federal Income tax is not required to be distributed or apportioned to states nor have any connection to Census results. It was written to avoid being a 'direct tax' and avoid conflict with the Supreme Court ruling in 1895. With 48 states in the union, 36 states were needed to ratify before it could be passed as an amendment.
Then in 1910 a secret meeting was held on secluded Jekyll Island with the most powerful bankers and financial decision makers of the time. This event really requires much more discussion and entire books have been written about this meeting. What is important to take from this is the fact that this meeting was the start of what we know today as the Federal Reserve Bank. Few people even today understand the impact of this meeting.
It is interesting to note that since the proposed 16th amendment in 1909; only 31 states ratified it through 1911. The US presidential election of 1912 was a rare four way contest. Incumbent President William H. Taft ran along with former President Theodore Roosevelt and Woodrow Wilson (finally nominated by his party on the 46th ballot) and Eugene Debs from the Socialist Party. Throughout the 1912 presidential campaign (typically a 2 month event), the 16th Amendment was a 'hot topic'. At the time of the election in November only two more states were needed to ratify the 16th amendment. Woodrow Wilson was elected and the 16th Amendment to the US Constitution was ratified on February 3, 1913.
With the Congress' windfall of revenue it was time to jump on the roller coaster of cash. World War I came along and in 1918 Congress set the taxes at a rate of 77% for those with income over $ 1,000,000. That's a 2012 equivalent of $15 million annual income, so most people didn't even care that there was an income tax. With this first major income tax in 1918, our US annual revenue surpassed one billion dollars for the first time ever. That's a "one" as in single and "B" for Billion. Then just two years later, in 1920 the US annual internal revenue grew to $5.4 billion. This represents a 500% increase in just 24 months.
A lot of other history was being made over the years from 1920 to 1940 and the tax front was relatively quiet. The economy grew at a rapid pace during the 20's, hence the name 'Roaring Twenties'. Then in October of 1929 the "What goes up must come down" effect took place. The stock market crashed and brought with it a depression. Like many events in history, the government's intervention slowed the normal recovery and this era is now known as the "Great Depression".
When people talk about the 'highest tax rate' they often see a number that is reserved for the very rich. What gets overlooked in addition to that highest rate is the income 'threshold' which determines the number of people impacted by that rate. In 1941 the highest income tax rate was 81.1% for those making over $5,000,000. That certainly limited this high rate to a minimal number of people. Then in 1942 (the very next year), the highest rate was raised to 88%. In itself, this does not seem too bad until you consider that the threshold was lowered to those making over $200,000. Lowering the threshold from $5 million to $200,000 meant that many more people would be paying that new higher rate. In 1942, World War II created a huge increase in employment and stimulation of the economy (compared to the years of the depression). With this spike in employment there was also a spike in tax revenue and the US revenue exceeded $7.3 billion in collections.
Up to this point in time the collection of taxes were voluntarily paid by taxpayers. People filed their tax reports and made payment of their taxes. In 1943, Congress adopted 'Mandatory Federal Income Tax Withholding' requiring employers to pull out taxes from employee's pay and forward it to the US Treasury. This measure increased the number of taxpayers to over 60 million (estimated increase of 30+% in number of taxpayers). After WWII ended in 1945, Congress increased that top rate to 94% and kept the threshold at $200,000. Congress/IRS closed some loopholes on the 'tax withholding' bill and included more complications on who had to pay quarterly tax payments. The annual internal revenue in 1945 surpassed $43 billion, up nearly 50% each year for 15 years.
The end of WWII marked a period of substantial growth, both the economy and the birthrate. We entered a new era in America with tremendous growth and individual responsibility. Families were living the American Dream. Congress and the Internal Revenue Service continued to 'tinker' with the tax codes after WWII. At the end of 1969, Congress enacted the "Tax Reform Act of 1969" which established the Alternate Minimum Tax (AMT). This was a new totally separate tax system for some Americans. The number of Americans who were required to pay the AMT in 1970 was around 19,000 and the amount collected was $122 Million.
Years go by with an obvious abundance of income for the Federal Government. Budgets are set to automatically increase, regardless of the actual amounts needed or spent. In 1981 Congress enacted the largest tax cut in US History by cutting $750 Billion over 6 years from revenue. Then in 1982, yes just the very next year, Congress passes a tax act to INCREASE revenue. The increase wasn't enough, so in 1984, Congress passed another tax act increasing revenue. Between the 1982 and 1984 tax acts, the total revenue was around $265 Billion. This is about 1/3 of the revenue cuts passed in 1981, which were to take place over 6 years.
On October 22, 1986, President Ronald Reagan signed the "Tax Reform Act of 1986" which dropped the top tax bracket from 50% to 28%. This represents a significant drop in the top rate, the lowest top rate since 1916. Another part of the 1986 Act was a change in the AMT to expand and include many homeowners. Congress got into a bad habit of making their "Tax Act" an annual event with more changes in 1987, 88, and 89.
On November 5, 1990 the "Revenue Reconciliation Act of 1990" was signed into law. This was just a fancy name for "Tax Act" and had most of the same tinkering with our income taxes. This Act primarily focused on raising taxes on wealthy Americans. The economy was growing and inflation rates were recovering from the 80's. When President Clinton signed the "Reconciliation Act of 1993", the purpose was to reduce the federal deficit by $496 Billion. Revenue to the Federal government was still greater than what was required to operate and surpluses existed. In 1997, President Clinton signed the tax Act cutting taxes by $152 Billion. This bill brought down the capital gains tax, provided a $500 per child tax credit, and had tax incentives for education.
In 2001, President Bush signed the "Economic Growth and Tax Relief Reconciliation Act of 2001". This contained the 3rd largest tax cut since WWII, set to cut $1.3 Trillion over 10 years. With such a long name and such a huge tax cut, you would hope that maybe this would be enough to last 10 years. Well that makes too much sense. In 2003, President Bush signed the "Jobs and Growth Tax Relief Act of 2003" accelerating the rate cuts of 2001.
While not a law, in 2004 the 'World Trade Organization' ruled that the US Corporate tax provision was illegal. This did have an impact on how corporations planned their business and tax strategies. This also indicates the foreign influence and encouragement for American corporations to be more like European business models. In 2005 the favorable rates on capital gain and dividends were extended. The exemption levels for the Alternative Minimum Tax were raised in 2006.
Remember a few paragraphs ago when we looked at that Alternative Minimum Tax? Established in 1969, the AMT was established as an entirely separate tax system to the income taxes. While most Americans were not aware that this tax even existed, the changes made to the AMT affected nearly 5 Million taxpayers in 2011. In 1970 the AMT accounted for $122 Million in revenue and in 2011 the AMT revenue exceeded $40 Billion. This is nearly 260 times more than 1970.
Through the years since our founding, America has been on a path of rapid government growth. Taxes are the price we pay to live in a civilized society providing basic services and caring for those unable to care for themselves. If the government showed a history of being good stewards with our tax dollars, more Americans would proudly pay taxes without complaining. However, the layers upon layers of tax regulation have brought us to a point of dependency for many who rely on our complicated tax system. The kind of changes that are needed will require a major overhaul. Most politicians and special interest groups today will not allow the drastic measures needed to establish a new fair tax system. This means that anyone looking to the future would have sense enough to figure that future taxes will most likely be much higher than they are today.

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Saturday, October 11, 2014

Is Social Security Taxable?

There's a simple calculation that will help determine if your Social Security benefits may be taxable.

Wednesday, October 8, 2014

Amending My Return

Forgot to claim a credit or need to correct your tax return? These tips will make amending your return a breeze.

Sunday, October 5, 2014

Form 5500-EZ Pilot Penalty Relief Program

Learn about the pilot penalty relief program for late filed Form 5500-EZs. To get even more in depth information, go to and type "form 5500 corner" in the search bar.

Wednesday, October 1, 2014

Taxpayer Bill of Rights

Learn about the 10 fundamentals in your Taxpayer Bill of Rights. For even more information, go to and type "taxpayer bill of rights" in the search field.