A Panel Discussion Led by Chris Blees, with panelists including:    Brandon Brown, Senior Resident Director & Wealth Management Advisor, Merrill Lynch Brian Colvert, Financial and Portfolio Manager, UBS Financial Services Bud Rainsberger, President, Rainsberger Wealth Advisors

We’ll Discuss:   Current trends in investment strategies Outlook for industries and asset classes Asset protection techniques Thursday, May 16, 2013   7:30 – 9 a.m. BiggsKofford’s Office, 630 Southpointe Court, Suite 200

Greg Gandy Director Send Email View Full Bio

Michael McDevitt Director Send Email View Full Bio

Deborah Helton Director Send Email View Full Bio

(Thompson Reuters) The IRS has issued its annual data book, which provides statistical data on its fiscal year 2012 activities. As this article explains, the data book provides valuable information about how many tax returns IRS examines (audits) and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections. The figures and percentages in this article compare returns filed in calendar year 2011 and audited in FY 2012 to returns filed in calendar year 2010 and audited in FY 2011.

What are the chances of being audited?

Of the 143,399,737 individual tax returns filed in calendar year 2011, 1,481,966 were audited. This works out to roughly 1.0%, down slightly from 1.1% the previous year. Of the total number of individual income tax returns audited in FY 2012, 487,408 (32.9%) were for returns with an earned income tax credit (EITC) claim, a slight increase from the 483,574 (30.9%) of all audited returns for FY 2011.Only 24.3% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That’s slightly down than the 25% figure for the previous year. The 75.7% balance of the audits were correspondence audits, slightly up from 75% for the previous year.

Following are selected audit rates for individuals not claiming the EITC:

• For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 3.6% of returns were audited in FY 2012, down from 4.3% in FY 2011.
• For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.4% of returns were audited in FY 2012, a decrease from 3.8% in FY 2011.
• Of the returns showing farm (Schedule F) income, .5% were audited in FY 2012 versus .6% in FY 2011.
• For returns showing total positive income of $200,000 to $1 million, 2.8% of returns not showing business activity were audited, and 3.7% of returns showing business activity were audited. The audit rates for such returns were 3.2% and 3.6%, respectively, for the previous year.
• For FY 2012, the audit rate for returns with total positive income of $1 million or more was 12.1%, slightly down from the 12.5% rate for FY 2011.

Not surprisingly, examination coverage increased for higher income earners. For example, the percentage was 0.85% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (down from 1% for FY 2011), and 1.96% for those with $200,000 to $500,000 of AGI (down from 2.66% for FY 2011). Exam coverage increased to 8.9% for those with at least $1 million but less than $5 million of AGI (down from 11.8% for FY 2011). Similarly, coverage increased for those with at least $5 million but less than $10 million of AGI, as well as for those with AGI of $10 million or more.

Select audit rates for business returns were as follows:

• For all corporate returns other than Form 1120S, 1.5%, same as the year before.
• For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.7%; $1-$5 million, 2.1%; and $5-10 million, 2.6%. For FY 2011, the percentages were, respectively, 1.6%, 1.9%; and 2.6%.
• For large corporations with returns showing total assets of $10 million or more, the overall audit rate was 17.8%, up slightly from 17.6% for FY 2011. The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 10.5% for those with total assets of $10-$50 million (down from 13.4% for FY 2011); 22.7% for those with $250-$500 million (up from 17.4% for FY 2011); 45.4% for those with $5-20 billion (down from 50.5% for FY 2011), and 93% for those with $20 billion or more (down from 95.6% for FY 2011).
• For partnership and S corporation returns, the audit rate was 0.5%, as compared to 0.4% for the year before.
• IRS’s activity on other fronts.

Here’s a roundup of some of the other valuable information carried in the new IRS Data Book.

Number of returns filed.

The number of partnership returns filed (Form 1065) increased by 1.5%, and the number of S corporation returns (Form 1120S) grew by .8%. The number of C or other corporation (e.g., REMIC, REIT, RIC) returns dropped by 2.2%.The number of individual income tax returns (e.g., Forms 1040, 1040A, 1040EZ) increased by 1.8%, reflecting the second consecutive increase (likely due to improvement in economic activity) after the 2% drop exhibited in FY 2010 and the 6.7% drop shown in FY 2009.

The number of estate tax returns filed in FY 2012 increased by 145.5%, following last year’s 62.1% plunge (which was attributable to the temporary repeal of the tax for deaths in calendar year 2010 before being reinstated retroactively with a $5-million exemption as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010).

Math errors on individual returns.

IRS sent out roughly 2.7 million math error notices relating to the 2011 return.Of the total math error notices, 23.9% were for tax calculation/other taxes (which includes errors related to self-employment tax, alternative minimum tax, and household employment tax), 15.3% related to exemption number/amount, 13.4% related to the EITC, 10.6% related to the standard/itemized deduction(s), 5.3% related to the child tax credit, and 5.2% related to the first-time homebuyer credit.

Penalties.

In FY 2012, IRS assessed 28.5 million civil penalties against individual taxpayers, slightly down from 28.75 million assessed in the previous year. Of the FY 2012 assessments, the “top three” penalties in percentage terms were 60.2% for failure to pay, 24.8% for underpayment of estimated tax, and 11.5% for delinquency. On the business side, there were a total of 995,533 civil penalty assessments (down from 1,080,027 for the year before), and the “top three” penalties in percentage terms were 51.4% for delinquency, 25.8% for failure to pay, and 20% for estimated tax.

Offers-in-compromise.
In FY 2012, 64,000 offers-in-compromise were received by IRS (versus 59,000 for FY 2011), and 24,000 were accepted (up from 20,000 for the year before).

Criminal cases.

IRS initiated 5,125 criminal investigations in FY 2012. There were 3,701 referrals for prosecution and 2,634 convictions. Of those sentenced, 81.5% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2011, IRS initiated 4,720 criminal investigations, there were 3,410 referrals for prosecution, and there were 2,350 convictions. Of those sentenced, 81.7% were incarcerated.

If you have any questions about this, please contact Gregory L. Gandy, CPA, Deborah Helton, CPA, or Michael E. McDevitt, CPA, for more information.

Deborah Helton Director Send Email View Full Bio

A few of our physician clients have received large refunds of their student FICA taxes paid while a medical resident.

Medical residents of hospitals and universities that were paid wages from 2002 – April 1, 2005 may be eligible for a refund of the FICA tax paid on their wages during the time of residency under the student FICA exception. If you were a medical resident during this time period you should contact your former employer (hospital or university) to see if it filed a FICA refund claim. If it did file a claim, you can register for your portion of the refund with the employer; the resident won’t hear directly from IRS.

This is a very specific window for the refund and action must have been taken by the hospital or university to claim the funds, but worth the inquiry. Unfortunately, the IRS has since changed the rules to state that medical residents working no longer qualify for this exclusion. Current medical students will not qualify for the exclusion.

If you have questions about your student FICA refund claim, please contact Deborah Helton, CPA.

The IRS is modifying several eligibility requirements, making it possible for many more interested employers, especially larger ones, to apply for the program. Applying for this program gives a partial relief from federal payroll taxes for eligible employers who are treating their workers or a class or group of workers as independent contractors or other nonemployees and now want to treat them as employees.

To be eligible for the VCSP, an employer must currently be treating the workers as nonemployees; consistently have treated the workers in the past as nonemployees, including having filed any required Forms 1099; and not currently be under audit on payroll tax issues by the IRS. In addition, the employer cannot currently be under audit by the Department of Labor or a state agency concerning the classification of these workers or contesting the classification of the workers in court. Normally, employers are barred from the VCSP if they failed to file required Forms 1099 with respect to workers they are seeking to reclassify for the past three years. However, for the next few months, until June 30, 2013, the IRS is waiving this eligibility requirement.

If you have questions on how to navigate this program, please e-mail Michael E. McDevitt, CPA, or Greg L. Gandy, CPA.

Over the past couple of weeks, many insurance companies have provided guidance in their investor calls that premiums for insurance plans being sold in the individual market could go up as much as 50 percent on average.

One has to wonder how this is even possible when ObamaCare was passed under the promise of affordability and access.  While some may argue that “rate shock” has become a mechanism for insurance companies to scare the market, the reality is that economics really leave the insurance market with no other choice.

ObamaCare requires insurers to offer benefit plans on the new exchanges that are relatively generous and would include coverage for maternity, prescription drugs and treatment of mental illness.  These are clearly important areas to cover.

In order to get this level of coverage, however, many people in their 20s, who are used to buying basic coverage, will now be required to pay more for these required benefits in the exchanges.  In fact, it is expected that more than 75-85 percent of individuals in this age group could end up spending more for insurance in these exchanges than they do currently.

Some argue that the annual price tag of $1,600 to $2,000 for an insurance plan is still an attractive deal, but if the penalty for not having coverage can be as low as $95 per year, the question remains whether many people will decide to opt out until they absolutely need insurance.

A key reason why insurance premiums are going up is because insurance companies will no longer be able to turn away or charge people more with pre-existing conditions. Even more significant is that these companies would only be able to charge its oldest customers three times as much as their youngest.

If younger individuals decide to wait until they get sick enough to require health insurance, this will obviously skew the insurance market where the sickest individuals will be the ones who are in the system, thus raising rates for everyone else. Many insurance companies are pushing the government to regulations that would charge higher rates for individuals who don’t sign up for insurance within a certain time frame.

What many people also fail to recognize is the income they earn this year will impact the amount of subsidy and/or penalty that will be calculated for 2014.  A recent survey indicated more than 70 to 80 percent of Americans had no idea how this year’s income reporting will impact the calculation of their benefits for next year, and as much as 40 percent of people between the ages of 18 to 34 were unaware that there was even a penalty for not having coverage.

Supporters of the law have downplayed the notion of rate increases with the idea that the new competitive markets will force insurers to provide competitive rates.  History will tell us, however, that in the days of managed care it is very difficult to ultimately contain costs in the long-term, especially when you factor in community rating and guaranteed issue.

The other complicating factor in the equation is that, as of Friday, February 15, 2013, only about half of the states have agreed to proceed with setting up the insurance exchanges, while the other half is deferring to the federal government.  What remains to be seen is how effective this dichotomy of market places will be in driving competitive advantage, and how insurance premiums will vary between these two systems.

The Congressional Budget Office indicated in its estimates that insurance premiums for those buying coverage in the marketplaces would probably be 10 to 13 percent in 2016 because the health plans would be more comprehensive.  The likely outcome from the current effects of ObamaCare is that while rates come down for older people, they may increase for consumers in their 20s, which could leave an older, sicker population now, and an even sicker population down the road.

The idea that federal subsidies will help shelter the cost of those individuals who need to find affordable coverage is worrisome in light of recent findings.  Several high-risk pools were established to provide assistance for those individuals with pre-existing conditions who needed help in finding coverage.  As recent as last week, it was reported these high-risk pools were running out of money and are underfunded.

The harsh reality is with an aging population that has a growing need for care of their chronic conditions, the cost for providing adequate coverage will not be cheap, and the biggest fear among employers, states, insurance companies, providers and the consumer is how we will afford the price tag to provide for what has been proposed.

As premiums continue to rise out of control, the jury is still out as to whether the promises of ObamaCare will actually be able to reel these trends in, or whether it is a balloon that continues to drift away.

Dr. Sreedhar Potarazu is an acclaimed ophthalmologist and  entrepreneur who has been recognized as an international visionary in the business of medicine and health information technology. He is the founder of VitalSpring Technologies Inc., a privately held enterprise software company focused   on   providing employers with applications to empower them to become more sophisticated purchasers of health care.

Currently, states, federal agencies and other organizations collectively hold more than $58 billion in unclaimed cash and benefits. That’s roughly $186 for every U.S. resident. The unclaimed property comes from a variety of sources, including abandoned bank accounts and stock holdings, unclaimed life insurance payouts and forgotten pension benefits.

Some people are owed serious cash. Last year, a Connecticut resident claimed $32.8 million, proceeds from the sale of nearly 1.3 million shares of stock. The recipient of the funds requested to remain anonymous and no further details were provided.

More than $300 million in pension benefits is currently owed to some 38,000 people, according to the Pension Benefit Guaranty Corp. The unclaimed benefits currently range from 12 cents to a whopping $704,621, with an average benefit of $9,100. Benefits may go unclaimed because an employee is unaware they had accrued retirement benefits at a previous employer, the agency said.

However, the majority of the forgotten funds — roughly $41.7 billion — are held by the states, according to the National Association of Unclaimed Property Administrators.

Under varying state laws, financial institutions and other companies are required to turn over any funds considered “abandoned,” including uncashed paychecks, forgotten bank account balances, unclaimed refunds, insurance payouts and contents of safe deposit boxes. They have found some pretty unusual items like diamonds, bottles of liquor and sardines. Property is usually considered abandoned after the holder of the account or property has had no activity or contact with the owner for several years.

The states then try to find the owner through websites, newspaper ads and booths at events like state fairs. But every year, the vast majority of unclaimed funds remain in state coffers, where the cash can be used to fund government operations. Although the states are careful to note that the owner’s claim to the property will always remain valid.

“The money belongs to the owner in perpetuity. Even if the owner dies, then their heirs could come back and claim it,” said Carolyn Atkinson, West Virginia’s deputy treasurer for unclaimed property and a past president of National Association of Unclaimed Property Administrators.

Florida’s chief financial officer announced this month that the state had received 61,271 new unclaimed property accounts worth more than $25 million as part of a settlement with insurance company AIG (AIG). The settlement is one of several reached last year with major insurers, including MetLife (MET), Prudential (PRU) and Nationwide after regulators in 20 states audited the methods they used to locate life insurance beneficiaries after a policyholder’s death.

The state auditors found that many insurers would use the Social Security Administration’s Death Master File to cancel annuity payments to clients who passed away, but not to start issuing payments to their beneficiaries. In some cases, companies would continue collecting premium payments from the policy’s value for years after the insured’s death, depleting the cash reserves down to zero.

Through the settlements, those balances are being reinstated and remitted to the states. But in many cases, beneficiaries remain unaware of their policy claim and many of their current addresses are unknown, making it hard for the funds to be connected with their rightful owner.

“Once it goes to the state, it’s unlikely that the rightful owner will be found,” said Mark Paolillo, a Massachusetts-based accountant and Ryan LLC’s abandoned and unclaimed property practice leader.

Are you owed money? Here’s where you can find out.

• State-held unclaimed property: Visit NAUPA’s unclaimed.org for a map with links to each state’s program.

• Life insurance: For benefits not held by the state, check the insurer’s site directly. For example, MetLife has an online search.

• Pensions: For Pension Benefit Guaranty Corp. benefits, visit the agency’s online search directory.

• U.S. savings bonds: More than 45 million matured savings bonds, worth nearly $16 billion, remain unredeemed, according to the U.S. Department of the Treasury. To search the database, visit treasuryhunt.gov.

• Tax refunds: In 2011, the Internal Revenue Service said it had $153.3 million in tax refund checks that were undeliverable. To make sure you’ve received your checks, visit the IRS’sWhere’s my refund? tool.

• Overbid proceeds: If a foreclosed home or tax lien for delinquent taxes is sold at auction for a price above the money owed, the former property owner is owed the so-called “overbid proceeds,” which are typically held at the country level. But, counties typically send notifications about the funds to the foreclosed address, so many people remain unaware of the extra cash, according to Mary Pitman, author of “The Little Book of Missing Money.” These funds are different than other unclaimed funds in that the property owner’s claim in some counties only last a few years. Contact the county clerk to find out which local agency holds the funds.