03-30-2009 - IRS Announces New Voluntary Disclosure Terms for Offshore Account Holders, Sets Six-Month Deadlines

IRS Announces New Voluntary Disclosure Terms for Offshore Account Holders, Sets Six-Month Deadlines

The IRS has announced new steps to coax U.S. taxpayers with undisclosed foreign bank accounts to come forward. In return for paying back taxes for the past six years, plus interest and a set of stiff penalties, the IRS will promise not to bring criminal charges or the 75-percent fraud penalty. IRS Commissioner Douglas H. Shulman announced this policy shift and clarification at a press briefing from his Washington, D.C. offices on March 26, at which he also released internal IRS documents that put the plan into motion.

"We believe the guidance represents a firm, but fair, resolution of these cases and will provide consistent treatment for taxpayers," Shulman explained. "The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice while they still can." He set a deadline of six months for disclosures under the terms of the guidance, at which time the program will be re-evaluated.

The IRS has issued a series of three memoranda, and has revised the Internal Revenue Manual (IRM), to reflect updated policies concerning voluntary disclosure, primarily in connection with offshore transactions. Voluntary disclosure occurs when a taxpayer timely discloses information necessary to determine or correct the taxpayer's liability. The IRM continues to provide that its voluntary disclosure practices do not create any substantive or procedural rights for taxpayers, but are a matter of internal IRS practice.

Voluntary Disclosure Terms

Shulman emphasized that the terms being offered for the disclosure of offshore accounts are an outgrowth of current policy and carry penalties at a level consistent with voluntary disclosure programs in the past. Within this framework, Shulman enumerated the amounts that would need to be paid by taxpayers with heretofore undisclosed offshore accounts who "come clean" under the program:

--Back taxes due on newly disclosed assets for the last six years;
--Interest due on these back taxes for the last six years;
--A 20-percent accuracy-related under Code Sec. 6662 or a 25-percent delinquency penalty under Code Sec. 6651 for each tax year at issue; and
Looking to the past six years, a 20-percent penalty on the total balance of all the taxpayer's foreign bank accounts or assets during the year among the past six in which the accounts had their highest aggregate value.
CCH Comment. This latter penalty is reduced to 5 percent for passive investors in certain transactions.

While Shulman observed that the penalties demanded under the program are not insubstantial, he pointed to several advantages to participating taxpayers regarding what the IRS will not do:

--The IRS will not pursue charges of criminal tax evasion against taxpayers who voluntarily disclose their offshore assets under this new policy; and
--The IRS will not pursue other penalties against participating taxpayers, such as the Code Sec. 6663 fraud penalties (75-percent of the unpaid tax) or the statutory penalty for willful failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50-percent of the foreign account balance) that both annually apply to undisclosed accounts and assets during the relevant tax years.

Shulman also touted the advantage to offshore account holders of "getting the matter behind them" and giving them certainty as to their tax liability.
In a follow-up comment, an IRS spokesman emphasized that "it is too late for any taxpayer who is under criminal investigation to make a voluntary disclosure. The IRS cannot discuss specific situations, but the voluntary disclosure process does not apply when the IRS has information related to a specific taxpayer from a criminal enforcement action."

CCH Comment. The issue apparently remains unclear as to whether taxpayers recently disclosed by the Swiss Bank, UBS, as holding undisclosed bank accounts in Switzerland may successfully participate in this initiative. The IRS provided reporters during the March 26 briefing a copy of Section 9.5.11.9 of the Internal Revenue Manual that holds taxpayers to have timely participated in the voluntary disclosure program if they disclose before the IRS has initiated a civil or criminal examination or notified the taxpayer of such an investigation. Their failure to disclose their accounts/assets before the IRS received notice under the UBS deferred prosecution agreement may, therefore, be irrelevant.

03-25-2009 - Be careful when borrowing tax refund amount upfront

BY PATRICIA KITCHEN | patricia.kitchen@newsday.com

Getting back what the government owes you in a day or two may sound appealing, especially this year when money is tight and consumers are strapped.

But, if you're thinking of getting a tax refund loan - in which you borrow the amount of your tax refund upfront - you'll want to ask plenty of questions about how much it will truly cost in fees.

"Even under the best of circumstance this is expensive credit for such a short period of time," said Jean Ann Fox, director of financial services for the Consumer Federation of America, which together with the National Consumer Law Center prepares reports on refund anticipation loans and services.

A seven-to-14-day loan for $3,000 can cost $62 to $110 in fees, according to this year's report, "Big Business, Big Bucks: Quickie Tax Loans Generate Profits for Banks and Tax Preparers While Putting Low-Income Taxpayers at Risk."

Yet, filing the return electronically and having the IRS deposit it directly to your bank account can get you your return in about 10 days at no extra charge, Fox said.

Cary Carbonaro, a certified financial planner in Huntington Village, said she could see the need for access to quick cash back when it took six to eight weeks to get a refund.

But now, she said she would advise taking out such a loan only in "life or death situations" or "if you have no money and need to feed your kids."

Otherwise, "I don't see any reason to do it - ever."

Of course, some tax preparers "don't always make clear" how quickly the IRS is processing electronically filed returns, said Chi Chi Wu, staff attorney with the National Consumer Law Center.

She pointed to shopper research that found only one in 17 preparers telling the customer they could get a return in eight to 15 days by e-filing.

In 2007, 8.7 million American taxpayers forked over about $833 million in tax refund loan fees, according to the report.

Some also paid more than $68 million in related "add on fees" called "application," "administrative," "e-filing," "service bureau," "transmission," or "processing" fees, which can cost from $25 to several hundred dollars.

Not all tax preparers charge such add on fees, Wu said, so it's wise to comparison shop ahead of time if you must go the tax refund loan route.

s C03-32-2009 - Net Operating Losarryback Guidance Provided for Eligible Small Businesses

The IRS announced that small businesses with deductions exceeding their income in can use a new net operating loss (NOL) tax provision to get a refund of taxes paid in prior years. The IRS has updated the instructions for Form 1045, Application for Tentative Refund, and 1139, Corporation Application for Tentative Refund, so that eligible small businesses can make use of the special carryback provision under Code Sec. 172(b)(1)(H) for 2008. The new provision, enacted as part of the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), enables small businesses with a net operating loss in 2008 to elect to offset this loss against income earned in up to five prior years. Some taxpayers must make the election to use this special carryback by April 17, 2009.

CCH Comment. With the economic downturn and the new law, the IRS expects record numbers of small businesses to be eligible for the refunds. The IRS is putting in special steps to ensure timely processing of these refunds to help small businesses during this period.


CCH Comment. The IRS has clarified that the $15 million in gross receipts test is to be applied over the three-year tax period ending with the tax year of the NOL. Although this is consistent with the CCH's interpretation of the rule in CCH'sAmerican Recovery and Reinvestment Act of 2009: Law, Explanation and Analysis, there was confusion regarding the application of the test, which is based on the gross receipts test in Code Sec. 448(c). In particular, some interpreted the test to be applied over the three-year tax period preceding the NOL year. Including the NOL year as one of the test years could allow more taxpayers to meet the requirements for the expanded NOL period because a loss year arguably means a taxpayer will have lower gross receipts for the year.

For small businesses that use a fiscal year, this special carryback may be used for an NOL in either a tax year that ends in 2008 or a tax year that begins in 2008. Once a taxpayer makes this election, it may not be changed.
To qualify for the new five-year carryback provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. If a small business previously elected to waive the carryback of 2008 NOL but now wants to elect this special carryback, the small business may revoke its previous election to waive the carryback. The election revocation must be made on or before April 17, 2009. Form 1045 or Form 1139, whichever the taxpayer uses, generally must be filed within one year after the end of the tax year of the NOL. Further, the current year's tax return must be filed by the date the Form 1045 or Form 1139 is filed. Form 1045 and Form 1139 are filed at the same place the taxpayer's return is filed, as listed on the return instructions.

In addition, Frequently Asked Questions (FAQs) have been posted on the IRS.gov website. Small businesses that file Form 1040 can also call 1-800-829-1040 with NOL questions. Corporations can contact 1-800-829-4933 with NOL questions.

Rev. Proc. 2009-19, 2009FED ¶46,292

IR-2009-26,

2009FED ¶46,293

Other References
Code Sec. 172

03-20-2009 ID thieves targeting tax returns

WBBH-TV
updated 7:12 a.m. MT, Sat., March. 14, 2009

LEE COUNTY: Identity thieves are now targeting tax returns to make money at your expense. In fact, the problem has become so bad, the Internal Revenue Service opened a special office to handle identity theft cases.

Like millions of Americans, Dan Jacobs filed his tax return with a tax preparer, but instead of getting his money from the IRS, he got a phone call.

"We had been rejected by the IRS. My social security number had already been used by another individual," said Jacobs.

Someone had stolen Jacobs' social security number, gotten a job, and filed a tax return using his identity.

"You hear about it all the time, but until it hits you, it hits home. You wonder, you get scared, upset," said Jacobs.

Shalimar Price of the IRS says the problem has become so widespread, the agency has opened a special identity theft unit.

In fact, the Federal Trade Commission just issued a new report showing identity theft went up 20-percent from 2007 to 2008.

"We see now when they file their tax returns, they may see their tax return has already been filed. That happens, and so people come into our office," said Price.

The IRS has issued an alert telling people if you get a letter from the IRS saying a tax return has already been filed for you - pay attention, chances are its legit.

"Any type of correspondence from the IRS if you question it-- contact us. Come in, call. If you get an email - we don't email you," said Price.

Another sign you may be the target of identity theft is an IRS letter indicating you received wages from an employer unknown to you.

The IRS says the best way to avoid identity theft in the first place is to protect your personal information, especially things like W-2s.

"You want to make sure information such as your tax return is safe. Don't leave it in your car. You want to make sure it's safe," said Price.

"It was disturbing," said Jacobs.

Jacobs filed a police report and notified credit agencies, things the IRS tells you to do, but says he still doesn't have his identity back.

"Frustrating. Extremely frustrating," said Jacobs.

He wants others to know it can happen to you, too.

You can reach the IRS Identity Theft Hotline at 1-800-908-4490 or the Federal Trade Commission at 877-ID-THEFT.

Baucus Outlines Offshore Tax Haven Legislation

Senate Finance Committee Chairman Max Baucus, D-Mont., on March 12 began circulating among the IRS, the Financial Crimes Enforcement Network (FinCEN) and the business community a preliminary draft of legislation aimed at curbing offshore tax evasion. Baucus intends to introduce a final bill within weeks and has scheduled a hearing on the subject for March 17.

Baucus outlined a three-pronged approach to the problem that would detect, deter and discourage offshore tax evasion by giving the IRS increased time and tools to spot and shut down offshore noncompliance, requiring certain reports to be filed with tax returns, increasing penalties and closing a loophole that results in employers in offshore tax havens avoiding payment of Social Security taxes on workers.

The information reporting would require entities transferring funds offshore, other than on behalf of publicly traded companies, to report to the IRS the amount and destination of funds transferred. In order to give the IRS more time to detect and examine offshore activity, the measure would extend the statute of limitations from three years to six years for tax returns that reported, or should have reported, certain international transactions. The bill would also require the Foreign Bank Account Reports (FBAR) form to be filed with the income tax return. Currently, the FBAR is filed only with the Treasury’s FinCEN. In addition, it requires preparers to ask a series of due diligence questions to determine whether an FBAR should be filed. This is similar to the existing earned income tax credit due diligence regime.

Deterrence also comes through provisions that would: (1) enhance the foreign trust “failure to file” penalty by establishing a $10,000 minimum penalty, (2) expand the types of property considered to be a distribution, such as artwork and jewelry, and (3) double applicable fines and penalties on tax underpayments attributable to certain offshore transactions Companies would also be discouraged from establishing offshore entities through modification of a provision in the Heroes Earnings Assistance and Relief Tax Act of 2008 (P.L.110-245) and requiring offshore entities that hire workers to perform services pursuant to a government contract to treat those workers as American employees subject to Social Security tax.

Believe me, as a Trader you DON’T want to do your own taxes!

Every year at this time, many Americans sit down with a strong cup of coffee, a yellow No. 2 pencil and a legal pad and try to make sense of that giant jigsaw puzzle known as the federal income tax return.

Tax time is a little like the anti-holidays, where tax forms with forgettable names and numbers suddenly replace those visions of sugar plums that were dancing in our heads just a few weeks ago.

Below are some of the significant tax forms in a typical trader’s federal tax return. We suggest that you look at them, become familiar with what they do – and then forget them.

Why? Because you’re a trader, not an accountant.

You can’t read the results of your blood test, can you? Or diagnose engine trouble? Or figure out what the heck dry cleaning is, right?

So why would you attempt to do your own taxes – or let just any accountant attempt to, given the unique rules and regulation that govern trader taxation?

That’s our job. As traders and accountants, Traders Accounting’s tax professionals specialize in helping you prepare an audit-proof tax return that trims your taxes to the absolute minimum.

What’s more, our tax experts keep on saving you money by staying current on every tax law change – especially those that could pose a threat to your trader tax status or offer opportunities for even greater tax savings.

Here are the trader’s most important tax forms. Call Traders Accounting today to keep them from dancing in your head!

Mark-to-Market Statement of Intent

For most traders, switching to the mark-to-market (MTM) accounting method is the single most tax-efficient move they will ever make.

Why? Because it changes the tax status of your earnings from capital gains/losses to ordinary income/losses, thereby avoiding the $3,000 capital loss limitation and the wash sale rule.

To elect mark-to-market, you must enclose a statement of intent with your tax return (or extension request) by April 15th the year prior to beginning MTM. That means that to use MTM on this year’s return, you would have to have elected it April 15th of last year.

The IRS makes one exception: If you file as a new business entity (partnership, limited liability company or C corporation), you have two months from opening to note your accounting preference in your meeting minutes. You need not notify the IRS until you file Form 3115 (below).

Form 3115: Application for Change in Accounting Methods

Your first year using MTM, you must submit IRS Form 3115 (Application for Change in Accounting Methods) with your tax return. This form contains a one-time adjustment, Section 481(a), which captures duplications and omissions resulting from the change in accounting methods.

If the adjustment is $25,000 or less, you may deduct the full amount on your return; if it exceeds $25,000, you may deduct 25% each year for the next four years.

Schedule C: Profit or Loss from Business

If you file as a sole proprietor and do not elect mark-to-market accounting, you will report your expenses on Schedule C (Profit or Loss from Business) and your trades on Schedule D (Capital Gains and Losses), a disconnect the IRS considers suspect.

One way to avoid flagging the taxman is to trade under a formal business entity (limited partnership, LLC or C corporation). Tax treatment of business entities is both more favorable and more predictable than that afforded sole proprietors.

Schedule D: Capital Gains and Losses

Traders in stocks, options and single-stock futures who do not elect mark-to-market accounting must report their trading activity on Schedule D (Capital Gains and Losses).

Schedule D contains two parts: short-term capital gains/losses for holdings of less than one year, and long-term capital gains/losses for holdings of more than one year. This also is the form on which wash sale adjustments are recorded.

Because trading frequently involves the buying and selling of unequal shares, calculations of gain or loss must be broken down into the smallest number of shares on either the buy or sell side. This can be a time-consuming and tedious process.

If you’re an active trader, filling out Schedule D can be an arduous task without the assistance of an experienced trader tax professional. Traders Accounting can help simplify your record keeping and streamline your Schedule D preparation.

Form 6781: Gains and Losses from Section 1256 Contracts and Straddles

If you trade in commodities – including such Section 1256 contracts as futures, foreign exchange and nonequity options – you must report your trading activity on Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles). You enter the gross amount of your Section 1256 proceeds from your 1099 on Part 1, Line 2 (Net Gain or Loss) of Section 1 (Contracts Marked to Market).

The IRS generously allows commodities traders to split their Schedule D gains and losses, 60% long-term and 40% short-term. This is such an attractive deal that many commodities traders choose not to elect mark-to-market accounting, thereby retaining their profitable 60/40 split on gains. An added plus: losses on Form 6781 may be carried back three years against gains.

Form 4797: Sales of Business Property

Traders in stocks, options and single-stock futures who elect mark-to-market accounting report their trading activity on Form 4797 (Sales of Business Property (Also Involuntary Conversions and Recapture Amounts Under Sections 179 and 280F(b)(2)).

Under the mark-to-market accounting method, all securities that you hold at the end of the year are treated as if they were sold and repurchased on the last day of the year; they are “marked to market” for tax purposes. All trading activity should be entered under Section II of Form 4797 (Ordinary Gains and Losses).

Note: long-term investments that are not part of your trading business should be entered on Schedule D and not marked to market on Form 4797.

Form 4868: Application for Automatic Extension of Time

Tax time can be confusing, especially for beginners. Which brings us to Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return).

When filed by April 15, the extension automatically moves your tax deadline forward three months to Aug. 15. If needed, you can then file a second extension, to Oct. 15, giving you a full six months to file.

However, the second extension is not automatic, and won’t be official until you receive the form marked “granted” back from the IRS.

And beware: An extension only buys you time to file, not pay. If you don’t remit more than 90% of your estimated tax due by the original April 15 deadline, your extension will be deemed invalid.

Don’t suffer through another tax season alone. Get Traders Accounting on your team today. As both traders and accountants, we can help design a tax-effective trading plan that is right for you. It’s a gift that will keep on giving for years to come.

Text of H.R. 1068: To amend the Internal Revenue Code of 1986 to impose a tax on certain securities transactions

111th CONGRESS

1st Session

H. R. 1068

To amend the Internal Revenue Code of 1986 to impose a tax on certain securities transactions to the extent required to recoup the net cost of the Troubled Asset Relief Program.

IN THE HOUSE OF REPRESENTATIVES

February 13, 2009

Mr. DEFAZIO (for himself, Mr. WELCH, Ms. SUTTON, Mr. CAPUANO, Mr. WU, Mr. STARK, Ms. DELAURO, and Ms. EDWARDS of Maryland) introduced the following bill; which was referred to the Committee on Ways and Means

---

A BILL

To amend the Internal Revenue Code of 1986 to impose a tax on certain securities transactions to the extent required to recoup the net cost of the Troubled Asset Relief Program.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘Let Wall Street Pay for Wall Street’s Bailout Act of 2009’.

SEC. 2. FINDINGS.

Congress finds the following:

(1) The Bush Administration allocated the first $350 billion of TARP funds in a manner that has outraged the Nation by failing to provide the most basic oversight of the funds.

(2) Congress has declined to block the remaining $350 billion of TARP funds despite the lack of oversight and the record fiscal year 2009 budget deficit estimated at $1.2 trillion.

(3) The Board of Governors of the Federal Reserve System has committed more than a trillion dollars to stabilize the economy by bailing out various banks deemed ‘too big to fail’.

(4) The $700 billion TARP fund and the new Federal Reserve lending facilities were created to protect Wall Street investors; therefore, the same Wall Street investors should pay for this infusion of taxpayer money.

(5) The easiest method to raise the money from Wall Street is a securities transfer tax, a tax that has a negligible impact on the average investor.

(6) This transfer tax would be on the sale and purchase of financial instruments such as stock, options, and futures. A quarter percent (0.25 percent) tax on financial transactions could raise approximately $150 billion a year.

(7) The United States had a transfer tax from 1914 to 1966. The Revenue Act of 1914 (Act of Oct. 22, 1914 (ch. 331, 38 Stat. 745)) levied a 0.2 percent tax on all sales or transfers of stock. In 1932, Congress more than doubled the tax to help overcome the budgetary challenges during the Great Depression.

(8) All revenue generated by this transfer tax should be deposited in the general fund of the Treasury of the United States, scaled to meet the net cost of these bailouts, and phase out when the cost of the bailouts are repaid.

SEC. 3. RECOUPMENT OF DEFICIT ARISING FROM FEDERAL BAILOUT.

(a) In General- Chapter 36 of the Internal Revenue Code of 1986 is amended by inserting after subchapter B the following new subchapter:

‘Subchapter C--Tax on Securities Transactions

‘Sec. 4475. Tax on securities transactions.

‘SEC. 4475. TAX ON SECURITIES TRANSACTIONS.

‘(a) Imposition of Tax- There is hereby imposed a tax on each covered securities transaction an amount equal to the applicable percentage of the value of the security involved in such transaction.

‘(b) By Whom Paid- The tax imposed by this section shall be paid by the trading facility on which the transaction occurs.

‘(c) Applicable Percentage- For purposes of this section--

‘(1) IN GENERAL- The term ‘applicable percentage’ means the lesser of--

‘(A) the specified percentage, or

‘(B) 0.25 percent.

‘(2) SPECIFIED PERCENTAGE-

‘(A) IN GENERAL- The term ‘specified percentage’ means, with respect to any taxable year beginning in a calendar year, the percentage that the Secretary estimates would result in the aggregate revenue to the Treasury under this section for such taxable year and all prior taxable years to equal the Secretary’s estimate of the net cost (if any) to the Federal Government of--

‘(i) carrying out the Troubled Asset Relief Program established under title 1 of the Emergency Economic Stabilization Act of 2008, and

‘(ii) the exercise of authority by the Board of Governors of the Federal Reserve System under the third undesignated paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 343).

‘(B) DETERMINATION OF PERCENTAGE- Such percentage shall be determined by the Secretary not later than 30 days after the date of the enactment of this section, and redetermined for taxable years beginning in each calendar year thereafter. Such percentage shall take into account the Secretary’s most recent estimation of such net cost. Any specified percentage determined under this paragraph which is not a multiple of 1/100th of a percentage point shall be rounded to the nearest 1/100th of a percentage point.

‘(d) Covered Securities Transaction- The term ‘covered securities transaction’ means--

‘(1) any transaction to which subsection (b), (c), or (d) of section 31 of the Securities Exchange Act of 1934 applies, and

‘(2) any transaction subject to the exclusive jurisdiction of the Commodity Futures Trading Commission.

‘(e) Administration- The Secretary shall carry out this section in consultation with the Securities and Exchange Commission and the Commodity Futures Trading Commission.’.

(b) Clerical Amendment- The table of subchapters for chapter 36 of such Code is amended by inserting after the item relating to subchapter B the following new item:

‘subchapter c. tax on securities transactions’.

(c) Effective Date- The amendments made by this section shall apply to sales occurring more than 30 days after the date of the enactment of this Act.

Believe me, you DON’T want to do your own taxes!

Jim Crimmins on why his trader/accountants are your best bet

Every year at this time, many Americans sit down with a strong cup of coffee, a yellow No. 2 pencil and a legal pad and try to make sense of that giant jigsaw puzzle known as the federal income tax return.

Tax time is a little like the anti-holidays, where tax forms with forgettable names and numbers suddenly replace those visions of sugar plums that were dancing in our heads just a few weeks ago.

Below are some of the significant tax forms in a typical trader’s federal tax return. We suggest that you look at them, become familiar with what they do – and then forget them.

Why? Because you’re a trader, not an accountant.

You can’t read the results of your blood test, can you? Or diagnose engine trouble? Or figure out what the heck dry cleaning is, right?

So why would you attempt to do your own taxes – or let just any accountant attempt to, given the unique rules and regulation that govern trader taxation?

That’s our job. As traders and accountants, Traders Accounting’s tax professionals specialize in helping you prepare an audit-proof tax return that trims your taxes to the absolute minimum.

What’s more, our tax experts keep on saving you money by staying current on every tax law change – especially those that could pose a threat to your trader tax status or offer opportunities for even greater tax savings.

Here are the trader’s most important tax forms. Call Traders Accounting today to keep them from dancing in your head!

Mark-to-Market Statement of Intent

For most traders, switching to the mark-to-market (MTM) accounting method is the single most tax-efficient move they will ever make.

Why? Because it changes the tax status of your earnings from capital gains/losses to ordinary income/losses, thereby avoiding the $3,000 capital loss limitation and the wash sale rule.

To elect mark-to-market, you must enclose a statement of intent with your tax return (or extension request) by April 15th the year prior to beginning MTM. That means that to use MTM on this year’s return, you would have to have elected it April 15th of last year.

The IRS makes one exception: If you file as a new business entity (partnership, limited liability company or C corporation), you have two months from opening to note your accounting preference in your meeting minutes. You need not notify the IRS until you file Form 3115 (below).

Form 3115: Application for Change in Accounting Methods

Your first year using MTM, you must submit IRS Form 3115 (Application for Change in Accounting Methods) with your tax return. This form contains a one-time adjustment, Section 481(a), which captures duplications and omissions resulting from the change in accounting methods.

If the adjustment is $25,000 or less, you may deduct the full amount on your return; if it exceeds $25,000, you may deduct 25% each year for the next four years.

Schedule C: Profit or Loss from Business

If you file as a sole proprietor and do not elect mark-to-market accounting, you will report your expenses on Schedule C (Profit or Loss from Business) and your trades on Schedule D (Capital Gains and Losses), a disconnect the IRS considers suspect.

One way to avoid flagging the taxman is to trade under a formal business entity (limited partnership, LLC or C corporation). Tax treatment of business entities is both more favorable and more predictable than that afforded sole proprietors.

Schedule D: Capital Gains and Losses

Traders in stocks, options and single-stock futures who do not elect mark-to-market accounting must report their trading activity on Schedule D (Capital Gains and Losses).

Schedule D contains two parts: short-term capital gains/losses for holdings of less than one year, and long-term capital gains/losses for holdings of more than one year. This also is the form on which wash sale adjustments are recorded.

Because trading frequently involves the buying and selling of unequal shares, calculations of gain or loss must be broken down into the smallest number of shares on either the buy or sell side. This can be a time-consuming and tedious process.

If you’re an active trader, filling out Schedule D can be an arduous task without the assistance of an experienced trader tax professional. Traders Accounting can help simplify your record keeping and streamline your Schedule D preparation.

Form 6781: Gains and Losses from Section 1256 Contracts and Straddles

If you trade in commodities – including such Section 1256 contracts as futures, foreign exchange and nonequity options – you must report your trading activity on Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles). You enter the gross amount of your Section 1256 proceeds from your 1099 on Part 1, Line 2 (Net Gain or Loss) of Section 1 (Contracts Marked to Market).

The IRS generously allows commodities traders to split their Schedule D gains and losses, 60% long-term and 40% short-term. This is such an attractive deal that many commodities traders choose not to elect mark-to-market accounting, thereby retaining their profitable 60/40 split on gains. An added plus: losses on Form 6781 may be carried back three years against gains.

Form 4797: Sales of Business Property

Traders in stocks, options and single-stock futures who elect mark-to-market accounting report their trading activity on Form 4797 (Sales of Business Property (Also Involuntary Conversions and Recapture Amounts Under Sections 179 and 280F(b)(2)).

Under the mark-to-market accounting method, all securities that you hold at the end of the year are treated as if they were sold and repurchased on the last day of the year; they are “marked to market” for tax purposes. All trading activity should be entered under Section II of Form 4797 (Ordinary Gains and Losses).

Note: long-term investments that are not part of your trading business should be entered on Schedule D and not marked to market on Form 4797.

Form 4868: Application for Automatic Extension of Time

Tax time can be confusing, especially for beginners. Which brings us to Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return).

When filed by April 15, the extension automatically moves your tax deadline forward three months to Aug. 15. If needed, you can then file a second extension, to Oct. 15, giving you a full six months to file.

However, the second extension is not automatic, and won’t be official until you receive the form marked “granted” back from the IRS.

And beware: An extension only buys you time to file, not pay. If you don’t remit more than 90% of your estimated tax due by the original April 15 deadline, your extension will be deemed invalid.

Don’t suffer through another tax season alone. Get Traders Accounting on your team today. As both traders and accountants, we can help design a tax-effective trading plan that is right for you. It’s a gift that will keep on giving for years to come.

Cheers,

Jim Crimmins