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Have an HRA? Make Sure to Pay Your “Patient-Centered Outcomes Trust Fund Fee”

If you have a health reimbursement arrangement plan (HRA, sometimes called a “Section 105 plan”), you probably owe a “Patient-Centered Outcomes Trust Fund Fee.”

Most people reading this blog post are probably saying, “What the heck is that?”.

The Patient-Centered Outcomes Trust Fund Fee is part of the Affordable Care Act. The fee is imposed on businesses or insurance companies at a rate of $1 per participant in a health plan. A “health plan” of course includes traditional health insurance plans, but it also includes HRAs.

(Side note: on an employer-provided health insurance policy [not an HRA], whether the employer or the insurance company owes the fee depends on the nature of the plan; I am not an expert on health insurance plans so I won’t get into that here.)

Back to HRAs: for purposes of this fee, an HRA is considered a health plan, thus making HRAs subject to the fee.

Here’s what’s annoying for businesses with an HRA: there’s no exemption for small businesses — and almost all HRAs (at least that I deal with) are with small businesses, oftentimes sole proprietors who have hired their spouse.

So you have a sole proprietorship. You hired your spouse and you set up an HRA because of the tax advantages (self-employment tax savings) of running medical expenses through the HRA as deductible business expenses via your spouse. Before July 31, you’ll need to fill out a Form 720 and send a $1 check to the U.S. Treasury ($1 x the number of participants in the HRA).

This is insane, of course. An abject waste of a small business’s time. But it’s what the Affordable Care Act calls for.

Certainly a $1 or $2 fee is no reason to eliminate your HRA. But it’s yet another piece of paperwork to keep track of and another form to fill out.

Say Hello to Dinesen Tax & Accounting, P.C.

I am pleased to announce that I have obtained an Iowa “Licensed Public Accountant” designation and have formed a public accounting firm — Dinesen Tax & Accounting, P.C.

LPAs in Iowa are similar to CPAs in that we can practice public accounting. The difference is, LPAs can’t do audits of financial statements. As a solo operator, I’m not really in a position to conduct audits anyway, so the LPA meets my needs by allowing me to provide a higher level of accounting services to business clients.

DinesenTaxLogoLG_doubleThe logo for Dinesen Tax & Accounting, P.C. is similar to that of Dinesen Tax, Inc. and is shown on the left. (Thanks as always to Mike Sansone at Coverstations for his work on the logo.)

For the time being, Dinesen Tax, Inc. will continue to exist alongside Dinesen Tax & Accounting, P.C. I’ll slowly be transitioning everything over to Dinesen Tax & Accounting, P.C. and will be dissolving Dinesen Tax, Inc. There are many things that need set up, some large (applying for an electronic filing ID # with the IRS) and some small (updating letterhead, etc.).

I’ll be sending more information by mail and e-mail to clients in the next few weeks.

And look for more blog posts in the future that talk about why I pursued the LPA designation and decided to form a public accounting firm.

Taxpayer Identity Theft — Part 15

I’ve been telling the story of Wendy Boka and the identity theft nightmare she’s going through with the IRS. Her husband Brian died at age 31 in 2010. Someone stole his identity and filed a fraudulent tax return in his name.

The IRS still has not processed Brian and Wendy’s final joint tax return for 2010. Wendy is owed a refund from that tax return and we’re still waiting for that refund to be paid.

Brian and Wendy were native Iowans. After Brian died, Wendy — a widow at age 29 — moved to Texas. The names are real and are used with Wendy’s permission.

You can read the other parts of this series here: 1234567891011,1213, 14


The saga continues.

Back in early April, the IRS told me that Wendy’s refund check from 2010 would be sent in “6-8 weeks.” Eight weeks passed at the end of May, and of course there was no refund check to be found.

So I called the IRS again yesterday.

As usual, the first minute or two of the conversation was spent explaining the entire situation to the random IRS call-center person. Then waiting on hold while the random call-center person tries to figure out whether to look things up under Brian’s Social Security Number or Wendy’s.

Then more waiting as the random call-center person tries to figure out why a check hasn’t been issued yet.

I never really got a straight answer as to why they didn’t issue a check in the promised timeframe. Something about their records not matching what I was telling them. But then with me patiently explaining things — and more time on hold so the person could “talk to their manager” — suddenly the random call-center person agreed with me that a check should have been issued and that they would put in the request “right away.”

Current timeline: “two to three weeks.”

We’ll see.

Dinesen Tax Greatest Hits: When a Temporary Absence is Not a Temporary Absence

Since it’s a holiday week, I’m reaching into the archives and re-running popular stories from days gone by.

This story is about a Tax Court ruling over dependency exemptions relating to separated couples.


Originally published October 17, 2011

A man by the name of Mr. Alarcon lost a Tax Court case on Monday over whether he could claim the dependency exemptions for his two kids while he and his wife were separated and the kids lived with the wife.

Mr. and Mrs. Alarcon separated in late 2006.  They lived apart in 2007; she lived in the couple’s home while he went to live with his parents.  Mrs. Alarcon also had custody of the kids.  The divorce was finalized in 2010, at which time Mr. Alarcon was given possession of the house and moved back in.

The trouble started in 2007 when Mr. and Mrs. Alarcon claimed both kids as dependents on their separate tax returns.  This caused an IRS review, and the IRS denied the Mr. Alarcon’s claim because the kids lived with their mom more than half the year, thus making her the custodial parent and the person who is entitled to claim the kids.  Mr. Alarcon took the case to Tax Court.

Mr. Alarcon argued that his absence from the couple’s home was a temporary absence caused by the divorce proceedings.  He pulled out language from IRS publications that says temporary absences do not count as time spent away from a person’s kids, and thus he should be considered to have been living in the home with them.

While clever, the argument didn’t work.  ”Temporary absence” means, according to the publications, “if one or both of you are temporarily absent from your home due to special circumstances such as illness, education, business, vacation, or military service.”  Here’s more from the Tax Court ruling:

Petitioner, seeking justice from his perspective, construes the publications and the statutes they interpret as permitting him to claim his sons since he paid all costs for 2007 on the marital home, which he also considered to be his home. Congress and the Secretary, however, have laid down a bright-line test for simplicity and administrative convenience …. Because pursuant to the temporary order petitioner could not live at the marital home but his wife could and did in 2007, it was her and the sons’ residence, not his during that year. His prolonged absence, though not his fault and even if caused by his wife and her attorneys, does not make his more than 3 years’ absence temporary, nor does it make the marital home his residence for 2007. Consequently, neither (child) was petitioner’s qualifying child in 2007.

Mr. Alarcon could potentially have claimed the kids if he had gotten his ex-wife to sign a Form 8332, releasing her claim to the kids and letting him claim them.  But since that didn’t happen, he was out of luck.

Similar Dinesen Tax Times coverage:  Noncustodial Parent Loses Dependency Exemption

Same-Sex Marriage, Community Property, And Multi-State Income — Part 2

Here in Part 2, I’ll explore what happens when a same-sex couple in a community property state moves to a non-community property state such as Iowa during the middle of the year.

I have encountered this issue several times in my practice. What follows is a composite of some of these encounters. Please note that “Angie and Alice,” the “client” used in the example below, are fictional characters, not real clients of mine.

The Setup

Angie and Alice are in a same-sex marriage in California. They moved to Iowa in September. Both states recognize their marriage (although I believe that most of this scenario would be the same even if they moved to a state that didn’t recognize their marriage).

I warn you, this is going to get deep. Consider yourself warned!

Here we go:


Alice earned $56,000 of W-2 income while a resident of California. She had $11,000 of federal taxes and $4,000 of California taxes withheld from this income.

Angie earned $32,000 of W-2 income in Iowa. She had $4,000 of federal taxes and $2,000 of Iowa taxes withheld from this income.

OUTCOME: The California income and withholding must be split 50/50 between Angie and Alice.

Because Iowa is not a community property state, Angie will report 100% of her Iowa wages and associated withholding on her return.

End result: Angie reports $60,000 of income ($28,000 + $32,000) and Alice reports $28,000 of income.


Angie earned dividends during the year, on a separate brokerage account in her name only. The statement from the investment company showed $400 of dividends earned while she resided in California, and $200of dividends earned while she resided in Iowa. (For the sake of simplicity, we’ll assume that all dividends are ordinary dividends taxed as ordinary income.)

OUTCOME: In California, dividends, interest and rents from separately held property is NOT community property and is reported 100% by the spouse earning the income. The original version of this story, as published on 5/15, had this wrong. Thanks to reader Ray for catching my mistake (see the Comment section below). So Angie reports all $600 of the dividends on her tax return, including the dividends earned while she resided in California.

Pension Withdrawal

After she moved to Iowa, Alice withdrew $40,000 from a retirement account. $8,000 of federal taxes and $2,000 of Iowa taxes were withheld.

OUTCOME: This is not community property because the withdrawal happened in Iowa. Alice has $40,000 of taxable income to report. She’ll get credit for the full $8,000 of federal taxes withheld and can take an itemized deduction for the $2,000 of Iowa taxes withheld.


Angie was unemployed while living in California. She received $16,000 if unemployment benefits, which ceased upon moving to Iowa. Federal taxes of $1,600 were withheld from these benefits.

OUTCOME: This is community property. Angie and Alice will each report $8,000 of unemployment income and $800 of associated federal withholding on their federal tax returns.


Angie and Alice paid $14,000 on a mortgage for their home when they lived in California. They sold the home at the same time they moved to Iowa. (They sold it at a loss, so no capital gain to worry about.) They paid $4,000 of property taxes on this house. Angie and Alice owned the home jointly.

They also paid $2,000 of interest on their new home in Iowa. Angie and Alice agree that Angie made 100% of this payment. They made no property tax payments in Iowa in 2012.

OUTCOME: The $14,000 of California interest and $4,000 of California property taxes are split 50/50. The $2,000 of Iowa interest is claimed 100% by Angie. So Angie will show a $9,000 mortgage interest deduction, while Alice will show a $7,000 deduction. Note that if the California property was owned entirely by Angie or Alice separately, then only that spouse would claim the deduction.

Charitable Contributions

Angie and Alice made $500 of cash charitable contributions while residing in California. The contributions were made from joint, community funds.

OUTCOME: This is community property. Angie and Alice will each claim a $250 charitable contribution deduction on their federal tax returns.

End Results (using 2012 exemption amounts and tax tables):

401(k) Withdrawal,$0,$40000
Less: State Withholding,$4000,$4000
Less: Property Taxes,$2000,$2000
Less: Mortgage Interest,$9000,$7000
Less: Charitable Contributions,$250,$250
Less: Personal exemption,$3800,$3800
TAXABLE INCOME,$49550,$58950
TAX (Single Filing Status),$8424,$10774
Early Withdrawal Penalty,$0,$4000
NET TAX,$8424,$14774
Less: Federal Withholding,$10300,$14300
REFUND,$1876, $474 OWED[/table]

 Total refund; $1,402

Here’s how it would look if they didn’t apply community property rules. Angie and Alice would each claim whatever they were entitled to claim, without having to split anything:

401(k) Withdrawal,$0,$40000
Less: State Withholding,$2000,$6000
Less: Property Taxes,$2000,$2000*
Less: Mortgage Interest,$9000,$7000
Less: Charitable Contribs.,$250,$250*
Less: Personal Exemption,$3800,$3800
TAXABLE INCOME,$31550,$76950
Early Withdrawal Penalty,$0,$4000
NET TAX,$4301,$19274
Less: Federal Withholding,$5600,$19000
REFUND,$1299,$274 OWED[/table]

Total refund: $1,025

*-Even though we’re not applying community property laws in this table, the California mortgage interest and property taxes should be split 50/50 barring any agreement to the contrary. The charitable contributions were made jointly out of joint funds and thus should be split 50/50 in all circumstances.

You’re a brave soul if you made it this far!

This is just the federal returns. In Part 3, I’ll explore how to handle the “mock” federal return and the state returns.


Another Example of a Tax Scam E-Mail

A client forwarded me the following e-mail they received from the “IRS.” I should note that this e-mail is copied and pasted directly from the e-mail, so all of the weird font issues (such as needing a magnifying glass to read the last line) were present in the original e-mail.


Claim Your Tax Refund Online

We identified an error in the calculation of your tax from the last payment, amounting to $ 419.95. In order for us to return the excess payment, you need to create a e-Refund account after which the funds will be credited to your specified bank account.
Please click “Get Started” below to claim your refund:

Get Started

We are here to ensure the correct tax is paid at the right time, whether this relates to payment of taxes received by the department or entitlement to benefits paid.


In the actual e-mail, the words “Get Started” contained a link that almost certainly would download something undesirable to your computer.

Obviously this is a scam/spam e-mail. As I told the client, the IRS never corresponds with taxpayers by e-mail. So if you get an e-mail like this from the “IRS,” the IRS didn’t send it.

Taxpayer Identity Theft — Part 14

I’ve been telling the story of Wendy Boka and the identity theft nightmare she’s going through with the IRS. Her husband Brian died at age 31 in 2010. Someone stole his identity and filed a fraudulent tax return in his name.

The IRS still has not processed Brian and Wendy’s final joint tax return for 2010.

Brian and Wendy were native Iowans. After Brian died, Wendy — a widow at age 29 — moved to Texas. The names are real and are used with Wendy’s permission.

You can read the other parts of this series here: 1234567891011,12, 13


As detailed in Part 12, the IRS had said in January that they were finally going to pay Wendy the refund she was owed from the 2010 tax return. The catch was, they were going to knowingly and willingly send the refund check to an old, no longer vaild, address. The check would get sent back to them, and then they would re-issue the check to Wendy’s current address. (The reason why the IRS decided to go about things in this manner is still a mystery.)

The check was supposed to be re-issued in March. March has come and gone, and still no refund check.

I tried calling the “identity theft liason” for Wendy’s case earlier this week. He of course didn’t answer, and hasn’t returned my call. Wendy has tried calling him over the last couple of weeks, and he isn’t returning her calls either.

We did get a notice from the IRS that said the check had come back to them and that we should verify that they have the correct address (they do, and have had it for nearly 18 months).

So I called the number shown on the notice. To my shock, the person at the call center was actually helpful. They’ll be sending a new check — but it will take another 6-8 weeks. The reason for the delay is, the original check was not only sent to the wrong address but was also made out wrong (it included Brian’s name but should have only included Wendy’s name).

To recap the timeline:

  • Brian died in January 2010. That’s almost 39 months ago.
  • We filed Brian and Wendy’s 2010 tax return right before the filing deadline in April 2011. That’s almost 24 months ago.
  • We sent the IRS the requested identity theft forms in the fall of 2011. That’s about 18 months ago.
  • The IRS told us we needed to fix a clerical error on the forms in the fall of 2012. That’s about 6 months ago.
  • More recent events: in January, the IRS told Wendy that they were finally ready to pay the refund from 2010 but that they were going to mail it to the wrong address. Once the check was “returned to sender,” they would re-issue the check to her correct address “in March.” Now it will be May or June.

A Note to Clients: All Systems Back Up

Another note to clients: the new computer system is up and running. All files and programs have been transferred, and everything is working! (Knock on wood….)

As of Sunday afternoon at about 3 pm, Dinesen Tax is officially back in business.

A Note to Clients: Computer System Down

This is a note for my clients — my computer died Friday afternoon. I have purchased a new computer and a transfer of files and programs is underway. I should be back up and running in another day or two. But in the meantime, things are at a standstill.

I’m still available by email and phone but won’t have access to files or tax returns until the file transfer is finished.

A “Standard Deduction” for Sole Proprietors?

Should lawmakers provide a standard deduction to sole proprietors? The author of an article in USA Today last fall thinks so. Quoting the article:

Instead of having to keep piles of receipts and track every expense, set a sliding scale of standard deductions that sole proprietors can take based on business income up to a set amount, say $75,000 or $100,000.

That would get rid of a lot of paperwork.

Robert Flach at The Wandering Tax Pro blog first commented on this story in his November 10th “Buzz”. I agree with Robert’s take:

A terrible idea indeed!  Small business owners should NOT be discouraged from keeping receipts and tracking expenses.  It is often hard enough to get them to do so as it is.  Small business owners MUST keep records and track expenses for a variety of very important reasons – preparing their tax return is only one, and not the most important one at that.

I don’t have much else to add to what Robert says, other than to reiterate that this is a bad idea, and to add to his last sentence, about how tracking expenses is important for more than just tax purposes. Tracking expenses is also important for management purposes.

Paperwork is annoying. I think we can all agree with that. But for businesses, the paperwork and tracking of expenses is a vital part of managing the business.

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