Small Business Taxes & Management

News and Tip of the Day


Small Business Taxes & ManagementTM--Copyright 2015, A/N Group, Inc.

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March 2, 2015

News

The IRS has issued final regulations (T.D. 9712) relating to the election of the alternative simplified credit (ASC) under Sec. 41(c)(5). The final regulations affect taxpayers claiming the research activities.

In Internal Revenue News Release IR-2015-36 the Service announced that farmers and fisherman who miss this year's March 2 tax deadline because they are receiving corrected premium tax credit forms (Form 1095-A) will have until April 15, 2015, to file their 2014 returns and pay any tax due. (Normally, farmers and fishermen who choose not to make quarterly estimated tax payments are not subject to a penalty if they file their returns and pay the full amount of tax due by March 1.)

Tip of the Day

Accelerated death benefits . . . You may receive accelerated death benefits under a life insurance contract or viatical settlement before the insured's death. These may be excludable from income if the insured is terminally or chronically ill. A person is considered terminally ill if a physician certifies that the individual has an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification.

 

February 27, 2015

News

In Internal Revenue News Release IR-2015-34 the IRS announced that almost 40 million tax refunds worth nearly $125 billion have been issued as of Feb. 20. The average refund is $3,120. The IRS has processed nearly 50 million returns, about one-third of the total individual federal income tax returns the agency expects to receive this year, with almost 83 percent of those returns resulting in refunds. More than 92 percent of refunds have been directly deposited into taxpayer accounts. The IRS is again advising taxpayers that longer wait times on IRS phone lines and at IRS offices mean itís more important than ever for taxpayers to use IRS online tools and resources on IRS.gov.

The House has approved, by a wide margin (401-20), legislation that would change 529 plans. Under the bill computers are a qualified expense, the distribution aggregation requirements are removed, and a student receiving a refund of qualified 529 expenses can redeposit the funds in their 529 account without penalty.

Revenue Procedure 2015-22 (IRB 2015-11) contains a modification to Revenue Procedure 2013-22, as modified by Revenue Procedure 2014-28, and modifications to Revenue Procedure 2015-8. In particular, this revenue procedure changes the addresses to which applications for opinion and advisory letters for Sec. 403(b) pre-approved plans should be submitted and inserts a user fee that was omitted from Rev. Proc. 2015-8.

Tip of the Day

Suffered losses related to a federally declared disaster? . . . If so, you'll qualify for postponement of certain actions such as filing personal and business tax returns, among other things. But who qualifies? Affected taxpayers include:

 

February 26, 2015

News

In Estate of Eileen S. Belmont, Deceased (144 T.C. No. 6) the decedent's will directed that the residue of her estate, which included income in respect of a decedent, be left to charity. The estate took a charitable contribution deduction pursuant to Sec. 642(c)(2) on its Federal income tax return, claiming that it had permanently set aside an amount of its gross income for charity. At the time of her death, the decedent owned a condominium in which her brother resided. During the protracted administration of the estate, the brother took a variety of legal actions and asserted a life tenancy interest in the condo and was subsequently awarded a life tenancy in the condo. Because of the cost of litigation over the unit, the estate no longer had sufficient funds to pay the amount previously deducted as a charitable contribution. The Tax Court held that Sec. 642(c)(2) provides that any part of the gross income of an estate, which pursuant to the terms of the will is permanently set aside during the taxable year for a purpose specified in Sec. 170(c) will be deductible by the estate. The regulations provides that no amount will be considered permanently set aside for charity under this section unless under the terms of the governing instrument and the circumstances of the particular case the possibility that the amount set aside . . . will not be devoted to such purpose is so remote as to be negligible. The possibility that costs involved in a dispute over the condo would cause the estate to invade the amount set aside for charity was not "so remote as to be negligible" as required under Reg. Sec. 1.642(c)-2(d). Therefore, the estate did not permanently set aside the charitable contribution amount as required.

In Tim Sheridan (T.C. Memo. 2015-25) the taxpayer claimed a theft-loss deduction for an alleged patent infringement. The taxpayer advanced a number of arguments to support a theft loss, but failed to prove that a theft actually occurred under State law or to show the amount of the loss. He alleged no facts to show that an infringement of his patent occurred, much less that a crime was committed. The Court sided with the IRS in denying the claim noting the taxpayer neither proved a theft loss nor the amount of any loss.

Tip of the Day

Taxability of federal and state interest income . . . Be particularly careful when entering interest income from federal and state obligations in your tax software. Interest on federal obligations is generally not taxable for state purposes and interest on state obligations are not taxable for federal purposes. (Most states exempt interest on their own obligations, but not on those of other states.) But while interest on an issuer's bonds may not be taxable, interest on tax refunds, property taken by eminent domain, etc. generally aren't. Check with your tax adviser to be sure. There are exceptions to many rules.

 

February 25, 2015

News

The Financial Crimes Enforcement Network (FinCEN) has lauched a new Web page at www.fincen.gov/forms/bsa_forms/fbar.html to help individuals and institutions that must file an FBAR (Report of Foreign Bank Account). The site has a number of sections and a guide to make the reporting process easier.

Tip of the Day

Does your state follow federal rules? . . . Many states automatically follow federal tax law, with exceptions. For example, in one state gross income is basically the same for state and federal purposes. There are however modifications. The state does not allow the federal 50% bonus depreciation, subtracts the federal taxable social security benefits, etc. This year things could be even trickier for some state filers. Because the "extenders package" was passed so late, some states that don't automatically adopt federal rules may not have accepted the changes made at the end of 2014. Check the rules for your state.

 

February 24, 2015

News

The Affordable Care Act imposes an excise tax on high-cost employer-sponsored health coverage under Section 4090I (sometimes referred to as "Cadillac Plans"). If the aggregate cost of such employer-sponsored coverage (applicable coverage) provided an employee exceeds the statutory dollar limit (revised annually), the excess is subject to a 40% excise tax. Notice 2015-16 provides potential approaches with respect to a number of issues, which could be incorporated in future proposed regulations, and invites comments on these potential approaches. The issues addressed in the notice include the definition of applicable coverage, the determination of the cost of applicable coverage, and the application of the annual statutory dollar limit to the cost of applicable coverage.

The Department of Health and Human Services has announced that it will provide a special enrollment period from March 15 through April 30, 2015 for individuals who were uninsured in 2014 and obligated to make the individual responsibility payment. The special enrollment period will be available to individuals in states with a federal marketplace.

Tip of the Day

Change in life? . . . Get married last year? Divorced? Addition to the family? Taking care of an elderly relative? Death in the household? Become unemployed? Retire? Start a business? Acquire a rental property? Send a child to college? Any of those changes (and others) require extra consideration on your tax return. If you're preparing your own return, check the Form 1040 instructions, IRS Publication 17, and any IRS publications specific to your situation. YOu can find a quick index at sbrl046.html. If you're using a paid preparer, make sure to mention the changes to him or her at the opening of your interview.

 

February 23, 2015

News

Corporations (both S and C), LLCs, and limited partnerships offer protection to owners for the debts of the corporation. But the corporate veil can be pierced if the creditor can show that the entity was the alter ego of the owners. In Robert A. Politte, et al. (U.S. Court of Appeals, Ninth Circuit) the Court upheld a D.C. Calif. decision where the Court found the Appellants were liable for the unpaid employment taxes of a corporation where they were the majority shareholders. Under California law to pierce the corporate veil a creditor must show (1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result would follow. The Court noted the Appellants were majority shareholders, exercised substantial control over the corporation's operations, and regularly drew on corporate funds to finance personal expenses, and borrowed money without maintaining corporate formalities. The Court also noted the transfer of funds between the corporation and another corporation where there was a unity of interest and ownership. The Court found the lower court did not clearly err in finding the Appellants were the corporation's alter egos.

Tip of the Day

Charitable contributions $250 or more . . . A canceled check alone won't do, nor will a credit card statement. You must have a written acknowledgment for each such contribution or one acknowledgment that lists the amount and date of each contribution. For example, you made two contributions to the Madison Relief Fund--one for $275 on January 23 and another for $255 on June 30. The charity can give you two separate letters or one letter where the two contributions are listed with the dollar amount and date. You must have the acknowledgment on or before the earlier of the date you file your return for the year of the contribution or the due date, including extensions for filing the return. Generally, that means you must have the acknowledgment before you file. Most charities are diligent and you probably got the acknowledgment shortly after making the contribution, or no later than January 31 of the following year. But if you don't have it, you've still got a chance to get the documentation before filing. You don't want to lose a deduction for lack of an acknowledgment.

 

February 20, 2015

News

Notice 2015-13 (IRB 2015-10) provides guidance on section 119 of the Tax Increase Prevention Act of 2014, American Taxpayer Relief Act of 2012, Pub. L. No. 113-295, enacted December 19, 2014. The Act amends Sec. 51 of the Internal Revenue Code to extend the Work Opportunity Tax Credit through Dec. 31, 2014. The notice also provides employers additional time beyond the 28-day deadline in Sec. 51(d)(13) for submitting Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to Designated Local Agencies.

In Dana Karl Bateman et ux. (T.C. Memo. 2015-22) the IRS determined a deficiency in the taxpayers' returns for two years and sent them a notice of deficiency on February 23, 2009. (The taxpayers filed a petition with the Tax Court which was dismissed because the petition was filed late.) On February 5, 2013 the IRS sent the taxpayers a Letter 3172, Notice of Tax Lien Filing (NTFL) relating to the years at issue. The taxpayers requested a collection due process (CDP) hearing. On July 18, 2013 the taxpayers faxed the IRS a Form 433-A (Collection Information Statement). At a CDP hearing the taxpayers informed the Appeals officer they disagreed with the determination of the underlying tax liabilities and that the NFTL was premature and threatened his employment. The Appeals officer discussed with the taxpayer the terms of a possible installment agreement, pursuant to which the NFTL eventually could be withdrawn (after the taxpayers paid a sufficient amount of their tax liabilities). The taxpayers said they could not afford the proposed monthly payments and rejected the agreement. The Court noted that to establish that the IRS abused its discretion, the taxpayers must establish that the IRS's actions were arbitrary, capricious, or without sound basis in law or fact. The Court looked at the facts and procedures followed by the Appeals officer and found that the IRS's determination not to withdraw the NFTL was not arbitrary or capricious.

Tip of the Day

Receive disaster relief payments? . . . They're generally nontaxable. The amount received must be to reimburse or pay reasonable and necessary personal, family, living or funeral expenses resulting from the disaster, to reimburse or pay for the reasonable and necessary expenses incurred for the repair or rehabilitation of your home or contents, or paid by a federal, state, or local government agency in connection with a qualified disaster. You can only exclude amounts for expenses not covered by insurance. There are some other points, but those are the most important.

 

February 19, 2015

News

Notice 2015-17 (IRB 2015-10) provides transition relief from the assessment of excise tax under Section 4980D for small employers (in particular, employers who are not applicable large employers) who reimburse or pay a premium for an individual health insurance policy for an employee. Notice 2015-17 also addresses the treatment for federal tax and for market reform purposes of arrangements reimbursing premiums of 2%-shareholder employees of S corporations. Finally, Notice 2015-17 addresses application of the market reforms to certain employer arrangements to fund Medicare premium payments or to provide a TRICARE-related health reimbursement arrangement (HRA).

The IRS announced (IR-2015-30) a limited test in 10 of its larger Tax Assistance Centers around the country to determine if an appointment-based service approach can help reduce taxpayer wait times during a time of severe budget cuts. While the IRS believes this approach will benefit taxpayers by helping them avoid long waits in line that they otherwise might have experienced, the IRS is testing this process during the tax filing season to ensure this is a more efficient approach for taxpayers. The initial test locations available by appointment are: Atlanta, Ga. (Atlanta-Woodcock), Austin, Texas, Birmingham, Ala., Chicago, Ill. (Dearborn), Denver, Colo., Fresno, Calif., Hartford, Conn., Plantation, Fla., San Antonio, Texas, and Seattle, Wash. The appointment-based test begins Feb. 23. For more information click on the link to the new release, above.

The IRS is warning return preparers and other tax professionals to be on guard against bogus emails making the rounds seeking updated personal or professional information that in reality are phishing schemes. Specifically, the bogus email asks tax professionals to update their IRS e-services portal information and Electronic Filing Identification Numbers (EFINs). The links that are provided in the bogus email to access IRS e-services appear to be a phishing scheme designed to capture your username and password. This email was not generated by the IRS e-services program. Disregard this email and do not click on the links provided. For more information go to IRS News Release IR-2015-31.

Tip of the Day

State tax refunds and income . . . Don't automatically include your state income tax refund you received last year on Line 10 of Form 1040. The amount you actually have to report could be less. There can be a number of reasons for the difference. First, if you didn't itemize in 2013, none of the refund is taxable. But there can be other reasons for less or none of the refund generating taxable income. If your itemized deductions were limited because your income was above the beginning of the phaseout amount, some of the refund may be nontaxable because you may not have received a deduction for part of the taxes. Second, if you owned the alternative minimum tax you may not have received a full benefit for your state income taxes. You should also make an adjustment for the amount you could have deducted as state and local general sales taxes on your return. There are some other reasons for a difference, but those are the more common ones. Your tax program should handle many of the differences, but most likely not without some input from you. See IRS Publications 17 and 525 for more information.

 

February 18, 2015

News

Deposits into your bank accounts can be considered as income by the IRS unless you can prove otherwise. In Susan Na a.k.a. Sung Hwa Na (T.C. Memo. 2015-21) the taxpayer made large deposits (more than a $1 million during the year at issue). The IRS claimed she had unreported income. The taxpayer testified that her employer instructed her to make certain deposits, from his sources including his business, into her accounts and to write certain checks from the accounts. She testified she did so to keep her job. She deposited funds from her employer's business into her account and traveled with him on gambling trips where she would withdraw funds from her accounts to use on her employer's gambling outings. The IRS found the taxpayer's explanation of the source of the deposits not credible. The Tax Court, on the other hand, believed the taxpayer's testimony. The Court noted that the evanescence showed she received little or no benefit from the funds, her accountant's testimony collaborated her claims, and the bank records revealed a striking pattern of matching deposits and withdrawals consistent with her story. The Court still found she had some unreported income, but left the calculation of the underpayment to the taxpayer and the IRS. Whether or not a substantial understatement penalty would be appropriate will depend on the taxpayer's liability. However, the Court found the taxpayer liable for the negligence penalty. She failed to maintain adequate books and records and did not maintain contemporaneous records of the funds received and paid out on behalf of her employer. She did not establish a formal trust relationship with the bank (informing them that all the funds were her's) or advise them she was using the accounts as trust accounts. Finally, she commingled her own funds with her employer's in the accounts, compounding the uncertainty by inadequate recordkeeping.

Tip of the Day

Net investment income tax . . . Many of the entries on Form 8960 are automatically completed by your software. Many, but not all. For example, your state and local income taxes deducted on Schedule A should automatically appear on line 9b of Form 8960. But most software will not automatically deduct any of those expenses. You'll have to enter the deductible amount. For example, your state income taxes total $30,000. You only have two sources of income--salary of $300,000 and rental income of $100,000. One-quarter ($100,000/$400,000) of the $30,000 of in income taxes should be allocable to your net investment income. Depending on your situation, the computations could be much more complex. And you may be able to deduct a portion of your miscellaneous itemized deductions. Another point, make sure your software correctly handles income from pass-through entities where you are nonpassive and rental income where you rent the property to your business or materially participate.

 

February 17, 2015

News

The House has passed America's Small Business Tax Relief Bill (H.R. 636). The bill would make permanent the higher expensing option of $500,000 in tangible personal property and software with a phaseout beginning at $2 million. The amounts would be adjusted for inflation.

Notice 2015-15 contains a proposed revenue procedure providing guidance to employers on employee consents used to support a claim for refund under Sec. 6402 and Reg. Sec. 31.6402(a)-2 for overpaid taxes under the Federal Insurance Contributions Act (FICA) and the Railroad Retirement Tax Act (RRTA). The proposed revenue procedure clarifies that, in addition to providing the relevant name, address, and taxpayer identification number, a valid employee consent must identify the basis of the claim for refund and be signed by the employee under penalties of perjury. The proposed revenue procedure provides guidance as to what constitutes reasonable efforts to secure employee consent when a consent is not obtained.

Tip of the Day

NOL can't offset self-employment income . . . If you have an NOL carryforward from a prior tax year that NOL can't be used to directly offset self-employment income, even if the source of the NOL is the same. For example, in 2013 your sole proprietorship generated a net operating loss of $75,000. You elect to carry the loss forward to 2014. In 2014 you have a profit of $75,000 from the business. The $75,000 carryforward can offset your overall income (Line 21 of Form 1040), but you can't use it to offset the $75,000 of profit from the business that is subject to the self-employment tax. It seems inequitable, but that's the law. That's another reason why trying to level your income from year-to-year can save tax dollars.

 

February 13, 2015

News

As a result of a severe winter storm from December 9 to 12 certain areas of Vermont are eligible for disaster relief (FEMA-4207-DR). Taxpayers in the counties of Addison, Chittenden, Essex, Franklin, Lamoille, Orange, Orleans, Rutland, Washington, and Windsor who sustained losses may deduct them on their 2013 return.

A number of tax bills are in the works in Congress. One would strengthen 529 plans, another would make the deduction for state and local sales tax permanent, and another would make changes to the research and development credit.

Tip of the Day

Theft losses . . . You may be able to take a casualty loss (if it exceeds the $100 and 10% of AGILE threshold) for the theft of one or more items, but no deduction is allowed if the item is simply lost. Theft includes blackmail, burglary, embezzlement, extortion, larceny, and robbery. Theft also includes the taking of money or property through fraud or misrepresentation if it is illegal under state or local law. For example, Fred Flood uses the name of another licensed contracted and installs plumbing fixtures that are not to code. It costs you $12,000 to fix the problem. More than likely you have a theft loss.

 

February 12, 2015

News

The IRS is reminding taxpayers the Presidents Day holiday period typically marks one of the busiest weeks of the tax filing season for its phone lines. There are other alternatives to help taxpayers find answers to commonly asked tax questions. The IRS has several easy-to-use, online tools on IRS.gov. Taxpayers can check the status of their refund, request a copy of their tax transcript or get an answer to their tax questions around the clock.

In February 2011, the IRS began implementing the first of several initiatives to assist economically distressed taxpayers by offering viable collection alternatives to help resolve their delinquent balance due accounts. These initiatives are known as the Fresh Start Initiatives. Although the Fresh Start Initiatives helped many struggling taxpayers resolve their outstanding tax liabilities, if the potential risks are not fully mitigated, revenue collection could be jeopardized. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine the impact of the Fresh Start Initiatives in promoting tax compliance. TIGTA found the IRSís implementation of the Fresh Start Initiatives provided several benefits to thousands of struggling taxpayers. For example, the number of Notices of Federal Tax Lien (NFTL) filed on taxpayers with assessed liabilities less than $10,000 decreased 60 percent, from 488,378 in Fiscal Year 2010 to 195,009 in Fiscal Year 2013. Many other taxpayers benefited from streamlined procedures for processing installment agreements and offers in compromise. In addition, penalties were not assessed on certain taxpayers who requested a filing extension. Although the Fresh Start Initiatives were generally implemented effectively, additional attention should be given in a few areas. For example, 524 taxpayers, who owed approximately $10.5 million, defaulted on their Direct Debit Installment Agreements after the IRS had withdrawn the NFTLs, yet the IRS did not file new NFTLs. In addition, the IRS has not fully assessed the revenue impact of filing fewer NFTLs. Performance measures may have helped identify potential problems and areas for improvement, but they were not established for all of the initiatives. To view the report, including the scope, methodology, and full IRS response, go to: www.treas.gov/tigta/auditreports/2015reports/201530005fr.html.

Tip of the Day

Nondeductible IRA contributions . . . If you're covered by a pension plan and your income exceeds the threshold, your ability to make deductible contributions is phased out. There is no income limit on nondeductible contributions (but the $5,500 limit and $1,000 catchup as well as the earned income requirements apply). There are pros and cons to making nondeductible contributions. But if you do, you must file Form 8606 to report them. If you fail to do so the full amount of the distribution will be taxable, rather than just the income portion. There's also a penalty for failure to file Form 8606.

 

February 11, 2015

News

Announcement 2015-8 (IRB 2015-09) addresses the application of the Courtís holding to claims for refund of employment taxes. In Quality Stores, Inc. 134 S.Ct. 1395 (2014), the Supreme Court held that the severance payments at issue in the case were wages subject to tax under the Federal Insurance Contributions Act (FICA). Under Rev. Rul. 90-72, supplemental unemployment compensation benefits that are linked to the receipt of state unemployment compensation and satisfy certain other requirements are excludable from wages for FICA, FUTA, and income tax withholding purposes, and are excludable from compensation for RRTA tax purposes.In Quality Stores, the parties agreed that the payments at issue did not satisfy the requirements for the narrow exclusion from FICA tax contained in Revenue Ruling 90-72. Accordingly, the Supreme Court did not address whether the exclusion from FICA taxes set forth in Rev. Rul. 90-72 for certain payments linked to state unemployment benefits is ďconsistent with the broad definition of wages under FICA.Ē

The IRS has published (IR-2015-26) it's list of the "Dirty Dozen" tax scams for 2015 and warning taxpayers about aggressive telephone scams continuing coast-to-coast during the early weeks of this year's filing season. The list includes repeaters from prior years but also includes offshore tax avoidance, fake charities, abusive tax shelters, falsifying income to claim credits, and excessive claims for fuel tax credits. Many of these scams are perpetrated in conjunction with a tax preparer. Chose a preparer carefully.

Tip of the Day

Capital loss in the year of death . . . A capital loss sustained by a decedent during his or her last tax year (or a carryover to that year) can be deducted only on the final income tax return filed for the decedent. The capital loss limits still apply. The decedent's estate cannot deduct any of the loss or carry it over to following years.

 

February 10, 2015

News

If you make contributions to an IRA for more than the allowed amount the "excess contributions" are subject to a 6% excise tax for every year the excess contribution continues. In Michael H. Wu et ux. (U.S. District Court, N.D. Illinois, East. Div.) the taxpayers made a substantial contribution in one year (in 2007) to their respective IRAs. They withdrew the excess contribution and the associated earnings on March 23, 2010. The taxpayers also filed returns for the intervening years late. The taxpayers acknowledged the overcontribution. The taxpayers requested a waiver of the taxes. The IRS denied the request, explaining it had no legal authorization to do so. The IRS levied the taxes along with penalties for filing their tax returns late, interest on the late payment and penalties on the late payment. The taxpayers paid, but requested refunds from the IRS. When denied, the taxpayers petitioned the Court for refunds. The taxpayers alleged that the IRS owed them a refund on an interest payment because it incorrectly determined the date of the payment (the IRS used the date received; the taxpayers claim interest ran to the date postmarked). They further alleged that the IRS owed them a refund on taxes paid for 2009 because they withdrew the relevant funds from the IRA accounts before "tax day" for 2009 (i.e., April 15, 2010). The IRS also allegedly owed them a refund on penalties paid for late filings because the penalty does not apply to tax returns for excess IRA contributions. The Court held the postmark rule applied and the taxpayers' mailing was timely. The Court also found that by withdrawing the funds before the due date for the taxes for that year they avoid a penalty for that year.

Tip of the Day

Reporting the sale of stock bought at various times . . . It's not unusual to have purchased shares of stock at different times over the years and sold them at one time. For example, you bought 100 shares of Madison in 2003, 50 shares in 2005, another 50 in 2006 and 100 more in 2010. You sell all the shares, 300, in 2014. You can consider such a sale as a single transaction (it's all long-term; you could have two transactions, part short-term, part long-term that would be two separate transactions) on Form 8949. In the "Date acquired" column write "Various". With most software entering V or var for the date acquired should generate "various" for the entry.

 

February 9, 2015

News

The IRS has announced (IR-2015-25) that the 2015 tax filing season is off to a strong start with most taxpayers filing their returns electronically and choosing direct deposit for their refunds. As of Jan. 31, the IRS received more than 14 million tax returns this year. More than 13 million of those returns have been filed electronically. IRS.gov has been accessed more than 65 million times this year, up 49 percent from the same time last year. The IRS has issued 7.6 million refunds worth $26.8 billion; the average refund is worth $3,539. More than 96 percent of all refunds have been paid through direct deposit. All total, 7.3 million refunds worth $26.2 billion have been directly deposited to taxpayer accounts.

Rev. Proc. 2015-19 (IRB 2015-8) provides the depreciation limits for cars and trucks for 2015. It also provides the inclusion amounts for leased vehicles that are considered luxury vehicles.

Tip of the Day

Inherit a U.S. savings bond? . . . If so, when you cash the bond in the Form 1099-INT you receive will show the full amount of interest accrued. But some of that interest was probably taxable in the decedent's hands, either on his final return or by the estate on the estate's income tax return. If that's the case you should report the full amount on Schedule B. Total the interest from all your interest items, enter a subtotal, then enter "U.S. Savings Bond Interest Previously Reported" and the amount of interest accrued before you received the bond. Subtract this amount from the subtotal and enter the total on line 2. Your software should handle the issue.

 

February 6, 2015

News

The IRS is warning (IR-2015-20) taxpayers that schemes to erroneously claim credits is on the annual list of tax scams it calls the "Dirty Dozen" again for the 2015 filing season. The IRS noted that some people falsely increase the earned income they report to the IRS to allow them to maximize refundable credits such as the Earned Income Tax Credit. The IRS noted that some unscrupulous return have used this to illegally inflate taxpayer refunds. The erroneous refunds could result in a significant tax bill along with penalties and interest.

In IR-2015-21 the IRS is warning taxpayers to watch for improper claims for fuel tax credits, another one of the ďDirty DozenĒ tax scams for the 2015 filing season. The fuel tax credit is generally limited to off-highway business use or use in farming. Consequently, the credit is not available to most taxpayers. But yet, the IRS routinely finds unscrupulous preparers who have enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000. Furthermore, illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS has taken a number of steps to improve compliance processes involving fuel tax credits. IRS compliance filters are preventing a significant number of questionable fuel tax credit claims from being processed. For example, new identity theft screening filters have also improved the IRSís ability to identify questionable fuel tax credit claims during return processing, including preventing the issuance of $33 million in questionable credit claims in 2013. For the upcoming filing season, the IRS has taken additional steps to identify returns for review that claim fuel tax credits, including broadening the identification criteria to ensure a more comprehensive compliance approach in selecting questionable tax returns.

Looking for a return preparer in your area? The IRS has released it's Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. The list includes attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and annual filing season program participants (AFSPs; those who have taken the prescribed IRS courses) who have a PTIN (preparer tax identification number). You can search the list by zip code and credential (e.g., CPA). Go to irs.treasury.gov/rpo/rpo.jsf.

The IRS has indicated (AOD-2015-1) that it will not acquiesce in Estate of Martinez (T.C. Memo. 2004-150). In that case the Tax Court held that the decedent could exclude his share of the partnership COD income from gross income under Sec. 108(a)1)(A) because the partnership debt was discharged "in a title 11 case" within the meaning of Sec. 108(d)(2). Invoking the principle of judicial comity, the Tax Court noted that the bankruptcy court's order discharged and released the partners from liability in a title 11 case and explicitly asserted jurisdiction over them.

Tip of the Day

Estimated tax penalty . . . You may be subject to an estimated tax penalty if you didn't make required estimated payments. But there are a number of ways to get part or all of the penalty waived. First, you may be able to annualize your income. That is, if you earned your income unequally during the year and more was earned later in the year, the penalty may be reduced or eliminated. You might also qualify for a waiver if you retired after reaching age 62 or became disabled in 2013 or 2014 and your underpayment was due to reasonable cause. See the instructions for Form 2210. If you are seeking a waiver because your home or business was in a federally declared disaster area and the reason for not making a payment on time was a result of the disaster, you don't need Form 2210. The IRS automatically identifies taxpayers in such areas. The Service will compute any penalties and send you a bill.

 

February 5, 2015

News

The America's Small Business Tax Relief Bill has been reintroduced in the House by Reps. Pat Tiberi, R-Ohio and Ron Kind, D-Wis. that would make the $500,000/$2,000,000 expensing limit of Section 179 permanent. Several other bills have been introduced that would make permanent some of the provisions that were extended through 2014.

If you're a bona fide resident of the U.S. Virgin Islands (USVI) you don't file a return with the IRS but with the USVI Bureau of Internal Revenue (VIBIR). In Estate of Travis L. Sanders, Deceased (144 T.C. No. 5) the deceased was a U.S. citizen who signed an employment agreement to work for M, a limited partnership (LP) organized in USVI as a professional consultant. He filed Forms 1040 with the VIBIR for tax years 2002, 2003, and 2004. More than three years after he filed those forms, the IRS mailed him a notice of deficiency determining that he was not a bona fide resident of the USVI for those years and treating him as a nonfiler for U.S. tax purposes. If that were the case, the statute of limitations would not have expired because he did not file tax returns. The Court found that the proper test for USVI residence is the "fact and circumstances" test and that the taxpayer filed with the VIBIR and met his Federal tax filing obligations. Finally, the period of limitations commenced when he filed his returns with the VIBIR and expired before the IRS mailed the deficiency notice. The Court looked at the factors used to determine residency and noted that he had a physical presence in the USVI and was employed by a USVI business and listed as a partner on their Schedules K-1. He also met several other criteria.

Tip of the Day

Direct deposit of refund . . . It's the fastest way to get your money back, but there are a couple of situations where it won't work. Your direct deposit request will be rejected if your financial institution does not allow a joint refund to be deposited in an individual account, the name on your account does not match the name on the tax refund, and if three direct deposit tax refunds have already been made to your account or prepaid debit card. If you file a paper return and any numbers or letters on lines 76b through 76d (where you'd enter the routing and account number) are crossed or whitted out.

 

February 4, 2015

News

The IRS has updated the instructions to Form 8965. To see the changes go to www.irs.gov/uac/Recent-Delveopment-2015-01-23-2014-I8965. The IRS had updated the instructions to other forms including Form 1040, 8903, 709 and Form 1040, Schedule F. To view all recent changes to tax forms and instructions, go to www.irs.gov/uac/Recent-Developments-for-Tax-Forms,-Instructions,-and-Publications.

President Obama has released his budget proposals for fiscal year 2016. The revenue proposals contain increased taxes on high-income individuals and changes to the taxation of international entities. The proposals would make the make the Sec. 179 expensing option permanent with the amount set at $500,000 for 2015 and $1 million for 2016. It would expand the use of the cash method to small businesses with up to $25 million in average annual receipts and broaden the small business health insurance credit to firms with up to 50 employees. The proposals also include the elimination of a step-up basis for assets transferred at death, with a $100,000 per-person exclusion and exceptions for surviving spouses. Also included is a proposal to increase the top rate on capital gains and dividends to 24.2 percent from 20 percent and reducing the exclusion for estate taxes to $3.5 million with a top tax rate of 45 percent. While the small business benefits stand a good chance of being accepted by Congress, the provisions that would raise taxes are unlikely to make headway in the Republican controlled houses.

The IRS has announced that the time to acknowledge receipt of an electronically transmitted return has return to normal.

Tip of the Day

Scam charities . . . The IRS is warning taxpayers that the Service's "Dirty Dozen" list of tax scams for 2015 includes groups masquerading as charitable organizations. Some "charities" have names similar to familiar or nationally known organizations. In some cases the websites look like those of a legitimate charity. You can check to see if a charity is in good standing and if the contributions are deductible by going to www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check. Use the "Exempt Organizations Select Check Tool" to check on the name. On the same page you can get additional information about the charity by clicking on the "Exempt Organizations Business Master File Extract (EO BMF)". There you can download a CSV file viewable in a spreadsheet program. That file contains additional information. While that may be a little too much trouble if you want to contribute $50, at some level you'll want to such a check. The IRS is also warning individuals that the scam charities may go beyond soliciting a donation and try to get personal information such as a Social Security number or passwords.

 

February 3, 2015

News

The IRS has issued a news release, EITC Awareness Day: Many Workers May Not Know of Significant IRS Benefit. The release also contains information on the Premium Tax Credit and the Health Care Law.

The IRS has released a second-quarter update to its 2014-2015 Priority Guidance Plan. The IRS has added 11 new projects to the annual plan. For the complete update go to www.irs.gov/pub/irs-utl/2014-2015_pgp_2nd_quarter_update.pdf

Tip of the Day

Grouping of real and personal property rentals . . . In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. For example, you rent some excess farm equipment and some greenhouses. However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. For example, you rent a house partially furnished.

 

February 2, 2015

News

If you're a preparer and have already started submitting returns, you may have noticed acknowledgments of filing the federal return are slower than expected. The IRS is aware of the problem and is taking steps to solve the issues. The time to acknowledge may increase as it gets later in the day.

As anticipated, Republicans have increased their attacks on the Patient Protection and Affordable Care Act with the introduction of a new bill. Currently, businesses with 50 or more full-time equivalent employees are required to offer health insurance or pay a penalty. The penalty applies to employees working 30 or more hours per week. The new bill (American Job Protection Bill) would repeal that employer requirement.

Tip of the Day

Business sell equipment in 2014? . . . If you do business as a corporation, partnership, or an LLC with more than one member you have to file a separate return (1120S or 1065) and you probably have to include a balance sheet on that return. That's not the case for a sole proprietorship. Without a balance sheet or correctly entering data in an accounting program, it's easier to miss the sale of equipment. And the tax consequences can be significant. If you sell the equipment at a loss the loss is deductible. But any depreciation is subject to recapture and taxed at ordinary income rates. You could also have a capital gain. Keep in mind that when calculating gain or loss your adjusted cost basis is what you paid, less depreciation taken. For example, you bought a machine for $1,000 and took $700 of depreciation. Your basis for determining gain or loss is $300. If you sell it for $450 you'll have to recapture $150 of depreciation. That's ordinary income. Sell it for $250 and you have a $50 loss. Make sure you tell your tax preparer about any equipment sales.

 

January 30, 2015

News

Legislation has been introduced (Fifth Amendment Integrity Restoration (FAIR) Act of 2015) in the Senate that would curtail property seizures where an individual has not yet been convicted of a crime.

A payor can deduct, and the recipient must include in income, amounts that constitute alimony. But for a payment to constitute alimony, it must satisfy four requirements. One of the requirements (the first) is that such payment is received by a spouse under a divorce or separation instrument. In Franklin Rex Milbourn (T.C. Memo. 2015-13) the taxpayer's spouse's attorney prepared an initial draft of a marital dissolution agreement (MDA) which purportedly outlined responsibilities for the taxpayer and his spouse. Because neither the taxpayer nor the spouse agreed on the amount of the monthly alimony payment, neither party signed the draft MDA. While a decree of divorce was issued in June 2006 (the year at issue), it did not include any instructions, provisions, or guidance with respect to alimony. Almost a year later, May of 2007, was an amended decree of divorce issued incorporating the final MDA signed by both parties. Consequently, the payments made in 2006 were not made under a decree of divorce. The Court then looked to see if the payments where made pursuant to a written separation agreement. The Court found that there was none. The draft MDA was simply the beginning of the negotiating process. The Court denied the claimed alimony deduction.

Tip of the Day

Want to get it over with? . . . Want to file your return so you can go backpacking through Europe but don't want to pay the IRS now? If you file electronically you can file at any time and have the money taken out of your bank account on April 15. Many states offer the same option.

 

January 29, 2015

News

The assault on the Section 529 college savings plans was short lived. Bipartisan legislation has been introduced that would actually liberalize the plans. Under the legislation computers would be a qualified expense and refunds of tuition as a result of withdrawal from school would no longer be subject to income tax and a 10-percent penalty if rolled over in 60 days.

If you work in a foreign country you may qualify for the foreign earned income exclusion ($100,800 for 2015; adjusted for inflation). But to be entitled to this exclusion, you must satisfy two requirements. First, you must be an individual whose tax home is in a foreign country; second, you must either be a bona fide resident of one or more foreign countries or be physically present in such country or countries during at least 330 days in a 12-month period. The Court noted that an individual's tax home can't be in a foreign country if the taxpayer's abode is in the U.S. A taxpayer's abode is generally in the country in which he has the strongest economic, family, and personal ties. Here the taxpayer's first and second wife and his daughter lived in his house or his parent's house in Louisiana. During off-duty periods he regularly returned to Louisiana for an average of 23 days. His business affairs were handled by his mother, whose address was used as his mailing address. His driver's license, voter registration, bank accounts, and motor vehicles were all centered in Louisiana. By contrast, his ties to Sakhalin Island (Russia) were transitory and not much more than the bare minimum to perform his duties. The Court found he did not qualify for the exclusion. The Court, did however, find that he was not subject to the accuracy-related penalty. He used a competent tax professional to prepare the return and fully disclosed the facts to the preparer who advised the taxpayer he qualified for the exclusion. Joel B. Evans (T.C. Memo. 2015-12)

Tip of the Day

Sell your home? . . . If you used part of the home for business, you may not have to allocate gain on the sale of the property between the business part and the part used as a home and you do not need to report the sale of the business portion on Form 4797. However, you cannot exclude any part of any gain equal to any depreciation allowed or allowable after May 6, 1997. The rules can more complex if you used a separate part of the property for business. For example, you used the ground floor for an office and the second floor for living.

 

January 28, 2015

News

House Speaker John Boehner (R-Ohio) and Senate Majority Leader Mitch McConnell (R-Ky) have indicated that they would consider adding a provision in any tax simplification legislation that would increase the Child and Dependent Care Tax Credit to 50% (from 35%) and increasing the amount per child to $6,000 for children age five. The phaseout of the credit would also be at a higher level.

You can generally exclude from income amounts received for physical injury or pain. For example, you're injured in a car accident and receive an insurance award for your broken leg. In Nichelle G. Perez (144 T.C. No. 4) the taxpayer agreed to be an egg donor for an infertile couple. The amount she received was not compensation for the eggs, but the pain and suffering associated with the procedure. The contract she signed stated that:

Donor Fee: Donor and intended Parents will agree upon a Donor Fee for Donor's time, effort, inconvenience, pain, and suffering in donating her eggs. This fee is for Donor's good faith and full compliance with the donor egg procedure, not in exchange for or purchase of eggs and the quantity or quality of eggs retrieved will not affect the Donor Fee.

The Court held that compensation for pain and suffering resulting from the consensual performance of a service contract is not "damages" under Section 104(a)(2) and must be included in gross income. (The Court noted that there a small number of true donors--women who undergo the rigors of the process for an infertile relative or friend without compensation and that this opinion wasn't about them.)

Tip of the Day

Ten-year collection limitation period . . . While the IRS generally has only three years in which to assess income taxes. But there's a 10-year limitation period on collection. For example, the IRS issues a deficiency notice to a taxpayer, but the taxpayer fails to pay. The IRS doesn't follow up immediately. The IRS has 10 years in which to pursue collection. In fact, that limitation period is waived if you have an installment agreement with the IRS to pay the tax. That is, there's no time limit on the IRS.

 

January 27, 2015

News

The Chairman of the Senate Finance Committee, Orrin G. Hatch (R-Utah) has indicated he wants to have a tax reform bill ready by the end of 2015. While both parties are interested in tax reform, it's unlikely to be easy. There is talk that corporate reform may be tackled first, since that is anticipated to be easier. But even corporate reform could be difficult. Getting the tax rate down to even 28% is expected to sacrifice some sacred cows such as accelerated depreciation.

Enrolled agents with Social Security Numbers (SSNs) ending in 7, 8 or 9 and those who donít have an SSN need to renew their enrollment status by Jan. 31. Go to www.irs.gov/Tax-Professionals/Enrolled-Agent-News.

Notice 2015-09 (IRB 2015-6) provides limited relief for taxpayers who have a balance due on their 2014 income tax return as a result of reconciling advance payments of the premium tax credit against the premium tax credit allowed on the tax return.

Tip of the Day

IRS tips on identity theft . . . The IRS is very concerned about identity theft since a significant amount involves tax refund claims. Here are some tips from the IRS, and a couple of our own.

 

January 26, 2015

News

If a business fails to pay the withheld taxes on employees (or other trust fund taxes), the IRS can recover from any responsible person. In John Chase Lee (144 T.C. No. 3) the IRS filed an notice of federal tax lien (NFTL) and sent the taxpayer a notice of lien filing and a notice of intent to levy with respect to trust fund recovery penalties assessed against the taxpayer. The taxpayer request a collection due process hearing. In the notice of determination sent to the taxpayer after the hearing the Appeals Officer sustained the IRS's filing of the NFTL and the proposed levy. The taxpayer petitioned the Tax Court for review. The IRS determined in a supplemental notice of determination the taxpayer could not challenge the underlying tax liabilities because he had previously had a opportunity to do so in response to a Letter 1153. Because the IRS did not mail the Letter 1153 to the taxpayer's last known address, the IRS was required to serve Letter 1153 on the taxpayer personally in order for the assessment to be valid. The taxpayer contended the letter was never served. The IRS had a motion for summary judgment in which it contended that there were no disputed issues of material fact. The Court held the IRS's motion for summary judgment be denied because the issue of whether the Letter 1153 was properly issued to the taxpayer by personal service remained a genuine dispute as to a material fact for trial. The Court also held the issue of whether a Letter 1153 was properly issued by mailing or personal service is a requirement of applicable law or administrative procedure that the Court would review without regard to whether the taxpayer raised the issue at the collection due process hearing.

Tip of the Day

Intercompany pricing . . . The IRS is extremely concerned what a domestic parent charges a foreign subsidiary for goods and services (and vice versa). That's because inappropriate pricing can shift profits to the foreign subsidiary where profits may be taxed at a lower rate. If you do business in multiple states, don't be surprised if a state challenges intercompany pricing. Some years ago one company put the company's logo in a Delaware corporation and charged stores in other states a high fee for the use of the logo, shifting profits to Delaware where they escaped taxes. A number of states changed their laws to stem the revenue loss. There's nothing wrong with shifting profits, but just make sure your transactions are at arms' length.

 

January 23, 2015

News

The Treasury Inspector General for Tax Administration (TIGTA) and the IRS are warning taxpayers about aggressive and threatening phone calls by criminals impersonating IRS agents. The IRS has seen a surge of these phone scams in recent months as scam artists threaten police arrest, deportation, license revocation and other things. Scammers are able to alter caller ID numbers to make it look like the IRS is calling. They use fake names and bogus IRS badge numbers. They often leave "urgent" callback requests. They prey on the most vulnerable people, such as the elderly, newly arrived immigrants and those whose first language is not English. Scammers have been known to impersonate agents from IRS Criminal Investigation as well. The Treasury Inspector General for Tax Administration (TIGTA) has received reports of roughly 290,000 contacts since October 2013 and has become aware of nearly 3,000 victims who have collectively paid over $14 million as a result of the scam, in which individuals make unsolicited calls to taxpayers fraudulently claiming to be IRS officials and demanding that they send them cash via prepaid debit cards. Keep in mind the IRS will never:

For more information, see the complete IRS News Release.

Drafting errors, often called scrivener's errors aren't as uncommon in legal documents as you might imagine. Sometimes the error is so obvious that a court quickly determines what was written was not intended. In Hartland Management Services, Inc., et al. (T.C. Memo. 2015-8) the IRS prepared three Forms 872, Consent to Extend the Time to Assess Tax but instead of indicating the disputed years on the forms, the IRS wrote in the current tax years. The error went unnoticed by the taxpayers, who signed the form, and the IRS area director. The IRS subsequently prepared three additional Forms 872 with the correct years and requested the taxpayers to sign them; they did not. The parties agreed the three-year period of limitation had expired before the IRS sent the notices of deficiency. The IRS argued that the errors on the initial signed forms were scrivener's error and that the parties' unawareness of these errors shows a mutual mistake, and that the forms should be reformed to apply to the disputed years. The Court noted that to reform Form 872, there must be "clear and convincing evidence" as to the parties' intent. The Court noted that the taxpayers' counsel was a tax attorney and CPA and is presumed to be knowledgeable about tax law and procedure. The Court also noted that the parties did not intend to extend the period of limitation for the erroneous years. Not only were those years open, they did not match the taxpayers'. The Court concluded the forms contained a mutual mistake. The IRS also argued that the continued actions with respect to one of the taxpayer's tax year showed that the taxpayers believed the period of limitations to still be open for the disputed years. The Court sided with the IRS and held the initial Forms 872 could be reformed to conform to the intent of the parties.

Tip of the Day

Mail, not e-mail . . . E-mail is fast and convenient and works well for almost all applications. But there are times when regular mail should be used. The first invoice to a customer can be sent by e-mail; same for the first reminder. After that you should consider regular mail or even certified. You want to make sure the customer is getting the mail, and if not, why not. Keep in mind that many contracts still require that notifications be sent by regular mail. For example, exercising the option to renew a lease.

 

January 22, 2015

News

The filing season has officially begun--at least for federal purposes. The IRS has announced that modernized e-File will conduct daily maintenance from 4:00 a.m. to 5:00 a.m. Eastern Standard Time, until further notice. At this time, that's unlikely to affect many taxpayers.

The IRS has released proposed regulations (REG-153656-03) concerning the application of Sec. 41, credit for increasing research activities. The proposed regulations provide guidance on computer software that is developed by (or for the benefit of) the taxpayer primarily for internal used by the taxpayer under Sec. 41(d)(4)(E).

The IRS has recently released updates of a number of forms, instructions and publications. Some of the more important ones include:

Pub. 3 Armed Forces' Tax Guide
Pub. 527 Residential Rental Property
Pub. 530 Tax Information for Homeowners
Pub. 590-A Contributions to Individual Retirement Arrangements (Pub. 590 has been split into two-590-A and 590-B)
Pub. 590-B Distributions from Individual Retirement Arrangements
Pub. 936 Home Mortgage Interest Deduction
Pub. 5187 The Health Care Law: What's New for Individuals and Families
Pub. 5199 Tax Preparer Guide to Identity Theft
Pub. 5027 Identity Theft Information for Taxpayers
Pub. 5201 The Health Care Law and Your Taxes

Form 1116 Foreign Tax Credit (Individual, Estate, or Trust)
Form 4562 Depreciation and Amortization
Form 5500-EZ Annual Return of One Participant Retirement Plan
Form 5695 Residential Energy Credits
Form 5884 Work Opportunity Tax Credit
Form 8582 Passive Activity Loss Limitations

Inst 1041 U.S. Income Tax Return for Estates and Trusts
Inst 4562 Depreciation and Amortization
Inst 8941 Credit for Small Employer Health Insurance Premiums
Inst 8960 Net Investment Income Tax for Individuals, Estates, and Trusts
Inst 8962 Premium Tax Credit
Inst 8983 Statement of Specified Foreign Financial Assets

Tip of the Day

Form 1099 series . . . It's not too early to start assembling your data and secure any forms and software to file Forms 1099. Because January 31st falls on a Saturday this year, the forms don't have to be mailed to recipients until February 2. Most businesses will have to file Form 1099-MISC for payments for services to nonemployees. Don't forget, that can include work done on the company car or truck, the tech who got the virus out of the computer, etc., not just the temporary office workers. The cost of parts and materials is included in the amount. Thus, if you paid Madison Auto, LLC $625--$85 for labor and $540 for parts--you owe it a 1099. The reporting threshold is $600 or more. Use 1099-MISC to report rents paid of $600 or more. Borrowed money from a shareholder, or a relative? If the interest paid is $10 or more you'll have to send them a 1099-INT. The penalties for failure to file, or filing late varies but can be $100 per information return.

 


Copyright 2015 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536


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