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December 9, 2016
TT.D. 9795 contains temporary regulations under Section 987 of the Code relating to the recognition and deferral of foreign currency gain or loss under Section 987 with respect to a qualified business unit (QBU) in connection with certain QBU terminations and certain other transactions involving partnerships.
The IRS has issued final (T.D. 9794) regulations that provide guidance under Section 987 regarding the determination of the taxable income or loss of a taxpayer with respect to a qualified business unit (QBU) subject to section 987, as well as the timing, amount, character, and source of any Section 987 gain or loss. Taxpayers affected by these regulations are corporations and individuals that own QBUs subject to Section 987. In addition, temporary and proposed (REG-128276-12) regulations (the temporary regulations) are being issued under Section 987 to address aspects of the application of section 987 not addressed in these final regulations.
It's not unusual for the IRS to question a loss (such as a casualty loss) on a tax return. In Ajibola O. Ibidunni (T.C. Memo. 2016-218) claimed a $50,000 for his investment in an LLC. The taxpayer was unable to prove he had an interest in the partnership. He was not listed as a partner in the bankruptcy documents. While the LLC's managing partner testified the taxpayer was a partner, he could not explain why he was listed as a partner in the bankruptcy documents. The taxpayer acknowledged he never received a Schedule K-1 from the LLC, nor any indication he received income distributions. The Court held that even if the taxpayer could show payments he made were for an investment in the LLC, they didn't substantiate and ownership interest.
Tip of the Day
What's your's is your's, what's mine is mine . . . The line between business and personal assets and expenses is often crossed in a closely held business. But that's exactly what the IRS often looks for in an audit, and, while usually unintentional, it can prove costly. For example, you purchase a building in your own name and lease it to your S corporation. Your attorney helps you draft a lease where the corporation pays you $5,000 a month (a fair rental). You're responsible for taxes, utilities, etc. You're off to a good start, but some time later things start to go awry. Here are some actions taxpayers have taken that can cause both tax and legal problems:
Some mistakes can be more costly than others. Many can be corrected, sometimes by some simple accounting entries. Talk to your accountant. If legal assistance is needed, talk to your attorney.
December 8, 2016
The IRS has issued temporary regulations (T.D. 9800) under Section 901(m) of the Code with respect to transactions that generally are treated as asset acquisitions for U.S. income tax purposes and either are treated as stock acquisitions or are disregarded for foreign income tax purposes. These regulations are necessary to provide guidance on applying Section 901(m). The text of the temporary regulations also serves in part as the text of the proposed regulations (REG-129128-14) under Section 901(m).
The IRS is advising (IR-2016-161) individuals who were wrongfully incarcerated they have until December 19, 2016 to file refund claims for tax years 2012 and prior for income that they reported that qualifies for the wrongful-incarceration exclusion contained in the Protecting Americans from Tax Hikes (PATH) Act. The refund claim applies to any civil damages, restitution or other monetary award received. Additional details are contained in the Release IR-2016-161.
Taxpayers who maintain an inventory are generally required to perform a physical inventory count annually. In Transupport, Incorporated (T.C. Memo. 2016-216) the taxpayer relied on a percentage of sales to determine cost of goods sold. The IRS challenged the percentage used and determined a far lower cost of goods sold, result in a higher profit. The Court agreed and noted that the taxpayer's financial statements where unreliable because of the greatly understated inventories at the beginning and end of each year and current purchases were written off during the years without regard to whether the items were added to the inventory or sold. In addition, the Court found that the compensation of the taxpayer's largest shareholder and his sons were excessive. The Court noted the lack of knowledge of the business demonstrated by the sons.
Tip of the Day
Will your angel be there? . . . You just got financing for your startup of $300,000 from an angel investor (or a relative). But before you celebrate, make sure there's more available if you need to go back to the well. The first step is to spend the time to accurately forecast your needs. Be conservative. There could be any number of reasons outside your control for needing additional funds. It could be a supplier that ups his price, or even a natural disaster. You don't want to lose momentum at a critical time. That could leave you with a capital need at the same time investors may be souring on the deal. On the other hand, getting funding when things are going well is relatively easy, but that's also likely to be the time you don't need it. Forecast your needs as best as possible, add a cushion, and make sure you have sources of funds you can call on.
December 7, 2016
Revenue Procedure 2016-56 (IRB 2016-51) updates Rev. Proc. 2016-18 to add countries to the list of countries set forth in Section 3 and Section 4 of Rev. Proc. 2014-64. Section 3 lists the countries with which the reporting requirement of Reg Secs. 1.6049-8(a) and 1.6049-4(b)(5) relating to bank interest income of certain nonresident alien individuals applies. Section 4 lists the countries with which the Treasury Department and the IRS have determined that it is appropriate to have an automatic exchange relationship with respect to that interest income information under Reg. Secs. 1.6049-8(a) and 1.6049-4(b)(5). Rev Proc 2016-56 adds one country (Saint Lucia) to the list set forth in Section 3 and three countries (Israel, the Republic of Korea, and Saint Lucia) to the list set forth in Section 4.
You can deduct wages paid to relatives, but don't be surprised if the IRS questions the expense. That's particularly true for wages paid to a younger child, wages that would be excessive for the skills of the individual, etc. In Malcolm D. Alexander (T.C. Memo. 2016-214) the Court disallowed wages paid to the taxpayer's 10-year old stepson. The Court questioned whether the work was ordinary and necessary in relation to the taxpayer's business. In addition, the taxpayer did not issue a Form 1099-MISC or W-2. Since the wages were in cash, there was no proof any amounts were actually paid. The Court also disallowed a home office deduction. The taxpayer did not show that the claimed space was used regularly and exclusively for his business. The photographs presented did not establish regular and exclusive use.
Tip of the Day
Sales tax can depend on whether property accompanies the service . . . If the cost of installing a new item of personal property is included in the price of the item, or even if broken out separately, the combined price is often subject to sales tax. On the other hand, the cost to just move or repair the item may be a service not be subject to sales tax. For example, Madison Inc. designs, sells and installs a cubicle system for Chatham, LLC. The cost to design and install as well as the purchase price of the cubicles is subject to sales tax. If Madison simply designs and assembles existing cubicles at the customer's location, the cost is not subject to sales tax. Check the rules in your state. Some states tax services as well as tangible property.
December 6, 2016
TThe IRS has announced that interest rates will remain the same for the calendar quarter beginning January 1, 2017. The rates will be:
The IRS has issued temporary regulations (T.D. 9799) and proposed amendments of regulations (REG-102952-16) that modify existing regulations related to the penalty under Section 6695(g) of the Code relating to tax return preparer due diligence. These temporary regulations implement recent law changes that expand the tax return preparer due diligence penalty under Section 6695(g) so that it applies to the child tax credit (CTC), additional child tax credit (ACTC), and the American Opportunity Tax Credit (AOTC), in addition to the earned income credit (EIC). To comply with the knowledge requirement under Sec. 1.6695-2(b)(3), the tax return preparer may not ignore the implications of information furnished to, or known by, the tax return preparer, and must make reasonable inquiries if the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete. Examples in Sec. 1.6695-2(b)(3)(ii) illustrate this requirement. This knowledge requirement is consistent with the verification requirement imposed on all tax return preparers with respect to preparation of any tax return or claim for refund under the accuracy-related standards set forth in Sec. 1.6694-1(e). Form 8867 has been revised for the 2016 tax year and is a single checklist to be used for all applicable credits (EIC, CTC/ACTC, and/or AOTC) on the return or claim for refund subject to the section 6695(g) due diligence requirements.
Notice 2016-75 (IRB 2016-51) provides guidance on Section 45R of the Code for certain small employers that cannot offer a qualified health plan (QHP) through a Small Business Health Options Program (SHOP) Exchange because the employer’s principal business address is in a county in which a QHP through a SHOP Exchange will not be available for the 2016 calendar year (the counties, which are listed in the notice, are all in Wisconsin). With respect to those employers, this notice provides transition relief allowing employers to claim the credit by satisfying the pre-2014 rules.
Tip of the Day
Holiday gifts for clients . . . You want to give something that bears a relationship to the value of the clients' business, but that's hard if you want to keep the gift deductible under IRS rules. Each gift is limited to $25 per recipient per year. That's could be viewed as insulting to a client who provides you with $225,000 of business a year. You've got just two other options. One is to take the client to dinner, a show, or both. Then the usual rules apply. Some businesses hold a company holiday party that includes both employees and customers. The second option is to make a gift to the client's favorite charity in his or her name. Consider the client before deciding.
December 5, 2016
The IRS has issued final regulations (T.D. NO. 9797) that provide transition rules providing that executors and other persons required to file or furnish a statement under Section 6035(a)(1) or Section 6035(a)(2) regarding the value of property included in a decedent's gross estate for federal estate tax purposes before June 30, 2016, need not have done so until June 30, 2016. These final regulations are applicable to executors and other persons who file federal estate tax returns required by Section 6018(a) or Section 6018(b) after July 31, 2015.
The IRS announced (IR-2016-155) the launch of an online application that will assist taxpayers with straightforward balance inquiries in a safe, easy and convenient way. This new secure tool allows taxpayers to view their IRS account balances, including amounts owed for tax, penalties and interest. Taxpayers may also access various online payment options including Direct Pay, pay by card and online payment agreement. The IRS anticipates additional capabilities will be added to this platform as they are developed and tested.
In Lawrence G. Graev et ux. (147 T.C. No. 16) the taxpayers claimed on their 2004 income tax return a charitable contribution deduction for the donation of a facade easement to the National Architectural Trust (NAT) and claimed on their 2005 return a carryover of a portion of that deduction. The examining agent disallowed the claimed charitable contribution deductions and also determined that the taxpayers were liable for the 40% gross valuation misstatement penalty. He prepared a penalty approval form for which he obtained written approval from his immediate supervisor, and on that form only the 40% penalty under Sec. 6662(h) was asserted. He prepared a notice of deficiency that included the 40% penalty; but before the notice was issued, a Chief Counsel attorney reviewed a draft of the notice. Through a memorandum approved by his supervisor, the attorney advised that an alternative 20% penalty under Sec. 6662(a) should be added to the notice. The notice of deficiency was then revised to include the 20% Sec. 6662(a) accuracy-related penalty (setting out the calculation to yield a zero 20% penalty to avoid stacking with the 40% penalty) and was issued as revised (but with no further approval from the examining agent's supervisor). The IRS conceded liability for the 40% penalty but continues to assert the alternative 20% penalty as a nonzero amount. The taxpayers contended that the Service failed to comply with the requirements of Sec. 6751 as to the alternative 20% penalty—i.e., that a computation of the penalty be included in the notice of deficiency, Sec. 6751(a), and that the “initial determination of . . . [the] assessment” of the penalty be “personally approved (in writing) by the immediate supervisor . . . or such higher level official as the Secretary may designate”, Sec. 6751(b)(1)—and that these failures bar the assessment of that 20% penalty. The Tax Court held that the notice of deficiency complied with Sec. 6751(a), and that because the IRS has not yet assessed any 20% penalty, the taxpayers' argument that the IRS failed to comply with Sec. 6751(b)(1) is premature. The Court also held that the 20% accuracy-related penalty for a substantial understatement of income tax is sustained for 2004 and 2005.
Tip of the Day
$100 signing bonus? . . . Many banks are now offering $100 cash, a deposit to your account, gas card, etc. for opening a new account. That's about as original as the toasters they gave away 30 years ago. Should you spring for their offer? Before you do, consider that you'll get a Form 1099 for the $100. That means many taxpayers will end up with $75 (or less) in their pocket. While the account may cost the same as one at the bank across the street, chances are $100 comes with some sort of catch. Or the bank is betting you won't switch later. Best advice? Consider what the account will cost you for at least a year. Do they have a minimum balance charge? A fee for talking to a teller? Go with the account that will cost you the least, not the one with the biggest signing bonus.
December 2, 2016
The Internal Revenue Service Advisory Council (IRSAC) issued its 2016 Public Report. The IRSAC recommended that the Commissioner request Congress to enact legislation expressly affirming the Treasury Department’s authority to establish and enforce professional standards for both paid tax return preparers and tax ‘practice’ broadly defined. The IRSAC also made a series of recommendations for revisions to Treasury Circular 230, to delete obsolete references, provide authority to address some topics currently contained in Circular 230 through revenue procedures or other administrative guidance, add references to appraisers, and delete outdated language.
In Roger L. Lingren (T.C. Memo. 2016-13) the Tax Court sided with the IRS in disallowing deductions for foreign travel for the taxpayer, his ex-wife and adult daughter. The taxpayer and his ex-wife were artists who traveled to France for art classes. Foreign travel is subject to special rules and possible allocation of the travel expenses. However, the Court noted that it did not have to examine that issue since the taxpayer did not substantiate the expenses for air travel, auto rental, etc.
Tip of the Day
Check out your landlord . . . Most landlords check out their tenants, but if you're renting space for your business, make sure you check out your landlord. In the case of most commercial leases you're committing to a five-year term, and you don't want to be stuck with a landlord who won't maintain the building, won't provide necessary services or upgrades, etc. Worse yet, should the landlord go into bankruptcy, you could be faced with additional problems. That's especially true if you're renting retail space or have customers or clients visiting your office. A client's impression of the space you're in reflects on your whole operation. Find out if the landlord has been sued by tenants, if there are outstanding disputes, etc. While you may be able to get out of the lease, it's likely to be difficult and expensive.
December 1, 2016
The IRS has issued final regulations (T.D. 9798) that provide user fees for installment agreements. The final regulations affect taxpayers who wish to pay their liabilities through installment agreements. The new fees are:
One of the most frequently encountered reasons for the IRS reconstructing a taxpayer's business income is a lack of any books of account (or simply poor books). That was the case in Cari Barnes (T.C. Memo. 2016-212) where the IRS used the bank deposits method. The taxpayer was able to show the Court that some of the deposits the IRS considered as additional income were actually from nontaxable sources. The Court also sided with the IRS in disallowing many of the taxpayer's business expense for lack of substantiation. The Court disallowed internet expenses where the taxpayer was unable to show in her home for business purposes. The Court also denied deductions for expenses related to a rental property where the taxpayer failed to show the dwelling was rented at a fair market rental at any time during each of two tax years.
Tip of the Day
Deducting auto lease . . . If you're deducting lease payments as a business expense there are several points to keep in mind. First, any up-front lump-sum payment isn't currently deductible. You've got to spread the amount over the life of the lease. For example, your monthly payments on a new SUV are $375 plus an up-front payment of $3,000. The $3,000 has to be spread over the life of the lease. Divide the $3,000 by term of the lease (in months) to compute the monthly amount. Second, if the vehicle is valued at more than about $19,000 (for cars) or $19,500 (for trucks), you can't deduct the full amount of the lease payments. You've got to adjust the annual lease payments by an "inclusion amount". The dollar threshold depends on the year the lease began. Go to ourAuto and Vehicle Tables for the thresholds and inclusion amounts. Third, if the auto is used partly for business and partly for personal purposes, only the amount allocable to the business use is deductible.
November 30, 2016
The IRS has announced that over the next five weeks, the IRS will send letters to certain e-Services product users who must either go online or call the e-Services e-Help Desk to validate their identities. These letters will go to those users who can access the Transcript Delivery Service and who have been active within the past year. To learn more about who is affected, who must validate their identities and what is required, please go to the e-Services main page at www.irs.gov/eservices. Users who receive these letters will have 30 days to either authenticate their identities online or call to authenticate by phone. Do not call the e-Help Desk unless you receive a letter or your account is suspended. If you do not revalidate in time, your account will be suspended for security purposes.
The IRS has issued proposed regulations (REG-125946-10) that relate to the establishment of dollar-value last-in, first-out (LIFO) inventory pools by certain taxpayers that use the inventory price index computation (IPIC) pooling method. The proposed regulations provide rules regarding the proper pooling of manufactured or processed goods and wholesale or retail (resale) goods. The proposed regulations would affect taxpayers who use the IPIC pooling method and whose inventory for a trade or business consists of manufactured or processed goods and resale goods.
In Harvey L. Tucker (U.S. Court of Appeals, 11th Circuit) the taxpayer's S corporation owned several properties at the time of the 2007-2008 real estate crash. The taxpayer claimed a loss on the properties, claiming they were worthless. The Court affirmed the Tax Court that no loss occurred in 2008, since there was no closed transaction. The properties were subject to a recourse mortgage, so no loss could be claimed until the properties were sold at foreclosure.
Tip of the Day
Business reason . . . Sometimes it's important to have a valid business purpose for a transaction such as transferring property to a corporation, dividing a corporation, transferring property to a related party, etc. You may also be saving taxes, but the business or economic purpose should be the primary motive. In some cases the IRS and courts can challenge the transaction as a sham without such a purpose. But the courts have also held that the presence of a business purpose won't legitimize a transaction where tax evasion motives existed.
November 29, 2016
Notice 2016-72 provides guidance on whether qualified principal residence indebtedness is discharged “subject to an arrangement that is entered into and evidenced in writing before January 1, 2017” within the meaning of Sec. 108(a)(1)(E)(ii) if, before that date, a mortgage loan servicer sends a borrower-homeowner under the Federal Housing Finance Agency’s (FHFA’s) Principal Reduction Modification Program (PRMP) a notice in conjunction with a written Trial Period Plan (TPP) or, for a borrower-homeowner in an active TPP, a separate notice in a written opt-out letter outlining the terms and conditions of the permanent mortgage loan modification following completion of the active TPP. This guidance also applies to a TPP under the Home Affordable Modification Program (HAMP).
The IRS has issued proposed regulations (REG-107424-12) providing guidance relating to the minimum present value requirements applicable to certain defined benefit pension plans. These proposed regulations would provide guidance on changes made by the Pension Protection Act of 2006 and would provide other modifications to these rules as well. These regulations would affect participants, beneficiaries, sponsors, and administrators of defined benefit pension plans. This document also provides a notice of a public hearing on these proposed regulations.
In Analog Devices, Inc. and Subsidiaries (147 T.C. No. 15) the taxpayer is a corporation that is a U.S. shareholder of a controlled foreign corporation (CFC). The taxpayer repatriated cash dividends from the CFC and claimed an 85% Sec. 965 dividends received deduction (DRD) for 2005. The taxpayer reported no related party indebtedness during its testing period pursuant to Sec. 965(b)(3) when it claimed the DRD. The IRS determined, and the taxpayer agreed, that the annual 2% royalty from CFC to the taxpayer should be increased to 6% for 2001-05 to reflect arm's-length pricing. In 2009 the taxpayer and IRS executed a closing agreement pursuant to Rev. Proc. 99-32, to effect the secondary adjustments required after a primary Sec. 482 allocation. The closing agreement established accounts receivable as described in Rev. Proc. 99-32, for 2001-05 and deemed them created as of the last day of the taxable year to which they relate. The IRS subsequently determined that the accounts receivable constituted an increase in related party indebtedness under Sec. 965(b)(3) during the taxpayer's testing period, which the IRS determined decreased the Sec. 965 DRD. The Tax Court held the parties did not reach an agreement in the closing agreement with respect to the treatment of the accounts receivable under Sec. 965. The Court also held Sec. 965(b)(3) does not provide that the accounts receivable constituted related party indebtedness arising during the taxpayer's testing period and that the accounts receivable did not increase CFC's related party indebtedness during the testing period. Finally, the Court held the taxpayer was entitled to the full amount of its claimed DRD.
Tip of the Day
Larger space? New location? . . . Sometimes these business decisions are easy. Demand has been expanding briskly so the only way to sell more is to get more space so you'll need a 20% increase in square footage. You've got to run the numbers to optimize your decision, but there's no question you'll need the space if you want to grow. Got 10 stores and want to open an 11th in the same local area? Again, you need to work the numbers, but it's not exactly a risky proposition. Now consider a situation where you've got a thriving store but need to vacate. The only viable location is two miles away. Will your customers follow you? How long will it take to recover? The analysis here should be closer to that used in justifying the original business.
November 28, 2016
The IRS has issued proposed regulations (REG-136978-12) relating to the application of Section 514(c)(9)(E) to partnerships that hold debt-financed real property and have one or more (but not all) qualified tax-exempt organization partners within the meaning of Section 514(c)(9)(C). The proposed regulations amend the current regulations under Section 514(c)(9)(E) to allow certain allocations resulting from specified common business practices to comply with the rules under Section 514(c)(9)(E). These regulations affect partnerships with qualified tax-exempt organization partners and their partners.
The IRS has recently updated its Conservation Easement Audit Technique Guide includes examination techniques, common and unique industry issues, business practices, industry terminology, and other information to help tax professionals when reporting various items related to charitable contributions of conservation easements.
Tip of the Day
Casualty losses in federal disaster area . . . The tax aspects of casualty losses can be complicated enough in normal situations, but things get even more complex if you're in a federally declared disaster area. Chances are you know you can file an amended return for the prior year and take the casualty loss on that return. That can make considerable sense because your income was probably higher. It can also improve your cash flow since you'll be getting a refund earlier. You will also have more time to file certain returns, make required payments or deposits, etc. Federal disaster relief grants for certain expenses (e.g., medical, housing, transportation, etc.) under the Robert T. Stafford Disaster Relief and Emergency Assistance Act are not income. State disaster relief grants for businesses aren't excludable from income, but you may be able to postpone reporting gain realized from a grant by buying replacement property. If the casualty results in an NOL (net operating loss) you may be able to carry the loss back three years instead of only two. Special rules also apply to business inventory. This is definitely one time when using a tax professional can produce big savings.
November 25, 2016
Additional victims of Hurricane Matthew that took place beginning on October 7, 2016 in parts of Virginia may qualify for tax relief from the IRS. The Service announced that taxpayers who have homes or businesses in the counties of Isle of Wight and Southampton and the independent cities of Franklin, Hampton, Portsmouth and Suffolk have been added to the list and will receive tax relief. In addition, the IRS has added Montgomery county to the counties in North Carolina qualifying for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after October 7, 2016 and on or before March 15, 2017 have been postponed to March 15, 2017.
A like-kind exchange can be used to defer gain on the sale of an investment or business property. But there are special rules for exchanges involving related parties. In The Malulani Group, Limited and Subsidiary (T.C. Memo. 2016-209) acquired replacement property from a subsidiary. The taxpayer argued that no prearranged plan existed, but the Court noted that was not dispositive of a violation of Sec. 103(f)(4). Instead, whether the transaction had been structured to avoid the purposes of Sec. 1031(f) should be focused on the actual tax consequences of the transaction to the taxpayer and the related party, considered in total. The Court noted that as a result of the transaction, the subsidiary was able to sell the property at a gain without paying tax because of net operating losses.
Tip of the Day
IRS can impose criminal as well as civil penalties . . . Most of the time the IRS limits penalties to fines. But it can impose criminal penalties--and that means jail time. In one case a business owner was sentenced to 27 months for claiming he paid no wages to himself, his wife, and some employees when, in fact, he did. Another business owner was sentenced to 16 months in jail for trying to hide assets when making an offer in compromise. Criminal penalties can be imposed for willfully failing to file a return, keep records, pay any tax or estimated tax, willfully evading tax, etc. And you can be liable for both. That means just because the IRS has won a civil case doesn't mean they can't pursue a criminal case. The good news is that the IRS doesn't pursue criminal penalties lightly. Usually there's a long pattern, illegal activities or large dollar amounts are involved, etc.
November 23, 2016
In Jose R. Pena (T.C. Memo. 2016-208) the Tax Court found the taxpayer, a tax return preparer, liable for the fraud penalty. Despite several opportunities, the taxpayer failed to reply to the IRS's allegations that he underreported his income and falsely overstated his business expenses resulted in underpayments of tax due for the years in issue. Because he did not reply to the allegations he was deemed to have admitted these facts. The admissions were adequate to support the IRS's burden of proving no genuine dispute of material fact existed as to the deficiency determinations. The taxpayer's deemed admissions of fact establish numerous badges of fraud including: (1) underreporting his income and overstating deductions; (2) dealing exclusively in cash; (3) maintaining inadequate records and concealing assets; (4) giving implausible or inconsistent explanations; and (5) filing false income tax returns.
Things can get complicated when a business gets into financial difficulty. In Philip Joseph Franklin (T.C. Memo. 2016-207) the taxpayer's wholly owned S corporation ceased to do business. The corporation had loaned money to the shareholder and, in an unrelated transaction, the shareholder had guaranteed a loan to the corporation. When the S corporation ceased operations it did not collect on the loan to the taxpayer. The Court held the taxpayer had cancellation of debt income. The Court rejected the IRS's claim that the loan was dividend since the corporation had no accumulated earnings and profits from which to make a dividend. The IRS also argued the taxpayer had insufficient basis to deduct the corporation's losses. The Court noted the creditor seized and sold property belonging to the taxpayer and applied the proceeds against the taxpayer's guarantee on the loan. The Court found the taxpayer's basis in the S corporation increased by the amount paid on the guarantee.
Tip of the Day
Participating in a trade show? . . . Check the rules in the state where the show is being held. One state has held that a company's participation at two 5- day trade shows was de minimus, too small a connection to subject it to the state's income tax. The corporation did not make any sales or take orders at the show. It merely displayed and demonstrated its products. If you limit your activities to simply demonstrating your products, you should be safe. Once you start taking orders or actually making sales, it quickly gets complicated. Best advice? Check with your tax advisor. The rules vary widely. Some states are particularly aggressive.
November 22, 2016
The Department of Homeland Security, U.S. Citizenship and Immigration Services, has issued a new Form I-9, Employment Eligibility Verification. The new version can be downloaded at www.uscis.gov/sites/default/files/files/form/i-9.pdf.
Rev. Proc. 2016-57 (IRB 2016-49)obsoletes Rev. Proc. 2003-41, Rev. Proc. 2003-1, SB/SE—Appeals Fast Track Mediation Procedure, and creates a new fast track mediation program, SB/SE Fast Track Mediation—Collection (FTMC), specifically directed at resolving certain collection cases and issues. FTMC allows taxpayers an opportunity to resolve certain offer-in-compromise (OIC) and trust fund recovery penalty (TFRP) disputes on an expedited basis with an Office of Appeals mediator serving as a neutral party.
Notice 2016-70 (IRB 2016-49) extends the due date for certain 2016 information-reporting requirements for insurers, self-insuring employers, and certain other providers of minimum essential coverage under Section 6055 and for applicable large employers under Section 6056 of the Code. Specifically, this notice extends the due date for furnishing to individuals the 2016 Form 1095-B, Health Coverage, and the 2016 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, from January 31, 2017, to March 2, 2017. This notice also extends good-faith transition relief from Section 6721 and 6722 penalties to the 2016 information-reporting requirements under Sections 6055 and 6056.
There's a strict limit on contributions to pension plans and exceeding the limit can result in penalties. In Pizza Pro Equipment Leasing, Inc. (147 T.C. No. 14) the employer adopted a qualified plan that had a single participant. The plan's normal retirement age was set at age 45. The plan filed Forms 5500 for each of the plan years at issue, but never filed any Forms 5330, Return of Excise Taxes Related to Employee Benefit Plans. The IRS asserted that portions of the plans contributions were nondeductible because the plan's funding did not fully account for the proper reductions imposed by Sec. 415(b)(2)(C) for benefits beginning before age 62. The Tax Court held that applied the correct method to reduce the maximum benefits under Sec. 415(b)(2)(C) to an actuarially equivalent value for a retirement age before age 62 in the plan where the plan did not provide for forfeiture of the participant's benefits at death, that the petitioner was liable for Sec. 4972 excise taxes for nondeductible contributions made to the plan because portions of the total contributions made were in excess of Sec. 404 limitations, that the petitioner did not make a valid election under Sec. 4972(c)(7) to disregard certain nondeductible contributions and that the statute of limitations does not bar the assessment and collection of Sec. 4972 excise taxes for nondeductible contributions made to the plan.
Tip of the Day
Legal expenses . . . It's one area the IRS often examines closely because it's frequently not directly deductible by a business (it must be amortized) or not deductible at all. Legal fees should always be directly traceable in your accounting records. The Code does not specifically list legal and other professional services expenses as deductible items. Therefore, a taxpayer's ability to deduct these types of expenditures depends upon the context in which they are paid or incurred. Deductions for amounts paid for legal and other professional services will generally depend on whether the expenses were “ordinary and necessary” and paid or incurred in carrying on a trade or business. A taxpayer may deduct legal services expenses if the origin of the claim in the proceeding is related to the taxpayer's trade or business or the production of income and not primarily personal. But even then you might have to capitalize the expense. Check with your tax advisor if the legal fees are associated with property, real, personal, or intangible.
November 21, 2016
There are some changes to that may affect individuals during the upcoming filing season. For example, if you're claiming the Earned Income Tax Credit or the Additional Child Tax Credit your refund won't be issued until February 15, no matter how early you file and some taxpayers using a software product for the first time may need to know their 2015 Adjusted Gross Income (AGI) to e-file. For the complete rundown on the changes, go to Take Steps Now for Tax Filing Season.
Want to find out if an attorney, CPA or enrolled agent has been disciplined by the IRS? The IRS now has a searchable database (in spreadsheet format) where you can find censures, suspensions, disbarments, and miscellaneous restrictions on practice by the Office of Professional Responsibility. To access the list go to Search for Disciplined Tax Professionals.
Tip of the Day
Now is not the time to buy a mutual fund . . . Why? because this is the time when many mutual funds make their annual distribution. And that distribution is usually taxed as a long-term capital gain. For example, you put $1,000 into Madison fund and three weeks from now the fund gives you a $100 distribution. In essence, you'll be getting some of your own money back and be paying tax on money you just put into the fund. Wait until the dividend is paid. Of course, if the fund is in an IRA or other qualified plan, there's no tax, but you may still have to make sure the dividend is reinvested. Talk to your tax or financial advisor.
November 18, 2016
The IRS has issued corrections to final and temporary regulations (T.D. 9788) that were published in the Federal Register on Wednesday, October 5, 2016 (81 FR 69282). The final and temporary regulations provide rules concerning how liabilities are allocated for purposes of Section 707 of the Code and when certain obligations are recognized for purposes of determining whether a liability is a recourse partnership liability under Section 752.
The IRS has updated the list of counties that are eligible for relief from Hurricane Matthew. Counties in North Carolina and Virginia have been added to the list. They are:
North Carolina: Franklin
Virginia: Franklin, Portsmouth, Suffolk, Isle of Wight and Southampton
If fraud is asserted by the IRS, you should have professional help in dealing with the issue. The fraud penalty is equal to 75% of the deficiency attributable to fraud. In Bradley A. Ballard (T.C. Memo. 2016-205) the taxpayer filed a petition to challenge the IRS in Tax Court, but failed to show on the day of the case. The burden of proof is on the IRS in the case of fraud. The Court noted that the IRS may satisfy its burden of proving liability for the fraud penalty with deemed admissions. Here the Court reviewed the facts established through deemed admissions or stipulation to determine whether they were sufficient to sustain a finding of fraud. The Court noted many of the badges of fraud were present and since the taxpayer did not contest the issue or the IRS's motion, the Court held the deemed admissions presented by the IRS were clear and convincing evidence of fraud, satisfying the IRS's burden of proof. The Court held the taxpayer liable for the fraud penalty.
Tip of the Day
Intercompany transactions . . . It's not unusual for the IRS to challenge them. The Service is looking to prevent taxpayers from shifting income from an entity taxed at a high rate to one taxed at a lower rate. In one case a corporation received commissions from its subsidiaries for marketing services. The court sided with the IRS, noting the commission rate did not even cover its fixed costs. That showed that the commission was not determined on an arm's length basis.
November 17, 2016
The IRS has issued a new Tax Tip entitled IRS, Partners Offer Tips to Protect Data from Online Threats. The Tax Tip the use of security software, using encryption software to protect sensitive data, etc.
Following an examination, you can wait for the IRS to send you a determination notice, or you can agree to the amount of the deficiency on Form 4549, in which case no determination notice need be sent. In Estate of Robert C. Duncan, Deceased et al. (T.C. Memo. 2016-204) the taxpayer signed the closing agreement which did not reference a dollar amount. No dollar amount appeared to be necessary because it was believed the disallowance of the Son of Boss benefits (a tax shelter) would simple reduce carrybacks and carryforwards. It turned out this was incorrect and the recalculation resulted in a $739,880 deficiency. The Court held that the closing agreement did not make restrict the IRS from determining a tax liability. The IRS made no representation that it could not determine a tax liability, noting a "specific matters" closing agreement does not address the taxpayer's overall liability for any year at issue. Thus, nothing barred assessment of the tax deficiencies and penalties.
The IRS doesn't make procedural errors often. In Ward Dean (T.C. Memo. 2016-203) the taxpayer argued the settlement officer did not verify that the 2006 and 2012 Notice of Federal Tax Lien (NFTL) filings were properly signed and, therefore, did not verify that all requirements of applicable law and administrative procedure have been met. The Court noted that an NFTL is required to be filed on a Form 668(Y), Notice of Federal Tax Lien. The regulations define Form 668 to mean “either a paper form or a form transmitted electronically, . . . [that] must identify the taxpayer, the tax liability giving rise to the lien, and the date the assessment arose”. There is no requirement that an NFTL filing be signed or certified, and a pseudonymous signature on an NFTL filing does not affect its validity.
Tip of the Day
Property transfers subject to sales tax . . . Most states that impose a sales tax have rules regarding the transfer of property outside of a purchase from a retailer. For example, you give your used truck to an old friend. The truck is valued at $4,000. In most states the transfer is subject to sales tax. On the other hand, many states have a exemption for the transfer to a relative. Had you given the truck to your daughter, tax may not have been due. Most states have an exemption for assets transferred to a corporation or partnership in exchange for an interest in the entity. You contribute a truck you own personally along with tools in exchange for all the stock of Madison Inc. Generally, that transaction is exempt from sales tax. Not infrequently, the exception is narrowly worded, so you've got to check the rules carefully. On the other hand, fewer states exempt a transaction going the other way, when the business transfers assets to the shareholders or partners. Again, check the rules. A mistake here could be costly.
November 16, 2016
In Harold P. Kupersmit (T.C. Memo. 2016-202) the taxpayer failed to file a return for 2009. The IRS reconstructed his income from Forms 1099 and W-2Gs (record of gambling winnings). The Court held that the IRS linked the taxpayer to the income producing activity and to the taxpayers' bank accounts and that was sufficient to give the IRS's notice of deficiency the presumption it was correct. The taxpayer did not present evidence to refute that presumption. The Court allowed the IRS amounts with the exception of reducing the gambling winnings by the amount of losses it calculated.
Tip of the Day
Can't avoid all risk . . . In business you may not be able to avoid all risk--at least if you want to survive. One retailer thought there would be a recession after World War II and banked its cash waiting for the crash and the time when it could buy out its rivals. But instead there was substantial growth and the rivals who expanded by adding stores got a jump on the company from which it never recovered. In effect the company took a big risk by not expanding. The point is to take a calculated risk. It's unlikely you'll be right every time, and you may not have to be. You just have to be right most of the time.
November 15, 2016
If you best the IRS in an administrative proceeding or in court, you may be able to recover your costs (there are a number of requirements). In David B. Greenberg (147 T.C. No. 13) the petitioner was an attorney who sought an award of administrative costs with respect to an administrative proceeding in which the attorney represented a taxpayer. The Court held that Sec. 7430 permits only a “prevailing party” to receive an award of reasonable administrative costs. Only a party to the underlying proceeding can be a prevailing party. Because the petitioner was not a party to the underlying administrative proceeding, he could not be a prevailing party under the statute. Therefore the petitioner is not the proper party to file a claim under Sec. 7430, and the Court lacked jurisdiction.
Tip of the Day
Expensing not always best option . . . You can now expense up to $500,000 ($510,000 in 2017) of equipment purchases, and more using the $2,500 exception. But that may not always be the best move. Expensing drops your basis to zero. If you sell the asset any amount up to the purchase price will be ordinary income. That can come back to haunt you. For example, in 2016 you're in the 15% tax bracket. Your S corporation purchases a used backhoe for $20,000. You expense the entire amount. That saves you taxes at 15% for a total saving of $3,000. Three years later you sell the backhoe for $20,000 when you're in the 33% tax bracket. The entire $20,000 is ordinary income (since you have no basis in the property). Your tax on the sale is $6,600. You should think before expensing if you're in a low tax now but expect to be in a higher one later. In that situation spreading the expense through depreciation will also give you more savings in addition to avoiding a potential big gain. Another time to consider not expensing is if you think you might sell the asset in the near future and/or the asset is one that holds its value.
November 14, 2016
The IRS has announced (IR-2016-46) special relief designed to support leave-based donation programs to aid victims of Hurricane Matthew. Under these programs, employees may forgo their vacation, sick or personal leave in exchange for cash payments the employer makes, before Jan. 1, 2018, to charitable organizations providing relief for the victims of this disaster. Under this special relief, the donated leave will not be included in the income or wages of the employees. Employers will be permitted to deduct the cash payments as business expenses. This relief is similar to that provided following Hurricane Katrina in 2005, Hurricane Sandy in 2012, the Ebola outbreak in West Africa in 2014 and this summer’s severe flooding in Louisiana. Details of this relief are in Notice 2016-69.
The IRS has issued final regulations (T.D. 9793) that remove the rule that a deemed discharge of indebtedness for which a Form 1099-C, “Cancellation of Debt,” must be filed occurs at the expiration of a 36-month non-payment testing period. The Treasury Department and the IRS are concerned that the rule creates confusion for taxpayers and does not increase tax compliance by debtors or provide the IRS with valuable third-party information that may be used to ensure taxpayer compliance. The final regulations affect certain financial institutions and governmental entities.
In Whistleblower 26876-15w (147 T.C. No. 12) the IRS denied a whistleblower any award because the taxpayer that was audited received a no change determination. The whistleblower filed a claim with the Tax Court. In the petition he claimed the IRS's determination of his claim was null and void because it was not signed by the director of the whistleblower office. The Court held that nothing required the director to sign the letter informing the petitioner his claim was denied. The Court also held the original notice was not mailed to the petitioner's last known address. Thus, he had 30 days from the date the notice was properly remailed to file his Tax Court petition.
Tip of the Day
Timing is critical in taxes . . . File that Tax Court petition one day late and the Court will deny to hear the case. But filing too soon will have the same result. In one case the taxpayer filed a petition with the Tax Court before the IRS issued a determination notice. That seems inequitable, but it's in the law a clear cut. Even if you're going it alone, get professional advice.
November 10, 2016
Anyone who has authority in a business can be deemed a "responsible person" and held personally liable for trust fund taxes (federal employment taxes) withheld from employee's wages but not paid over to the IRS. That could be an owner, shareholder, virtually any officer, even a bookkeeper or an outside contractor. The law is broad and it's hard to fight a IRS presumption. In Christina M. Fitzpatrick (T.C. Memo. 2016-199) the Court noted the taxpayer lacked the authority to control the financial affairs of the business or exercise any significant authority over the disbursement of the funds of the business. While she did have signatory authority and a spousal relationship to one of the corporation's owners, her position was larger ministerial. The Court noted she had no experience in finance or tax and generally had no involvement in day-to-day affairs of the corporation and spent little time at the business, had no responsibility for the payment of payroll taxes and signed roughly 4% of the nonpayroll checks. The Court found the taxpayer was not a responsible person.
Tip of the Day
Update equipment to save . . . Upgrading equipment just for the sake of getting the latest fad doesn't make sense. But neither does sticking with old equipment that's expensive to maintain or costly to run. You could see substantial savings by replacing old equipment where costs have escalated because it requires more repairs and maintenance. Or replacing electrical equipment that uses much less electric than older units. Manufacturers have been making equipment that uses less power when running and/or in standby. That, coupled with lower acquisition costs than in the past, could make buying new attractive. But that's not always true. In some cases, newer equipment may not be as well built as older units. It's another case of matching equipment to your particular needs.
November 9, 2016
The IRS has updated the list of counties that are eligible for relief from Hurricane Matthew. Counties in Florida and North Carolina have been added to the list. They are:
Florida Broward, Orange, and Osceola
North Carolina: Anson, Chatham, Halifax Northampton, Richmond, and Scotland
Letting your corporate, LLC, etc. legal standing in the state lapse or dissolving an entity too soon can be expensive. In Urgent Care Nurses Registry, Inc. (T.C. Memo. 2016-198) the taxpayer sought relief in Tax Court after the IRS issued a notice of determination sustaining a proposed levy. The Tax Court noted that the California Franchise Tax Board suspended the taxpayer's corporate charter. The California secretary of state certified that the powers, rights and privileges were suspended and remained the suspended. The Court looked to state law and noted that in California the Franchise Tax Board may suspend the powers of a domestic taxpayer if the corporation fails to pay any tax, penalty, or interest due and payable. Once a corporation's powers have been suspended it may not prosecute or defend an action. The Tax Court held the taxpayer lacked the capacity to litigate at the time it filed its petition.
Tip of the Day
Apologize and fix it . . . You should try hard not to make a mistake, but it happens. How do you deal with the customer(s)? The first step is to admit you made a mistake. The customer knows you're wrong or feels wronged. Admitting your mistake will go a long way to restoring confidence. The second thing to do is make it as right as you can. Sometimes you can't undo the mistake, but you showing you made the effort can go a long way. Finally, you've got to show how you're correcting the issue and what steps you're taking to make sure it won't happen again. There's no data that we know of, but we suspect that many lawsuits could have been avoided by admitting fault and trying to make things. If the situation affects many customers, get good advice first.
November 8, 2016
Some Individual Taxpayer Identification Numbers (ITIN) expire at the end of 2016. The IRS issues an ITIN to those who have a filing or reporting requirement but don’t have and are not eligible to get a Social Security number. If you need to renew your ITIN, you should submit a complete application this fall to avoid delays. The IRS has issued ITIN Tax Tip 2016-01 that includes a list of the documents you'll need to renew your ITIN.
The IRS can challenge casualty losses in several ways. One is that the loss is not a casualty. A building fire would create a casualty loss; a building that collapses from old age would not. The other is the amount of the loss. A casualty loss is defined as the difference in the fair market value of a property before and after a casualty. In certain instances the cost to repair the property can be a good indicator of the amount of the loss. In Howard Bruce Coates et ux. (T.C. Memo. 2016-197) the Court accepted the taxpayer's testimony of the values of one property before a tornado hit and after. The Court allowed the loss for one property based on he taxpayer's testimony, noting the taxpayer worked the ranch for 30 years and had bought and sold land in the county. (An earlier professional appraisal before the tornado existed.) The Court did not allow a loss with respect to a second property because the taxpayer could not prove his basis in the property, and a casualty loss is limited to a taxpayer's adjusted basis in the property. He claimed he purchased the property from his mother, but did not provide proof of the amount, if any, he paid for the property.
Tip of the Day
Jumping the gun vs. late to the party . . . Whether in a startup phase or a growing business, many business owners make a mistake in hiring a quality CEO, CFO, salesman, or other employee. Most of the time business owners wait too long to get professional help or assistance at the next level. By the time the new CEO (or CFO, etc.) comes on board, he or she will have a mess to clean up. That can result in extra costs and lost profits. But the reverse is not unusual. Madison Inc. hires a CFO for $90,000 a year when the company's only product is still in development. You can often get professional help on a part-time basis. Temp companies can provide CEOs, CPAs, etc. that can help you get systems in place and keep you on the right track for a lot less money. Often it's a way of checking out the individual before offering a full-time position. If you don't have friends or associates who can advise you on the right course, talk to a CPA.
November 7, 2016
The IRS has updated the list of counties that are eligible for relief from Hurricane Hermine that took place beginning on August 31, 2016 in parts of Florida. The additional counties are Manatee, Taylor and Wakulla.
If you want a refund from the IRS you must first file a valid claim. For most taxpayers that's done on Form 1040X, an amended individual return. In Scott Gillespie et ux. (U.S. District Court, E.D. Wisconsin) the Court noted to be considered a valid claim, the information supplied must “evince an honest and genuine endeavor to satisfy the law.” it is not enough for a form to contain some income information; there must also be an honest and reasonable intent to supply the information required by the tax code. The Court found the taxpayers claim for refund was clearly not an honest and genuine endeavor to satisfy the law and denied the claim.
Granting a conservation easement on the facade of a building can be a win-win situation for many taxpayers. You get a tax deduction for granting the easement and you would have left the building with its original look because you liked it. But in Partita Partners LLC et al. (U.S. District Court, S.D. New York) the taxpayer claimed a deduction of over $4 million for a contribution of a preservation easement on the facade of a building located in a historic district. As part of the contribution agreement the taxpayer reserved development rights to add "a couple of floors" and to potentially extend the ground floor of the structure. The Court noted that one of the requirements of the Code is that the real property interest contributed includes a restriction which preserves the entire exterior of the building (including the front, sides, rear and height) and prohibits any change in the exterior of the building which is inconsistent with the historical character of such exterior. The Court found the donation was not a qualified conservation contribution.
Tip of the Day
Diversify your nest egg . . . We're not talking about your stock portfolio here. That's a job for your broker. But many business owners have a substantial, and frequently virtually all, of their net worth tied up in their business. Over the years they've reinvested their earnings in the business. Frequently they've added to the asset concentration by owning the building they use for the business. The plan was always to sell the business and retire. But what if the business turns sour? It can be a technology shift or a change in the competition--just ask the hardware store owner after a big box moved into the area. Even if the change doesn't obsolete your business, it can make it less profitable and that translates into a lower selling price. The older you are, the more important having assets in other investments becomes. As you get older the less time you have to rebuild your cash. One way to reduce your investment in the business is to take on a partner.
November 4, 2016
Victims of Hurricane Matthew that took place beginning on October 7, 2016 in parts of Virginia may qualify for tax relief from the Internal Revenue Service. The President has declared that a major disaster exists in the Commonwealth of Virginia. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that taxpayers who have homes or businesses in the independent cities of Chesapeake, Newport News, Norfolk and Virginia Beach will receive tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after October 7, 2016 and on or before March 15, 2017 have been postponed to March 15, 2017. For complete details go to Tax Relief for Victims of Hurricane Matthew in Commonwealth of Virginia.
The IRS has issued final regulations (T.D. 9792) that provide rules regarding the treatment as United States property of property held by a controlled foreign corporation (CFC) in connection with certain transactions involving partnerships. In addition, the final regulations provide rules for determining whether a CFC is considered to derive rents and royalties in the active conduct of a trade or business for purposes of determining foreign personal holding company income (FPHCI), as well as rules for determining whether a CFC holds United States property as a result of certain related party factoring transactions. This document finalizes proposed regulations, and withdraws temporary regulations, published on September 2, 2015. It also finalizes proposed regulations, and withdraws temporary regulations, published on June 14, 1988. The final regulations affect United States shareholders of CFCs.
In Stephen T. Rangen ut ux. (T.C. Memo. 2016-195) the taxpayer deducted expenses related to his writing and cartoonist activities. The Court found that while the taxpayer set forth a general narrative relating to his writing and cartoonist activities, his testimony lacked the requisite specificity, coherence, and corroboration to convince the Court that he conducted either of these activities with substantial regularity or the purpose of producing income to constitute a trade or business. Furthermore, the expenses did not bear a reasonable and proximate relation to the production of taxable income. The Court disallowed the deductions.
Tip of the Day
Charitable contributions . . . It sounds like a good idea. You rent your vacation home during the season, but just after peak you've got a week vacancy. So you donate a week's use to your church for use in a raffle. Bad move--for two reasons. First, the use of the home is deemed personal, not business. That means you won't be able to deduct the expenses during that time. Second, you'll get no charitable contribution deduction. That's because the gift of the right to use property doesn't qualify as a deductible contribution.
November 3, 2016
AAs a result of severe storms and flooding during the period of September 2 to 12, 2016 in Kansas, the president determined that the counties of Cheyenne, Cowley, Ellis, Graham, Greenwood, Kingman, Norton, Rooks, Russell, Sedgwich and Sumner qualified for Disaster Relief. Taxpayers in those counties who sustained losses may deduct them on their 2015 or 2016 tax returns.
If the IRS reconstructs your income, their results are presumed to be correct. You can, however rebut the presumption by a preponderance of the evidence that the IRS's determination of unreported income is arbitrary or erroneous. That's not easy to do. In W. Morgan Parker et ux. (T.C. Memo. 2016-194) the taxpayer argued that certain deposits were funds advanced by clients that he held in a fiduciary capacity. The Tax Court did not agree with the taxpayer's argument. On another issue the IRS allowed a deduction for utility expenses based on the Cohan rule. The taxpayer had documentation to support one months' expenses and the Court he must have incurred similar expenses for the other months.
Tip of the Day
Good news travels quickly . . . And so does bad. The good Samaritans saving a woman from a burning car goes viral on YouTube. So do the ones about inadequate security at a hospital, abuse in a nursing home, etc. You definitely don't want your business to be on the wrong side of a YouTube or similar video. It would be great if you can get a video of your business doing a good deal to go viral. But don't fake it. If you're caught (perhaps by a newspaper reporter) that can do significant damage. And never forget that cameras are everywhere now.
November 2, 2016
The IRS has issued a first-quarter update to its 2016-2017 Priority Guidance Plan. The full text of the update can be found at www.irs.gov/uac/priority-guidance-plan.
The IRS is reminding enrolled agents with social security numbers ending in 4, 5, or 6 that they must renew their status by January 31, 2017. All enrolled agents must have an active Preparer Tax Identification Number (PTIN) and enter it on Form 8554. You can pay online at www.pay.gov.
The IRS is also reminding return preparers that they must renew their PTIN (preparer tax identification number) before they expire on December 31, 2016. The IRS noted that paper applications can take four to six weeks to process. Online renewals take only a few minutes.
Tip of the Day
$44 million for a hospital stay? . . . Fortunately, it was a billing error. But it made the news some years ago. Making an obvious mistake on a customer's invoice will be embarrassing even if it doesn't hit the headlines. At best the customer will question your competency; at worst they may think you're trying to cheap them. There may be steps you can take. One is to flag all invoices over a certain dollar amount for review. The review needn't be line-by-line; just a quick scan for unusual dollar amounts or charges. Small business owners often have a limited number of customers so that a quick manual review by someone can often be done. If you can't do that, periodically test check some invoices to make sure your system is working correctly. The advice applies to the flip side--make sure you don't pay an incorrect invoice. If you deal in goods, make sure there's a receiving report supporting the invoice. In all cases tell your employees to check large or unusual invoices. Any extra cost questioning a good invoice will be more than offset by savings from catching errors.
November 1, 2016
The IRS has issued final regulations (T.D. 9791) regarding the definition of short-term, limited-duration insurance for purposes of the exclusion from the definition of individual health insurance coverage, and standards for travel insurance and supplemental health insurance coverage to be considered excepted benefits. This document also amends a reference in the final regulations relating to the prohibition on lifetime and annual dollar limits.
The IRS has introduced two new electronic signature authorization forms, Form 8879-EMP, IRS e-file Signature Authorization for Employment Tax Returns and Form 8453-EMP, Employment Tax Declaration for an IRS e-file Return, that make e-filing employment tax returns for your clients easier than ever. Now, you can e-file your employment tax returns without becoming an IRS Authorized Signer; the new forms allow you to skip that process. Both forms allow for completely paperless e-filing, and offer several ways to electronically sign your clients’ returns. The process is described in an IRS video.
The IRS will attempt to identify and notify taxpayers who do not timely file a tax return by the extended due date. The IRS typically issues delinquency notices to more than 640,000 nonfilers with expired extensions annually. The Treasury Inspector General for Tax Administration (TIGTA) did an audit to determine if the IRS is effectively identifying delinquent individual taxpayers. TIGTA found the IRS has implemented a strategy under the Case Creation Nonfiler Identification Process to identify taxpayers who have not filed a tax return, including taxpayers with expired extensions, on an annual basis. Although it is mostly an automated process, the vast majority of nonfilers with expired extensions were not identified or addressed in Tax Year 2012 due to a programming error that was not fully investigated or timely corrected. Additionally, in Tax Year 2013, IRS management canceled this process for all taxpayers with expired extensions. As the nonfiler process is run on a stand-alone basis for each tax year, the majority of the nonfilers with expired extensions in Tax Years 2012 and 2013 will likely never be notified of their obligation and failure to file a tax return. The IRS identified high-income nonfilers as both a high compliance risk and one of the top eight high-priority areas in the annual work plan, but none of the high-income nonfilers with expired extensions were notified of their delinquency in Tax Years 2012 or 2013. In February 2014, the IRS revised its nonfiler strategy and outlined goals to increase compliance. However, as of July 2016, the IRS has not implemented any of the proposed nonfiler initiatives. Furthermore, the nonfiler strategy did not outline any specific actions to improve the compliance rate, including how to reach more of the nonfilers the IRS identifies annually and determining the effectiveness of the return delinquency notice in an effort to increase the response rate. TIGTA recommended that the IRS change various Collection function and information technology controls, tools, and procedures to improve the nonfiler program and ensure that additional nonfilers are addressed. In response to the report, IRS management agreed with our recommendations and plans to take corrective actions. To see the full report, go to www.treasury.gov/tigta/auditreports/2016reports/201630085fr.pdf.
Tip of the Day
Wash sale rule only for losses . . . The sale of stock at a loss and a purchase of an identical security 30 days before or after the sale will trigger the wash sale rule with the result that the loss will be deferred. But the rule doesn't apply to a gain. Thus, you can sell your 1,000 shares of Madison Inc., report the gain and purchase identical shares immediately. Why would you report the gain and repurchase the shares? It can make sense if you're in an unusually low bracket this year and, despite the fact you anticipate Madison moving higher, you expect to sell the Madison shares in the not too distant future. You'll pay less tax on the gain now than you would later. Talk to your tax and financial advisor before considering such a move.
Copyright 2016 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