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March 23, 2017
When major tax legislation is passed may depend on the fate of AHCA (American Health Care Act) moves through the legislative path. However, under an amendment to the AHCA, certain taxes imposed by the ACA would be repealed as of the beginning of 2017. Those taxes include the 3.8-percent net investment income tax (NIIT), the 0.9-percent Additional Medicare tax and the excise tax on qualified medical devices. In addition, the 10-percent AGI threshold for deducting medical expenses would be reduced.
The IRS has released Fact Sheet FS-2017-4 to assist tax professionals in helping their business and individual clients who are victims of tax-related identity fraud. The Fact Sheet has tips on identifying when identity fraud has occurred as well as steps that can be taken and links to IRS publications.
In a recently released audit the Treasury Inspector General for Tax Administration (TIGTA) found that employment tax (withheld income taxes, Social Security and Medicare taxes) noncompliance is a growing problem. As of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes, interest, and penalties. The TFRP (trust fund recovery penalty) is a civil enforcement tool the IRS Collection function can use to discourage employers from continuing egregious employment tax noncompliance and provides an additional source of collection for unpaid employment taxes. In FY 2015, the IRS assessed the TFRP against approximately 27,000 responsible persons—38 percent fewer than just five years before as a result of diminished revenue officer resources. In contrast, the number of employers with employment tax noncompliance for 20 or more quarters of delinquent employment taxes is steadily growing—more than tripling in a 17-year period. For some tax debtors, assessing the TFRP does not stop the abuse. Specifically, a review of 59 individual taxpayer accounts assessed the TFRP for 10 or more entities showed that only 5 (8.5 percent) of the 59 individuals had been investigated by CI for potential criminal prosecution. In addition, TIGTA reviewed taxpayer accounts with over $1 million in TFRP assessments from FYs 2010 through 2015. There were approximately 700 individuals who were assessed in excess of $1 million each of TFRP during this time period, yet CI had opened investigations on fewer than 50 of the individuals. Although the willful failure to remit employment taxes is a felony, there are fewer than 100 criminal convictions per year. In addition, since the number of actual convictions is so miniscule, in TIGTA's opinion, there is likely little deterrent effect. TIGTA recommended that the Commissioner, Small Business/Self-Employed Division and the Chief, Criminal Investigations (CI), should consider a focused strategy to enhance the effectiveness of addressing egregious employment tax cases. In addition, the Collection function should expand the criteria used to refer potential criminal cases to CI to include cases such as those over $1 million or individuals involved in 10 or more companies that fail to remit payroll taxes to IRS. In their response to the report, IRS officials partially agreed with our recommendation. The IRS agreed with the development of a focused strategy. The IRS disagreed that the Collection function should expand criteria used to refer cases to CI citing the need to balance several factors by stakeholders and limited resources. TIGTA continues to believe that additional egregious cases should be referred for criminal investigation.
Tip of the Day
Converting residence to rental property . . . If you start renting out your former residence, your basis for depreciation purposes is the lower of your adjusted basis at the time of the change or the fair market value (FMV) of the property at that time. When you sell the property, your basis for figuring a gain is your adjusted basis in the property. On the other hand, the starting basis for computing a loss is the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use and then adjusted for depreciation, capital improvements, etc.
March 22, 2017
President Trump has released his 2018 budget blueprint which calls for another $239 million in funding for the IRS for the next fiscal year.The IRS has released filing statistics for the week ended March 10. Returns received and processed are still behind last year's (down about 6.8% for each), but that's an improvement from last week. Receipts from tax professionals are still running behind the total.
Sometimes the details are critical; sometimes not. In Michael Shamrock and Victoria Bigg (U.S. Court of Appeals, Seventh Circuit) when the couple went to Tax Court they did so pro se, but were assisted by a lawyer. On his advice the couple stipulated that only half of the tax relief they sought was appropriate. Upon finding out that the attorney was not a member of the bar in Illinois, they asked the court to set aside the stipulation. The court refused and entered judgment against the couple. The Court of Appeals reversed and remanded and the second time around the Tax Court found that although the lawyer was not licensed in Illinois, he provided competent, valuable, diligent, and effective assistance. In addition, the taxpayers did not accuse him of malpractice. The Appeals Court the taxpayers were not prejudiced by his actions and affirmed the Tax Court's decision.
Tip of the Day
Didn't get your full refund? . . . You could have made a math error, missed an estimated tax payment, etc. in which case the IRS will send you a notice of explanation of the difference. It's also possible the IRS used some or all of your refund to offset federal or state tax debts, federal agency debts like a student loan, past-due child and spousal support, or certain unemployment compensation debts owed to a state. If that's the case you'll receive a notice listing the original refund and the offset amount as well as the agency's contact information. You may be able to dispute the offset amount. You should only contact the IRS if the offset was applied to a federal tax debt.
March 21, 2017
Revenue Procedure 2017-28 provides guidance to employers on the requirements for employee consent used by an employer to support a claim for refund of overpaid taxes under the Federal Insurance Contributions Act (FICA) and the Railroad Retirement Tax Act (RRTA). It clarifies the basic requirements for both a request for employee consent and for the employee consent and permits employee consent to be requested, furnished, and retained in an electronic format. It also contains guidance concerning what constitutes “reasonable efforts” if employee consent is not secured in order to permit the employer to claim a refund of the employer share of overpaid FICA or RRTA taxes.
Revenue Procedure 2017-25 establishes the Small Business/Self Employed Fast Track Settlement program (SB/SE FTS) to provide an expedited format for resolving disputes with Small Business/Self Employed (SB/SE) taxpayers. SB/SE taxpayers that currently have unagreed factual or legal issues in at least one open year under examination can work together with SB/SE and the Office of Appeals to resolve outstanding disputed issues while the case is still in SB/SE jurisdiction. This revenue procedure modifies and supersedes Announcement 2011-5.
Tip of the Day
Roth IRA distributions . . . Most taxpayers won't take money out of their Roth until they retire, maybe not at all. But what if you do take a distribution? If the distribution takes place after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA and after you've reached age 59-1/2 that's a qualified distribution and there's no tax and no penalty. (In addition to the age 59-1/2 exception, there are other exceptions.) If you don't meet the two requirements, you could be subject to tax and a penalty on the distribution. How much depends on your basis. Distributions are deemed to first come out of contributions, then from conversion and rollover contributions and then earnings. For example, six years ago you put $6,000 into a Roth. It's now worth $11,000. You withdraw $7,500 you're under age 59-1/2 and no other exception applies. The first $5,000 escapes tax; the $2,500 does not. It also generates a 10% early distribution penalty.
March 20, 2017
In Richard Liljeberg, et al. (148 T.C. No. 6) the taxpayers were nonresident aliens. In 2012 they were full-time students at foreign universities when they participated in the U.S. Department of State Summer Work Travel Program (SWTP). They came to the United States for no more than four months over the summer to participate in cultural exchange, travel domestically, and work in temporary or seasonal jobs. The taxpayers sought to deduct expenses they paid in connection with the SWTP, including the costs of airfare, program and visa fees, travel health insurance, and meals and entertainment. The IRS denied the taxpayers' claimed deductions, though it has since conceded the deductibility of the program and visa fees. The taxpayers in turn have conceded that the fees paid by one of them in 2011 are not deductible for 2012. The Court held the taxpayers may not deduct their expenses for airfare and meals and entertainment paid in connection with their participation in the SWTP because they were not “away from home in the pursuit of a trade or business” for purposes of Sec. 162(a)(2). The Court also held that the taxpayers could not deduct their expenses for travel health insurance under Sec. 162(a)(2) but could deduct those expenses under Sec. 213(a) to the extent they satisfy its requirements.
Tip of the Day
Got a net operating loss? . . . If you and your spouse are employees, you may not have heard of a net operating loss (NOL), at least until discussions of President Trump's taxes. But if you're a small business owner you stand a much better chance. Losses passed through from an S corporation, partnership, or sole proprietorship can generate a net operating loss on your personal return. The loss must first be carried back two years and any unused amounts can then be carried forward 20 years. You can make an election to forgo the carryback and only carry the losses forward. That makes sense if you expect to be in a higher bracket in the future. The election is made on your tax return for the year of the loss. This can be a complex area. If you do your own return complete Form 1045 to see if you have an NOL and how much. This is a good time to consult a tax professional.
March 17, 2017
In Robert L. McClendon (U.S. District Court, S.D. Texas) the IRS had assessed a trust fund recovery penalty against the taxpayer, a doctor with a medical practice. The government moved for a summary judgment finding that the taxpayer owed $4,323,343.70 plus pre- and post-judgment interest. The Court found that uncontroverted summary judgment evidence demonstrated that the taxpayer knew of the unpaid tax liability when he caused his medical practice to pay its employees rather than the IRS. The Court found the taxpayer was a responsible person who had willfully violated his duty to pay the taxes due and entered judgment for the full amount. Here the taxpayer moved for reconsideration, arguing for the first time that his personal liability was limited to $100,000, the amount of the preferential payment that was the basis of the Court's willfulness finding. The Court noted that the taxpayer could and should have raised this argument in his response to the government's motion for summary judgment, he cannot raise it for the first time in this motion for reconsideration. The Court held the taxpayer's argument also failed on the merits. The Court rejected the taxpayer's argument that his liability was limited to the $100,000 preferential payment, for two independent reasons. First, he could and should have raised the argument in the summary judgment briefing, and it therefore is not appropriately raised in this motion to reconsider. And second, even if the argument was properly before the court, the taxpayer had the burden of proof on the issue of the availability of funds. He had the burden to come forward with competent summary judgment evidence that would prove up the funds available to his medical practice and demonstrate the absence of sufficient unencumbered funds to cover the practice's tax liability. He did not do so.
In order to sustain a deduction, the expense must be an ordinary and necessary business expenses and you've got to adequately document it. In Luczaj and Associations, Martin J. Luczaj and Alisa M. Luczaj (T.C. Memo. 2017-42), the taxpayers deducted a variety of expenses that the IRS and Court disallowed. Some expenses, such as vehicle expense were not adequately documented, particularly with respect to mileage logs, and for some others the taxpayers failed to show the business relationship. The Court disallowed claimed deductions for a portion of their home, and expenses on credit card statements where they were annotated to show the difference between corporate and personal but did not establish the business purpose for each expenditure. Expenditures reported as gifts lacked the documentation required for gifts and some exceeded the $25 limit.
Tip of the Day
Converting personal residence to a rental? . . . You've got to establish your basis in the property for depreciation purposes. The rule is your basis is the lower of your cost or the fair market value. That means if you paid $100,000 for the house and it's now worth $475,000; your basis is $100,000. Don't forget to add improvements made over the years to your original purchase price and, for depreciation purposes only the structure and land improvements qualify; land does not. For computing depreciation you'll also have to make an allocation between the land and the house. That may not be easy. The best guide may be your real estate tax bill. Talk to your tax adviser.
March 16, 2017
The IRS has granted many businesses affected by this week’s severe winter storm additional time to request a six-month extension to file their 2016 federal income tax returns. The IRS is providing this relief to victims and tax professionals affected by this week’s storm (known as Winter Storm Stella) that hit portions of the Northeast and Mid-Atlantic. Business taxpayers who are unable to file their tax return by today’s due date (March 15, 2017) can request an automatic extension by filing Form 7004, available on IRS.gov, on or before March 20, 2017. Form 7004 provides a six-month extension for returns filed by partnerships (Forms 1065 and 1065B) and S corporations (Forms 1120S). Eligible taxpayers taking advantage of this relief should write “Winter Storm Stella” on their Form 7004 extension request (if filing Form 7004 by paper). As always, the fastest and easiest way to get an extension is to file this form electronically. (Note. New York State has granted essentially the same relief to taxpayers in New York. It's likely other states will also grant relief.)
As a result of a severe winter storm in Kansas beginning January 13 through January 16, 2017 taxpayers in the counties of Barton, Clark, Comanche, Edwards, Ellsworth, Ford, Hodgeman, Jewell, Kiowa, Meade, Ness, Pawnee, Pratt, Rush, Seward, Sheridan, Stafford and Trego who sustained losses attributable to the disaster may deduct the losses on their 2016 or 2017 tax returns.
Tip of the Day
Rental property in another state? . . . While your tax advisor should be consulted, you probably should be filing an income tax return in any state in which you have a rental property or other income producing property. An ownership interest through a partnership or LLC (or another type of entity) might also subject you to filing. The same goes for an interest in a "tenant-in-common" venture.
March 15, 2017
Revenue Procedure 2017-26 (IRB 2017-13) provides information to any individual who failed to meet the eligibility requirements of Section 911(d)(1) of the Code because adverse conditions in a foreign country precluded the individual from meeting those requirements for taxable year 2016. Rev. Proc. 2017-26 applies to an individual who left South Sudan on or after July 10, 2016.
The Department of Labor has issued guidance (Field Assistance Bulletin 2017-01) regarding enforcement of the fiduciary rule published in the Federal Register on April 8, 2016 in the event the DOL issues a final rule after April 10 implementing a delay in the applicability date or decides not to issue a delay in the fiduciary duty rule.
If you don't file a return, the IRS can file a substitute return based on the information available to it. That return is presumed to be correct. The burden is then on the taxpayer to show the IRS's determination is erroneous by providing substantial evidence to the contrary. That can be a substantial hurdle. In William Wallis (U.S. District Court, W.D. Virginia, Lynchburg Div.) the taxpayer failed to pay trust fund taxes for several closely held businesses. The IRS prepared substitute returns that assumed a 20% withholding rate; the taxpayer argued the rate was really 11%. The Court found the taxpayer's evidence of a lower withholding rate to be less than convincing. The Court questioned the documents, the choice of 941s from other periods, and noted the taxpayer failed to keep adequate records. The Court found the taxpayer did not rebut the presumption of correctness of the returns prepared by the IRS.
Tip of the Day
Paying the IRS . . . There are a number of ways to pay if you owe taxes. If you're filing electronically--either on your own or through a tax professional--you can have your bank account debited by the IRS (or state, if you owe). That's probably the simplest approach. You don't have to have the account debited at the same time as you file (unless you're filing on the deadline). You can file your return immediately and have your account debited on April 15. You can pay online or by phone using a credit card, but the processor charges a fee. Go to www.irs.gov/payments for authorized card processors and phone numbers. You can also use Direct Pay. You can schedule payments up to 30 days in advance. This option makes sense if you're filing on paper. Paying cash using the PayNearMe option is another approach. Details are available at IRS.gov/paywithcash. This approach is the most complex of all and involves 4 distinct steps. It also takes longer, so get the ball rolling earlier. You can' do this the last day. Another point. You're limited to $1,000 per day so you might have to make more than one payment--and each payment will cost $3.99.
March 14, 2017
The IRS Data Retrieval Tool on fafsa.gov and StudentLoans.gov is currently unavailable. The IRS is working to resolve the issue as quickly as possible. However, at this time, the IRS anticipates the online data tool will be unavailable for several weeks. Applicants have other options while the data tool is unavailable. Applicants filling out the Free Application for Federal Student Aid (FAFSA) and applying for an income-driven repayment (IDR) plan can manually provide the requested financial information from copies of their tax returns. The online FAFSA and IDR application remain operational, and applicants can continue filing the FAFSA or applying for an IDR plan as they normally would. The IRS decided to temporarily suspend the Data Retrieval Tool (DRT) as part of a wider, ongoing effort at the IRS to protect the security of data.
Notice 2017-21 (IRB 2017-13) provides for adjustments to the limitation on housing expenses for purposed of Section 911. These adjustments are made on the basis of geographic differences in housing costs relative to housing costs in the United States. Further, if the limitation on housing expenses is higher for taxable year 2017 than the adjusted limitations on housing expenses provided in Notice 2016-21, qualified taxpayers may apply the adjusted limitations for taxable year 2017 to their 2016 taxable year.
Tip of the Day
Resident alien . . . If you are a resident alien for the entire year, you must file a tax return following the same rules that apply to U.S. citizens. If you are a nonresident alien, the rules and tax forms that apply to you are different from those that apply to U.S. citizens.
March 13, 2017
The IRS has released filing statistics for the week ending March 3, 2017. While returns received and processed are still running behind last year's results, at the same time last year the filing season contained four additional days. Total returns received and processed are down by 8.5% and 8.3% respectively. E-filing by tax professionals is down by 10.1%. E-filed returns that were self-prepared are down by just over 6%. The number of refunds is down by 7.8%, about in line with the number of returns processed. The average refund is up just under 1%.
Tip of the Day
Taxpayer assistance centers . . . The IRS is reminding taxpayers that help is available at taxpayer assistance centers. While you can get forms and other services, you're better off going to irs.gov for those services. The taxpayer assistance centers can provide in-person help with a tax question or resolving a problem--but they are now only available by appointment. They're not in every town. There are only four in North Dakota and seven in Massachusetts. To find the nearest location go to Taxpayer Assistance Center (TAC) Locations Where In-Person Document Review is Provided.
March 10, 2017
Not infrequently taxpayers claim they did not receive an IRS deficiency notice. As proof of mailing the IRS can present a U.S. Postal Service (USPS) Form 3877 showing the items mailed and the addresses. In Steven L. Ertelt (T.C. Memo. 2017-41) the taxpayer claimed he had not received the notices of deficiency. At trial and on brief the taxpayer argued that Appeals failed to verify that the IRS mailed to petitioner the notices of deficiency on which the IRS's tax assessments and lien were based. The taxpayer alleged that the USPS Form 3877 certified mailing list contained in the record was defective because it did not expressly indicate the number of items respondent delivered to the USPS and did not include the signature of the USPS employee who received the items for mailing from respondent. The Court noted that the IRS was not entitled to the usual presumption of official regularity here because the certified mailing list was incomplete. The Court noted that the certified mailing list bore a date stamp and showed the taxpayer's name, address, and the certified mail article numbers of the corresponding notice of deficiency. The taxpayer did not argue that the address recorded on the certified mailing list was not his last known address, nor did he argue that the IRS failed to follow its established mailing procedures. The Court held the dated copies of the notices of deficiency combined with the Form 3877 certified mailing list with matching certified mail article numbers was sufficient to show the notices of deficiency were mailed to the taxpayer at his last known address.
The IRS has tax treaties with a number of countries. One of the purposes of the treaties is to prevent double taxation. In John P. McManus (U.S Court of Federal Claims) the taxpayer had gambling winnings in the U.S. from which taxes were withheld. The taxpayer also claimed to be a resident of Ireland. Under a tax treaty with Ireland, the taxpayer would be due a refund of the withheld taxes. To be a resident of Ireland for purposes of the tax treaty, the taxpayer would have to be liable for taxes in Ireland. The taxpayer argued he paid a domicile tax, but Court noted that the taxpayer was not a resident of Ireland for purposes of that country's income tax, corporation tax, or capital gains tax. The Court found that not sufficient to satisfy the requirements under the treaty and denied the taxpayer a refund of the withheld taxes.
Tip of the Day
State returns . . . If you do business in other states you may have to file an individual return in those states. That's true if you do business as a sole proprietorship, partnership, or S corporation. In the case of a partnership or S corporation, the entity files and the partners or shareholders file an individual return and pay the tax on their share of the income in that state. Some states allow the entity--partnership, LLC, or S corporation--to file a "composite" return and it pays the tax. Check the rules for the states you do business in and talk to your tax advisor.
March 9, 2017
In Joe Alfred Izen, JJr. (145 T.C. No. 5) the taxpayer filed a Form 1040X, Amended U.S. Individual Income Tax Return, for 2010, in April 2016, claiming a charitable contribution deduction of $338,080 for his alleged gift to a charitable organization of an interest in a 40-year-old airplane. On cross-motions for partial summary judgment, the IRS contended that the taxpayer was not entitled to the claimed deduction because he failed to satisfy the substantiation requirements of Sec. 170(f)(12), which applies to “contributions of used motor vehicles, boats, and airplanes.” Under paragraph (12), no deduction is allowed for contributions of vehicles whose claimed value exceeds $500 unless the taxpayer: (1) substantiates the contribution by a contemporaneous written acknowledgment from the donee organization meeting the requirements of Sec. 170(f)(12)(B); and (2) “includes the acknowledgment with the taxpayer's return of tax which includes the deduction.” Sec. 170(f)(12)(A)(i). The Court also noted a deed of gift can serve as a de facto contemporaneous written acknowledgment only if it acknowledges that a completed gift was made before the end of the calendar year, as an actual acknowledgment letter would do. Because the deed of gift in the current case was not signed by either donor, it does not establish, on its face, that taxpayer made a completed gift to the during the year in issue. The Court held the taxpayer failed to satisfy the statutory substantiation requirements because he did not include with his amended 2010 return a contemporaneous written acknowledgment that complied with Sec. 170(f)(12)(B). The Court also held the taxpayer was not entitled to the charitable contribution deduction claimed on his amended 2010 return.
Tip of the Day
File now and pay later . . . Can't pay what you owe with the return? You can still file and delay payment to April 18 (this year's due date). If you're paying by check, just mail the voucher and the check by the 18th. If you're paying electronically you can have the money withdrawn from your bank account at any time (but no later than the due date of the return). Filing now and paying later makes even more sense if you're getting a refund on either your state or federal return.
March 8, 2017
The House has introduced a draft bill to repeal and replace the ACA (Obamacare). The bill would:
The new law would continue to require insurers to cover pre-existing conditions (unless there's a gap in coverage) and cover children up to age 26 on their parents' policy.
The IRS has announced (Rev. Rul. 2017-6, IRB 2017-12) that interest rates on over- and underpayments of tax will remain the same for the calendar quarter beginning April 1, 2017. The rates will be:
The interest rates just announced are computed from the federal short-term rate determined during January 2017 to take effect February 1, 2017, based on daily compounding.
Tip of the Day
Unclaimed federal income tax refunds . . . The IRS is again warning taxpayers who haven't filed that refunds totaling more than $1 billion may be waiting for an estimated one million taxpayers who did not file a 2013 federal income tax return. If you haven't filed a 2013 return, and had withholdings even if you incurred no liability, you can file as late as April 18, 2017 to claim the refund. Aren't due a refund, but haven't filed? The IRS does look for nonfilers and if you don't file the statute of limitations never begins to run. You could end up owing taxes and substantial penalties sometime in the future. Get good advice. Talk to a tax professional.
March 7, 2017
The IRS has reported an increase in the fee for each part of the Special Enrollment Examination (for Enrolled Agents). The new fee is $111.94, up from $109. The increase is a result of an increase in the vendor's portion.
A recent report by the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS accurately determined the amount of allowable Premium Tax Credit (PTC) under the Affordable Care Act on more than 97 percent of tax returns reviewed during the 2016 Filing Season. The report found that, as of May 1, 2016, the IRS accurately determined the amount of the credits on 4.7 million out of 4.9 million returns. For the remaining 154,744 tax returns, either programming errors resulted in an inaccurate PTC computation, or high-risk tax returns were not identified as potentially erroneous because the discrepancy amount was below the dollar tolerance for which the IRS will review a claim, TIGTA auditors found. For the full report, go to www.treasury.gov/tigta/auditreports/2017reports/201743022fr.pdf.
Tip of the Day
Going it alone? . . . Doing your own return? Whether or not it makes sense depends on how complex your situation and how sharp you are. Don't rely on past returns. Just because you did (or didn't) do your return last year doesn't mean you should (or shouldn't) attempt it this year. Whatever you decide, there's one bit of advice for virtually everyone. Use a tax program to prepare the return. You can either purchase one (at an office supply store) or use an online version. If you're able to use IRS free file, that's another option. Using a tax program won't guarantee you won't miss a deduction, but if you go through the Q and A approach, you're chances of missing something are greatly reduced. Most importantly, the software will catch many errors that are easy to miss. For example, you'll probably get an error message if you don't answer the health insurance question, might qualify for a deduction or credit not taken, etc. Don't override any entries. If you've got to "force" a number, you're probably doing something wrong.
March 6, 2017
The IRS has released filing season statistics for the week ending February 24, 2017. Total returns processed continue to be impacted by the law change requiring a delay in processing the Earned Income Tax Credit and the Additional Child Tax Credit. Total returns processed are down some 10.4% from 2016. That's slightly better than the last week. E-filing receipts are down by 10.4%, with e-filings by tax professionals down by 12.6%. Total refunds to date are $127.227 billion, down from $142.085 billion for the same time period in 2016.
Tip of the Day
Tax reform quandary . . . One of the major sticking points in tax reform is how to handle pass-through entities. Most small to mid-sized businesses are organized as S corporations, LLCs or partnerships. A drop in the corporate rate to 20% and a cut in the top individual rate to 33% would make it more attractive to do business as a regular corporation--except that dividends would be double taxed. One approach is to limit the rate on "active business income" of pass-through entities to 25%. In addition, pass-throughs would have to pay a reasonable compensation to employee/owners. What should you do if you're starting a new business? The best approach might be to pick your entity based on current law. Congress may come up with a viable solution given that they're aware of the problem. And if the 1986 law change is any indication, provision should be made for switching entities without a penalty. But each situation is different. Discuss the issue with your tax advisor.
March 3, 2017
The Department of Labor has issued a document that proposes to extend for 60 days the applicability date defining who is a “fiduciary” under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code of 1986 (Code), and the applicability date of related prohibited transaction exemptions including the Best Interest Contract Exemption and amended prohibited transaction exemptions (collectively PTEs) to address questions of law and policy.
Valuations can be critical when it comes to estate taxes and charitable contributions. In Estate of Eva Franzen Kollsman, Deceased, Jeffrey Hyland, Executor (T.C. Memo. 2017-40) the estate used the valuation of an expert who the Court found unreliable and unpersuasive. The Court noted the expert had a conflict of interest, and he exaggerated the dirtiness of the paintings to be valued and the risks involved in cleaning them. The Court sided with the IRS's expert, but reduced the valuation by 5% to account for the condition.
Dealings between related parties are often more closely scrutinized by the IRS. In Gary J. Kauffman (T.C. Memo. 2017-38) the taxpayer's LLC paid an amount to his solely owned corporation for the rental of a specialized camera. The IRS disallowed the deduction on two grounds. First, while the taxpayer provided evidence of the payments, he failed to show that the payments by the LLC to the corporation were ordinary and necessary business expenses. In addition, the taxpayer failed to show how the expenses were calculated or whether the corporation charged third parties the same amounts for similar services. The Court sided with the IRS and disallowed the deduction.
Tip of the Day
Sale of home . . . If you owned and lived in your home for two out of the last five years (exceptions apply in certain situations) you can exclude up to $250,000 ($500,000 if married filing joint) of the gain on the sale. You don't have to report the sale on your tax return unless you have a gain and don't qualify to exclude all of it, you have a gain and choose not to exclude it, or you received Form 1099-S.
March 2, 2017
The IRS has announced (AOD-2017-1) it will not acquiesce in Burnett Ranches, Ltd (U.S. Court of Appeals, Fifth Circuit). The issue in Burnett Ranches was whether a limited partnership is excluded from the definition of a farming syndicate under Sec. 464(c)(1)(B) and (c)(2)(A) because the sole shareholder of a limited partner S corporation actively participated in the farming business.
You can deduct a bad debt, but you've got to prove certain facts. Usually, a bad debt is disallowed by the IRS because the taxpayer hadn't shown that the debt was truly bad. In Jason M. Scheurer (T.C. Memo. 2017-36) the Court found the taxpayer failed to substantiate that he advanced the funds to a partnership, noting there was no evidence of a transfer of funds. The Court also found the taxpayer failed to carry his burden of proving that the advances were bona fide loans, noting there was no promissory note, no fixed or determinable amount due, no specified interest rate no principal due date and no requirement of security. In addition, the debtor could not borrow from a bank because of his poor credit rating and was most likely insolvent at the time. Finally, the taxpayer did not prove that the debt was a business bad debt. The Court disallowed the bad debt deduction.
Tip of the Day
Paying another's expenses . . . It's not unusual for a business owner to work through multiple entities and even finance other businesses as an angel investor. Sometimes expenses of one business are paid by another party. Resist the temptation. The rule is that a taxpayer cannot claim a deduction for paying a third party's expenses. There's a narrow exception and that's when the taxpayer's motive for paying the other's obligation is to protect or promote the taxpayer's own business. For example, one of your subcontractor's can't make payroll one week. Without the sub your business would be in jeopardy of missing a critical deadline. You don't want to take a chance on writing a check without a deduction. Talk to your tax advisor before committing.
March 1, 2017
Notice 2017-20 (IRB 2017-11) extends the period for an employer that provides a qualified small employer health reimbursement arrangement (QSEHRA), which was added to the Internal Revenue Code by the 21st Century Cures Act (Cures Act), to furnish an initial written notice to its eligible employees regarding the QSEHRA. The period is extended from March 13, 2017 (90 days after the Cures Act was enacted) to at least 90 days after additional guidance regarding the contents of the QSEHRA notice is issued. The notice also provides transition relief from penalties for failure to furnish the written notice until after further guidance has been issued.
An IRS Memorandum issued by the Tax Exempt and Government Entities Division sets forth substantiation guidelines for EP Examinations employees examining whether a section 401(k) plan hardship distribution is “deemed to be on account of an immediate and heavy financial need” under safe-harbor standards set out in Sec. 1.401(k)-1(d)(3)(iii)(B) of the Income Tax Regulations. The memorandum does not address substantiation of non-safe-harbor distributions under Sec. 1.401(k)-1(d)(3)(iii)(A). The Office of Professional Responsibility (OPR) has released their Fiscal Year 2016 Accomplishment Report. In this report OPR shares information about its mission, duties and responsibilities, outreach activities and operational results. The report describes written guidance and memorandums of understanding, collaboration opportunities pursued, and plans for FY 2017 and beyond. The report also summarizes OPR actions taken in cases involving violations of the Circular 230 diligence standards, including factors considered in determining the discipline appropriate for those cases.
Tip of the Day
Capital loss utilization . . . Individuals can carry a capital loss forward indefinitely, but each year you lose $1,500 or $3,000 (depending on your filing status) whether or not you file or you can use the loss that year. And that loss expires on a taxpayer's death. Any unused carryforward loss at that time expires.
February 28, 2017
As a result of a severe winter storm during the period of December 24 to 26, 2016, the president has determined that some areas of South Dakota are eligible for government assistance. Taxpayers in the counties of Butte, Clark, Codington, Day, Deuel, Dewey, Edmunds, Fall River, Faulk, Grant, Haakon, Hamlin, Harding, Jackson, Jones, Marshall, McPherson, Meade, Pennington, Perkins, Roberts, Stanley, Sully and Ziebach; the Cheyenne River Sioux Tribe within Dewey and Ziebach counties and the Oglala Sioux Tribe within Jackson County who sustained disaster related losses may deduct the losses on their 2016 or 2015 returns.
In Internal Revenue News Release IR-2017-43 the IRS is reminding non-U.S. citizens who may have taxable income, such as international students and scholars who may be working or receiving scholarship funds, that they may have special requirements to file a U.S. tax return. The Internal Revenue Code generally requires non-U.S. citizens, whom the code defines as either resident or non-resident aliens, who are engaged in a trade or business within the U.S. to file tax returns. Non-resident aliens such as foreign students, teachers or trainees temporarily in the United States on F, J, M or Q visas are considered engaged in a trade or business.
Tip of the Day
Save all bank statements . . . If you're a business owner you should save all your bank statements, both personal and business. If there's a question about you underreporting income the IRS can reconstruct your income based on deposits into your business or personal accounts. But often an unreported deposit into a business account is really a loan or capital contribution from another source. You should be able to prove that if you can show a withdrawal from your personal account and a similar deposit into your business account on the same or next day. A direct transfer is even better documentation. Getting money from a relative? Keep a copy of the check or transfer instructions. Then make a deposit separate from the usual business deposits to highlight the loan or advance. Avoid dealing in cash where they'll be no paper trail. Talk to your accountant or tax adviser for additional assistance.
February 27, 2017
As a result of severe winter storms, flooding, and mudslides during the period from January 3 to 12, 2017 in California the president has declared certain areas to be eligible for assistance. Taxpayers in the counties of Alameda, Amador, Butte, Calaveras, Contra Costa, El Dorado, Humboldt, Inyo, Lake, Lassen, Marin, Mendocino, Merced, Mono, Monterey, Napa, Nevada, Placer, Plumas, Sacramento, San Benito, San Luis Obispo, Santa Clara, Santa Cruz, Shasta, Sierra, Siskiyou, Solano, Sonoma, Sutter, Trinity, Tuolumne, Yolo and Yuba who sustained losses as a result of the disaster may deduct those losses on their 2017 or 2016 federal income tax returns.
The IRS has released Filing Season Statistics for the week ending February 17, 2017. While still behind last year in almost all categories, the number of returns processed and refunds issued are catching up. Total returns received are now down only 13% from last year as are returns processed. E-filings from tax professionals are down 16% and self-prepared returns down 11%, year over year. The average refund is up slightly.
Tip of the Day
Help from IRS . . . The IRS has a number of on-line resources to make filing your return easier. In IRS News Release IR-2017-42 there are links to a number of helpful pages at IRS.gov including what to do if you can't pay, a list by zip code of tax professionals searchable by designation (CPA, attorney, etc.), how to make a payment, etc.
February 24, 2017
The Financial Crimes Enforcement Network (FinCEN) has announced the renewal of existing Geographic Targeting Orders (GTOs) that temporarily require U.S. title insurance companies to identify the natural persons behind shell companies used to pay “all cash” for high-end residential real estate in six major metropolitan areas. The GTOs (1) all boroughs of New York City; (2) Miami-Dade County and the two counties immediately north (Broward and Palm Beach); (3) Los Angeles County; (4) three counties comprising part of the San Francisco area (San Francisco, San Mateo, and Santa Clara counties); (5) San Diego County; and (6) the county that includes San Antonio, Texas (Bexar County). The monetary thresholds for each geographic area can be found in this table. The lowest trigger is $500,000 in San Antonio; the highest is $3 million in Manhattan. The transaction is reportable if the purchase is made, at least in part currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, or a money order in any form.
If you fit the IRS definition of a real estate professional you can deduct your passive real estate losses without the usual $25,000 restriction. To do so you must show you spent more than 750 hours and more than half your working hours in real estate during the tax year. In Mohammad M. Zarrinnegar et ux. (T.C. Memo. 2017-34) the taxpayer had logs that showed he spent more than 1,000 hours during the year on real estate activities, which was more than the time he spent working as a dentist. The taxpayer's testimony about the logs was credible and he provided the testimony of other witnesses. However, the Court denied some of his expenses related to the business because of insufficient documentation. The Court did not apply the Cohan rule, noting the taxpayers provided no evidence that certain expenses were in fact incurred.
Tip of the Day
IRS not only user of 1099 data . . . The IRS isn't the only taxing entity to use the data from 1099s to find unreported income. At least one state is using data from 1099-Ks to determine if income is underreported on a tax return. States could use the date for both income taxes and sales taxes. Since it's more than likely the business would have receipts from additional sources, e.g., either cash or check, in addition to credit card revenue, the data can only be used imprecisely. Some businesses receive more cash than others. Based on prior audits the amount of cash can be estimated, but with limited precision. But there's no question if you report only the amount reported on 1099-Ks, you'll probably get a letter from the state.
February 23, 2017
The IRS has announced (IR-2017-41) that publicly available information from approved applications for tax exemption using Form 1023-EZ, Streamlined Application for Recognition of Exemption, is now available electronically. The data on IRS.gov is available in spreadsheet format and includes information for approved applications beginning in mid-2014, when the 1023-EZ form was introduced, through 2016. The information will be updated quarterly, starting with the first quarter of calendar year 2017. The IRS’s Tax Exempt and Government Entities division approved more than 105,000 applications for exemption submitted on the Form 1023-EZ from 2014 through 2016. Information in the Form 1023-EZ includes basic identifying information such as the name of the organization, Employer Identification Number and the names of officers, directors and trustees. The Form also contains information regarding items such as the organizing documents, state of incorporation, purpose and activities of the organization.
Amounts received as worker's compensation and some related payments are not taxable. In Elias Olson and Rosalinda Olson (T.C. Memo. 2017-33) the taxpayer-wife had received disability payments for a service-related disability for several years. Those amounts were excludable from her income. However, when she reached normal retirement age the disability payments stopped and she began to receive her pension. The taxpayer excluded the pension from the income reported on their return. The Court held the pension payments were not excludable since the amounts were determined with reference to the taxpayer's age and years of service. In addition, the Court sustained the notice of Federal tax lien (NFTL) finding the taxpayers' history of failing to pay tax liabilities.
Tip of the Day
Apportioning income for state taxes . . . Business owners who do business in more than one state must generally apportion their income to determine their tax liability in each state. In the past a simple three-factor formula was used--the percentage of sales in the state to the total sales, then the property, and finally the payroll. The three percentages were added and divided by three to arrive at a single percentage. While some states still use basically the same approach, many states double weight sales, drop one of the other factors, etc. Some states use different "sales" formulas for different industries. Read the instructions for the forms carefully if you've got to apportion your income. A mistake can prove costly.
February 22, 2017
In Steven C. Clift (U.S. District Court, W.D. Washington, at Tacoma) the taxpayer filed a complaint against the IRS alleging it improperly assessed civil penalties for frivolous tax submissions and issued false levies. The Court noted a taxpayer cannot seek damages under Sec. Sec. 7433 for improper assessment of taxes. Because the assessment of civil penalties under Sec. 6702 for frivolous tax returns is not a "collection activity" the Court found it lacked jurisdiction. The petitioner also claimed the IRS engaged in an unlawful collection activity when it levied over 15 percent of his Social Security retirement benefits. The Court noted that Sec. 6331(h) does not create a 15 percent limit on the levy of Social Security retirement benefits.
Tip of the Day
Letter 4883C . . . The IRS takes many steps to protect taxpayers from identity theft. If taxpayers receive an IRS Letter 4883C, it’s because the IRS stopped a questionable return. Before calling the IRS, be prepared to validate identity. See Understanding Your 4883C Letter for details.
February 21, 2017
The IRS, state tax agencies and the tax industry are warning tax professionals to be alert to a new phishing email scam impersonating software providers. The scam email comes with the subject line, “Access Locked.” It tells recipients that access to their tax prep software accounts has been “suspended due to errors in your security details.” The scam email asks the tax professional to address the issue by using an “unlock” link provided in the email. However, the link will take the tax professional to a fake web page, where they are asked to enter their user name and password. Instead of unlocking accounts, the tax professionals actually are inadvertently providing their information to cybercriminals who use the stolen credentials to access the preparers’ accounts and to steal client information.
The IRS is advising taxpayers that Tuesday, Feb. 21, the day following Presidents Day, is typically the busiest day of the year for IRS telephone assistors, as they field thousands of calls per hour. The IRS reminds taxpayers that most questions can be answered online by using the numerous tools available at IRS.gov. Taxpayers calling the IRS about account issues should be prepared to validate their identities by having prior-year and most recently filed tax returns available.
Tip of the Day
Retirement and estimated taxes . . . Your financial status can change significantly upon retirement. For many taxpayers, earnings will decrease--but not for all. And even if your income drops because you're no longer working, it also means you may not be having regular withholding for income taxes. For example, a married couple collecting social security and just $40,000 in interest, pensions, etc. would have a tax liability and may or may not have to make estimated payments. If you or your spouse have a small side income that could also trigger payments. If you have substantial income from Social Security the easiest approach is to ask for federal taxes to be withheld. If you're still working full-time and collecting Social Security, your liability could be significant. If you're using tax software, look for a worksheet for computing estimated taxes.
February 17, 2017
The IRS has announced that it will not reject returns that do not indicate the status of the taxpayer's health coverage. Beginning this year the IRS had intended to reject those returns, but following the issuance of Executive Order 13765 by President Trump it has reversed it's stance. While the Service will process such returns and issue refunds if appropriate, the IRS also said taxpayers may receive correspondence some time in the future with questions about health care coverage. The IRS also indicated that the decision to process the returns doesn't change the fact that penalties for failure to have coverage have not been eliminated.
The IRS has reported that as of Sunday February 5, certain e-Services users who have not verified their identities with the IRS have had their accounts suspended. In December, IRS mailed Letters 5903 to users who had been active on their accounts in the past year and had access to the Transcript Delivery System. Users were given 30 days to verify their identities as part of our effort to better secure the e-Services program and protect taxpayer data. The IRS has updated the e-Services landing page and the Important Update about Your e-Services Account to provide users with guidance about how to reinstate their accounts if they did not do so within the 30-day timeframe.
Tip of the Day
Real estate professional . . . If you qualify as a real estate professional you can deduct all your losses on rental real estate with the usual restriction. However, simply checking the box on Schedule E may be a mistake. Claiming to be a real estate professional is apparently a hot topic with the IRS and you'll probably increase your audit chances significantly. Why? Part of the answer lies in the requirements. lies in the requirements. You'll have to show you spent more than half your working time and more than 750 hours in the real estate field during the year. Be prepared to show the IRS a diary with the time you spent working both in real estate and in other trades or businesses during the year. The courts have scrutinized any documentation presented and found a substantial number of journals inadequate. Discuss the issue carefully with your tax advisor.
February 16, 2017
If your spouse is not competent to sign a return you should document that if it could be questioned. In Peter William Moss (T.C. Memo. 2017-30) the taxpayer-husband filed a joint return attaching a letter saying his wife was mentally ill, but not attaching a power of attorney. The wife filed a return reporting just her income. The wife had been hospitalized for mental illness several years earlier and she was released on the condition she live with her husband, but he was not a formal guardian or conservator. Several years after the return in question was filed the wife was placed in a conservatorship with her daughters. The Court found the taxpayer was unable to show that his wife was unable to file a return, and even if unable, that he qualified as her agent when he filed the return. The Court noted that the fact that she filed a return (as married, filing separately) weighed heavily against the husband. The Court found the taxpayer was not entitled to either married filing jointly status or the additional personal exemption that follows.
If you have a qualifying child you can be entitled to a number of tax benefits including an exemption for the child, the child tax credit of $1,000, the earned income credit and filing as head of household. In Grisel A. Smyth (T.C. Memo. 2017-29) the taxpayer was a grandmother who provided over half the support for the grandchildren, they lived in her home more than half the year and met the other qualifications. However, the children were also qualifying children of the taxpayer's son and his wife and they claimed the children on their return. The Court noted that under the "tie-breaker" rules the parents and not their grandmother get to claim them if both parties claim them. The taxpayer argued that she was under the impression that her son and his wife relinquished the claim on an amended return, but the Court found no evidence of that. The Court was sympathetic to the taxpayer's plight, but indicated it had to follow the law and disallowed the taxpayer the credit.
Tip of the Day
IRS checking preparer compliance . . . The IRS is sending Letter 4858 to tax preparers who completed 2016 returns claiming the earned income tax credit but who may not have met the required due diligence requirements. Disregarding due diligence requirements could result in penalties and other consequences for preparers and their clients. Letter 4858 comes in both English and Spanish. The IRS is also sending Letter 5364 to tax preparers who completed two or more 2016 paper returns claiming Earned Income Tax Credit (EITC), American Opportunity Tax Credit (AOTC), or Child Tax Credit/Additional Child Tax Credit (CTC/ACTC) without including Form 8867, Paid Preparer’s Due Diligence Checklist.
Copyright 2017 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