Small Business Taxes & Management

News and Tip of the Day


Small Business Taxes & ManagementTM--Copyright 2016, A/N Group, Inc.

For the full text of new Revenue Rulings, Revenue Procedures, Regulations, etc. go to:
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For Health Care Tax Tips:
  Health Care Tax Tips

 

July 22, 2016

News

The IRS has announced that the "Get an IP PIN" tool has returned to IRS.gov with a stronger authentication process to help protect taxpayers. The Identity Protection Personal Identification Number (IP PIN) is given to taxpayers who are confirmed identity theft victims and to certain taxpayers who opt into the program. The six-digit IP PIN adds an additional layer of protection for the Social Security number. The re-launched tool uses a multi-factor authentication process that will help prevent automated attacks. Taxpayers must verify their identities using a more rigorous Secure Access process that requires them to have immediate access to an email address, account information from a credit card or other loans types and a text-enabled mobile phone. New and returning users must follow the Secure Access steps outlined in Fact Sheet 2016-20, How to Register for Get Transcript Online Using New Authentication Process. For more information go to www.irs.gov/uac/irs-statement-on-get-an-ip-pin-tool. Use of the IP PIN tool is limited to pre-selected taxpayers.

In order to be a casualty loss, the loss must result from a sudden, unexpected event. In Christina A. Alphonso (T.C. Memo. 2016-130) the collapse of a retaining wall was not sudden. While spring rains may have been a contributing factor, the wall, as noted by various consultants over a 20-year period, had been deteriorating. In addition, the Court noted a flaw in the analysis of the taxpayer's expert.

In Bonnie Maria Armour, Petitioner and Mark V. Poulsen, Intervenor (T.C. Memo. 2016-129) the Court denied the petitioner innocent spouse relief because she was the bookkeeper and office manager for her husband's business for a number of years. She also had control over a jointly owned horse boarding business where the income was underreported. The Court noted she had actual knowledge of the unpaid tax relating to the income of her husband's business.

Tip of the Day

State income tax . . . You file incorporation papers in a state. However, the action was premature. The corporation never issues stock, does business, or has any capital. Do you have to file income tax returns? In most states the answer is yes. Failure to file could subject you to penalties. In order to avoid having to pay taxes in the future, you'll have to formally dissolve the corporation. The same rules would apply for federal tax purposes. To avoid unnecessary fees for tax preparation, dissolution, etc. talk to your attorney. In most states you can reserve a name. Get all the paperwork in order for filing for incorporation, but hold off actually submitting the papers until you're sure you need the corporation. Most attorneys can file with an agent at the state capital for a very fast turnaround. In most cases the same rule applies to LLCs and partnerships.

 

July 21, 2016

News

There are a number of tax incentives related to energy production. One of them is the recovery of landfill gas. In Green Gas Delaware Statutory Trust, Methane Bio, LLC, Tax Matters Partner (147 T.C. No. 1) the petitioners were the tax matters partners for G and N, Delaware statutory trusts that were purportedly involved in the production and sales of landfill gas to RTC, which had entered into landfill license agreements with the owners and operators of 24 landfills. G claimed credits for producing fuel from a nonconventional source under Sec. 45K (and its predecessor, Sec. 29) with respect to landfill gas asserted to have been produced from 23 landfills in 2005, 2006, and 2007. N claimed such credits for one landfill for 2006 and 2007. The 24 landfills had varying degrees of equipment, monitoring, and production, from the nonexistent to the substantive, depending on the respective landfill and time period in question. The levels of documentation of the gas rights, gas sales, and operation and maintenance agreements between RTC and G and N were variable. So too was the documentation of actual landfill gas production and the documentation of various expenses for which G and N claimed deductions. The Tax Court held that untreated landfill gas is "qualified fuel" within the meaning of Sec. 45K; that in the landfill gas industry, to qualify as a "facility for producing qualified fuels" under Sec. 45K(f)(1), a system of wells, pipes, blowers, and equipment for pretreatment and measuring production of gas, if necessary, must be connected to either a gas-to-energy system or a system that allows for storage and treatment of landfill gas before it is routed to gas pipelines or otherwise prepared for delivery to a customer; that for a landfill gas production facility, the "placed in service" date within the meaning of Sec. 45K is the date when a gas-to-energy system becomes available for its specific function on a regular basis, not the date the first well is drilled; and, finally, that G and N were not entitled to credits under Sec. 45K because of inadequate substantiation of their alleged production and sale of landfill gas, except as to one landfill each and only for the time period during which gas-to-electricity equipment was running at those landfills.

Tip of the Day

Don't "tweak" your will . . . An individual had several relatives that would, without a will, been entitled to inherit a share of his estate. A correctly drafted will excluded the relatives, leaving everything to his brother and sister. But some place along the line, the individual wanted to leave a particular piece of land to a relative not mentioned in the will. The individual removed a section and hand wrote changes. He initialed them, but the changes were not witnessed. The result? The will was declared invalid and the very relatives he wanted to exclude were able to inherit. Don't play with your will. If you had it prepared by an attorney, have him make the changes. The cost is almost insignificant and certainly insubstantial compared to the problems you might create. In this case, because it was held there was no will, the $1.5 million estate will not be divided according to the deceased's wishes and the legal and administrative costs will be many times the cost of changing the will.

 

July 20, 2016

News

Announcement 2016-25 (IRB 2016-31) provides guidance to residents living near the Southern California Gas Company’s Aliso Canyon storage field who were affected by a natural gas leak discovered at that storage field. As part of a relocation plan, Southern California Gas Company was required to pay on behalf of, or reimburse, affected residents for certain relocation and cleaning expenses. This announcement informs affected area residents that the IRS will not assert that these amounts are includable in gross income.

After filing a Notice of Federal Tax Lien (NFTL), the IRS must notify the affected taxpayers in writing, at their last known address, within five business days of the NFTL filings. Taxpayers’ rights to timely appeal the NFTL filings may be jeopardized if the IRS does not comply with this statutory requirement. The Treasury Inspector General for Tax Administration (TIGTA) reviewed a statistically valid sample of 133 NFTLs filed for the 12-month period beginning July 1, 2014 and ending June 30, 2015, and determined that the IRS timely and correctly mailed the copy of NFTL filing and appeal rights to the taxpayers’ last known address, as required by Code Section 6320(a). However, tests of a judgmental sample of 162 undelivered lien notices identified nine cases for which lien notices were not timely sent to the taxpayers’ last known addresses because the lien notices were sent to the taxpayers’ old addresses even though IRS systems reflected their new addresses. Among the nine, seven sampled lien notices were not sent to the secondary taxpayers’ last known addresses because employees did not identify separate addresses for taxpayers’ spouses. Both notices were instead sent to the primary taxpayers’ addresses. Although the IRS reissued lien notices for three of the cases upon receipt of the undelivered lien notices and subsequently reissued lien notices for the remaining six cases, all nine cases involve potential legal violations because the IRS did not meet its statutory requirement to timely send lien notices to the taxpayer’s last known address. IRS regulations require that taxpayer representatives be provided copies of all correspondence issued to the taxpayer. However, for six of the 37 sample cases for which the taxpayer had an authorized representative, the IRS did not notify the taxpayers’ representatives of the NFTL filings. TIGTA estimated that 22,866 taxpayers may have been adversely affected. In addition, for 17 of 162 judgmentally sampled undeliverable lien notices, employees did not update the mail status of the lien notice with the appropriate transaction code and action code combination. To see the full report, go to www.treasury.gov/tigta/auditrepor ts/2016reports/201630047fr.pdf.

Tip of the Day

Some rental losses subject to tougher rules . . . You can deduct up to $25,000 (subject to a phaseout) of real property rental losses as long as you actively participate in the management of the property. The requirements for active participation are nominal--for example, approving tenants, deciding on rent terms, approving expenditures, etc. But the rules are much tougher if the average period of customer use of the property is 7 days or less, for example, a vacation home rented on a weekly basis during the season. In that case you have to show you materially participate in the operation to deduct losses. It's much more difficult to meet that test. There are several ways to meet the requirement, but depending on the circumstances it might not be easy. If you can't meet the requirements, you can only deduct the losses against offsetting income or when you sell the property. Talk to your tax advisor if you're in this situation.

 

July 19, 2016

News

The IRS has issued final regulations (T.D. 9777) on the arbitrage restrictions under Section 148 applicable to tax-exempt bonds and other tax-advantaged bonds issued by State and local governments. These final regulations amend existing regulations to address certain market developments, simplify certain provisions, address certain technical issues, and make existing regulations more administrable. These final regulations affect State and local governments that issue tax-exempt and other tax-advantaged bonds.

You may be able to discharge your debts in bankruptcy, but there are a number of requirements you must meet. In the case of Federal income taxes, you must have filed valid returns ("made an honest and reasonable attempt to satisfy the tax laws"). In In re Martin Smith, Debtor (U.S. Court of Appeals, Ninth Circuit) the bankruptcy court had held that wasn't the case. The Appeals Court sided with the bankruptcy court, noting the taxpayer didn't file a return until some time after the IRS prepared substitute returns.

Tip of the Day

Accrued interest . . . Behind on your mortgage? Or other debt where the interest is tax deductible? Any unpaid interest is accrued and added to the total you owe. You may get a statement from the bank showing the interest billed, but if you're a cash basis taxpayer you can't deduct the interest ut if you're a cash basis taxpayer you can't deduct the interest until it's actually paid.

 

July 18, 2016

News

The IRS has issued proposed regulations (REG-134016-15) under Section 355. The proposed regulations would clarify the application of the device prohibition and the active business requirement of Section 355. The proposed regulations would affect corporations that distribute the stock of controlled corporations, their shareholders, and their security holders. The regulations contain a business percentage test (66-2/3 percentage nonbusiness assets) and a holding period test. If the distribution isn't a per se device, then a facts-and-circumstances test would apply.

Revenue Procedure 2016-40 provides fact patterns (safe harbors) in which the IRS will not assert that a distributing corporation, D, lacks control of another corporation, C, within the meaning of Sec. 355(a)(1)(A), even though D and C engage in a transaction described in the revenue procedure.

Tip of the Day

Option to buy property . . . If you grant an option to buy your home (or other property) and the option is exercised, you add the amount you receive for the option to the selling price of the property. If the option is not exercised, you must report the amount you received a ordinary income in the year the option expires. If the income is reportable on your Form 1040, report the amount on line 21, other income.

 

July 15, 2016

News

In Richard Brewster Main (T.C. Memo. 2016-127) the Tax Court found that the taxpayer carried on an automobile activity with the intent of making a profit. The taxpayer was a patent attorney, but the business was not doing well during the year at issue. The Court reasoned that a smart businessman would not spend his money on pursuing the automobile restoration activity unless he had a profit intent. At its peak the taxpayer had 40 cars in inventory. The taxpayer carried on the activity in a businesslike manner, albeit unsophisticated. He switched tactics when an aspect of the business became unprofitable. However, the Court disallowed his deductions for a camcorder and wireless router because both were not used exclusively in connection with his primary business and that both items were not used exclusively at his regular business establishment. Thus, they were listed property and the taxpayer did not meet the required substantiation requirements showing the business usage with respect to the property.

Tip of the Day

Don't overpromise . . . We've recently seen some horrendous examples of management overpromising products or services and not being able to deliver, delivering late, or delivering a faulty product. In a number of cases it's cost the company billions of dollars. One factor common to most cases has been the penchant for management to ignore or deny the problem until the costs have skyrocketed. In many cases the problem might have gone either unnoticed and/or the cost minimal if swift action had been taken to pull or modify the product. Some 45 years later everyone still remembers the car with the exploding gas tank that the manufacturer decided not to fix because it would cost a few dollars on the production line. A big company may be able to survive; a small company or startup may not. There's nothing wrong with pushing the envelope, just do so in a rational way.

 

July 14, 2016

News

The Trust Fund Recovery Penalty (TFRP) is a penalty against any responsible person whose duty, status, and authority within a company or business requires them to collect, or to account for, and to pay over taxes held in trust for the benefit of the U.S. Government and who willfully fails to perform any of these activities. The penalty is equal to the amount of taxes that should have been paid, but weren't. As a result, the dollar amounts can be significant. The Treasury Inspector General for Tax Administration (TIGTA) performed an audit based on concerns identified in a prior TIGTA review about the delay in assignment of TFRP cases. The objective of this review was to determine whether the Collection function is taking effective and timely actions to assess and collect the TFRP. This review focused on timeliness of assigning TFRP cases, Notice of Federal Tax Lien (NFTL) filings for TFRP cases, and control of TFRP cases that were appealed. TIGTA reviewed two statistical samples of individuals with outstanding TFRP assessment liabilities (100 cases that were assigned and 100 cases that were unassigned). The IRS took an average of more than 15 months to assign cases to a revenue officer for collection action. Furthermore, only 20 (34 percent) of the 59 TFRP Field Collection cases were assigned to the same revenue officer who worked the business trust fund case. In addition, 72 (36 percent) of the 200 cases reviewed did not have NFTLs filed. TIGTA also reviewed a statistical sample of appealed TFRP assessments and found that they were not always timely sent to Appeals and that the inventory of cases sent to Appeals was not properly monitored. TIGTA recommended that the IRS: (1) require, when possible, the prompt assignment of the respective individual taxpayer account(s) to the same revenue officer working the business trust fund case; (2) clarify and emphasize the use of the NFTL in pyramiding trust fund cases; (3) require the revenue officer proposing the TFRP assessment to make a lien determination after the required notice period and update the Automated Trust Fund Recovery (ATFR) system to notify staff when an NFTL should be filed; (4) consider requiring revenue officers to complete a TFRP completeness checklist prior to sending cases to the Control Point Monitoring Advisory function to forward to Appeals; and (5) determine if it is feasible to systemically notify the Collection function when Appeals has made a determination. To see the complete report, go to www.treasury.gov/tigta/auditrepo rts/2016reports/201630046fr.pdf.

National Taxpayer Advocate Nina E. Olson has released her statutorily mandated mid-year report to Congress that contains extended excerpts from her ongoing Public Forums on Taxpayer Needs and Preferences, presents a review of the 2016 filing season, and identifies the priority issues the Taxpayer Advocate Service (TAS) will address during the upcoming fiscal year. To see the complete IRS News Release and for links to additional information, go to www.irs.gov/pub/irs-news/ir-16- 097.pdf.

Tip of the Day

Forms 1099 . . . You can't argue you didn't report income because you didn't receive a 1099. The IRS will pick up any missing dividend or interest income and simply bill you if the unreported amount is small. A large discrepancy could precipitate and audit. Direct matches of 1099-MISC are more difficult, but you're still responsible for reporting the income. The lack of a 1099 won't let you escape the tax or the penalty, if applicable.

 

July 13, 2016

News

The IRS has issued final and temporary regulations (T.D. 9775) relating to the requirement, added by the Protecting Americans from Tax Hikes Act of 2015 (PATH), that organizations must notify the IRS of their intent to operate under Section 501(c)(4) of the Code. The regulations affect organizations described in Section 501(c)(4) (Section 501(c)(4) organizations) that are organized after December 18, 2015, and certain section 501(c)(4) organizations existing on that date. The text of the temporary regulations serves as the text of the proposed regulations set forth in the related notice of proposed rulemaking (REG-101689-16).

If you pay a disputed tax you can claim a refund. If the IRS denies the claim for refund you can file suit in a U.S. District Court or the Court of Federal Claims. That's what happened in Dean A. Byrne (U.S. Court of Federal Claims). The IRS dismissed the individual's trust fund recovery penalty refund claim. The Court noted the law permits the filing of a claim within two years of the mailing date of the letter disallowing the claim. The Court also noted that an IRS Appeals review of a disallowed claim does not extend the two-year period for filing suit; however, it may be extended by mutual agreement. A second refund claim (or multiple claims) asserting the same grounds as the first does not extend the two-year period. The plaintiff identified procedural deficiencies that allegedly would provide the court with jurisdiction. The Court rejected the plaintiff's arguments and granted the IRS's motion to dismiss.

Tip of the Day

GAAP and non-GAPP . . . Most public (and many smaller companies) prepare financials to outsiders on a GAAP (Generally Accepted Accounting Principles) basis. More than a few companies report on both a GAAP and non-GAPP basis. There can be any number of differences between GAAP and non-GAAP financials, but two common ones are revenue recognition, that is when a sale is counted as revenue, and extraordinary items. GAAP rules aren't a perfect fit for all companies--particularly tech ones. But you should be aware that non-GAAP financials may limit comparisons between companies in an industry and between years or quarters for the same company. Non-GAAP financials are not inherently wrong, but you should read the financials carefully to determine why they are different than GAAP ones.

 

July 12, 2016

News

By a 239-to-185 vote the House has approved an appropriations bill that would provide the IRS with a $10.9- billion budget for fiscal year 2017. That's some $236 million less than the current budget and $1.3 billion below that requested by the administration. The Senate has its own version which is higher than the House version by some $300 million. To further complicate the issue, the President could veto the final bill.

The IRS has again updated the disaster notice for the Houston area. Victims of the severe storms and flooding that took place beginning on April 17, 2016 in parts of Texas may qualify for tax relief from the IRS. The complete list now includes the counties of Anderson, Austin, Cherokee, Colorado, Fayette, Fort Bend, Grimes, Harris, Liberty, Montgomery, Parker, San Jacinto, Smith, Walker, Wharton and Wood. For more information go to Tax Relief for Victims of Severe Storms and Flooding in Texas-Houston Area.

The IRS has issued final regulations (T.D. 9774) that provide a simplified method of accounting for gains and losses on shares in money market funds (MMFs). The final regulations also provide guidance regarding information reporting requirements for shares in MMFs. The final regulations respond to Securities and Exchange Commission (SEC) rules that change the amount for which certain MMF shares are distributed, redeemed, and repurchased. The final regulations affect MMFs and their shareholders.

Tip of the Day

Employee database . . . Most employees have education, skills, and talents other than those normally used in their jobs. For example, your payroll supervisor may also have a commercial driver's license, or your secretary may be fluent in German. An order picker may have had training as a welder, etc. Ask all new job applicants to list other skills and take a survey of existing employees. Put the information in a database that you can search. You never can tell when that skill may be useful or even critical to the business.

 

July 11, 2016

News

Revenue Procedure 2016-39 provides the procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue to change to or from the net asset value (NAV) method of accounting provided in Reg. Sec. 1.446-7 for gain or loss on shares in a money market fund (MMF). This Revenue Procedure modifies Rev. Proc. 2016-29.

Revenue Procedure 2016-41 (IRB 2016-30) sets forth the procedure for an organization to notify the Internal Revenue Service (IRS), consistent with section 506 of the Internal Revenue Code (Code), that it is operating as an organization described in section 501(c)(4) of the Code (a section 501(c)(4) organization).

Tip of the Day

Long-term projects riskier . . . That may be obvious, but many business owners (and investors) often don't factor that into their project analysis. It's much more important than even 15 years ago. Whether it's because of the internet or technology in general, the pace of change has accelerated. One hundred years ago the anticipated life of a building might be 75 years. Today a new building may be repurposed in 15 years--or less. The same is true for machinery, perhaps even more so. There are a number of ways to factor in the risk of obsolescence. The easiest may be to use the "payback period". That is, how long will it take for you to recover your investment. The quicker the payback, the less the obsolescence risk.

 

July 7, 2016

News

In Chris Nguyen (T.C. Memo. 2016-126) the IRS determined the taxpayer kept inadequate records with respect to his pottery business and reconstructed his income using the bank deposits method. (The taxpayer used an person untrained in bookkeeping to keep his records.) The taxpayer was able to show, by the use of loan documents and the testimony of himself and a close friend that some of the deposits were loan proceeds and some were gifts. The Court reduced the reconstructed income by those amounts. The IRS disallowed a number of deductions for lack of documentation and the Court did not allow deductions in excess of the amount allowed by the IRS. The Court noted that some of the disallowed items were subject to the strict substantiation rules of Sec. 274 and the Court declined to apply the Cohan because there was not adequate evidence to substantiate the amounts and business purpose of those expenses.

If a debt is forgiven, generally there is cancellation of indebtedness (COD) income. In Keith A. Newman, Jr. (T.C. Memo. 2016-125) the taxpayer created an overdraft situation on his bank account in 2008. In 2011 the bank sent him a Form 1099-C, Cancellation of Debt, in the amount of $7,875. The taxpayer did not report the amount as income on his return for that year. The year the taxpayer realizes COD income is a question of fact. There is a rebuttable presumption that an identifiable event occurred in a calendar year if, during a testing period (generally 36 months) ending at the close of the year, the creditor has received no payments from the debtor. The Court found the taxpayer had COD income for 2011. However, the Court also found that the taxpayer was insolvent (his liabilities exceeded his assets) immediately before discharge. The amount of income excluded under this exception cannot exceed the amount by which the taxpayer is insolvent. Here the taxpayer had assets valued at $35,500 and debts totaling $50,000, netting to $14,500. The Court noted the taxpayer has the burden of proven his claim of insolvency. The taxpayer did so and the Court held that all of the COD income was excludable.

Tip of the Day

How come I'm not rich? . . . Well, if you're making good money you've got to look on the other side of the equation. Maybe you're spending too much. Sometimes the answer is obvious, you're eating at top restaurants much of the week, you're buying luxury items regularly, etc. Sometimes it's assets that cost much to maintain. That 45-foot boat is expensive to maintain--slip fees, club membership, fuel, maintenance, storage, insurance, etc. How often are you using it? If you use it regularly, it may be worth it to you and your family. Then just take it in stride. But maybe a smaller boat would make everyone just as happy. The same is true for a vacation home. That German luxury car is not only expensive to buy, it's expensive to maintain. And the money to purchase the asset could have been invested. The best approach is use a spreadsheet to make a list of expenses by month. With the exception of seasonal items, it probably won't take more than a couple of months to see a pattern of your spending. That's the biggest first step to cutting expenses.

 

July 6, 2016

News

The IRS has again updated the list of counties in West Virginia where victims of the severe storms, flooding, landslides, and mudslides that took place beginning on June 22, 2016 in parts of West Virginia may qualify for tax relief. The complete list of counties now includes Clay, Fayette, Greenbrier, Jackson, Kanawha, Lincoln, Monroe, Nicholas, Pocahontas, Roane, Summers and Webster.

In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found the IRS needs to adhere more closely to established procedures for assessing its Volunteer Tax Return Preparation Program, although program review results showed that volunteers completed accurate tax returns for taxpayers they served for the 2015 Filing Season. The Volunteer Program plays an important role in achieving the goals of improving taxpayer service and facilitating participation in the tax system. It provides no-cost Federal tax return preparation and electronic filing to underserved segments of the population, including low-income to moderate-income, elderly, disabled, and limited-English-proficient taxpayers. TIGTA completed this follow-up review to determine whether the IRS’s Quality Statistical Sample (QSS) review program provides a sufficient evaluation of the accuracy of tax return preparation at Volunteer Program sites. More than 90,000 volunteers at 12,057 Volunteer Income Tax Assistance and Tax Counseling for the Elderly sites assisted more than 3.6 million taxpayers during the 2015 Filing Season. For the complete report, go to https://www.treasury.gov/tigta/a uditreports/2016reports/201640045fr.pdf.

In Colleen J. O'Connor, Mark C. Tracy (U.S. Court of Appeals, Tenth Circuit) the Court of Appeals upheld the Tax Court in finding that a U.S. citizen, licensed to practice law in Germany, could not deduct the cost of a legal education in order to obtain a license to practice in the U.S. The Court sided with the Tax Court in finding that the cost of obtaining a J.D. degree were incurred in connection with entering a new trade or business. The Court noted that courts have held that a person admitted to practice law in one jurisdiction, but then incurs expenses to become qualified to practice in another jurisdiction is considered to be entering a new trade or business. The Court also upheld the negligence penalty because this area of law is well settled and based on a 45-year-old case with very similar facts. Finally, the Court rejecting the taxpayer's argument that the IRS raised a new theory not included in its notice of deficiency. The Court noted the Tax Court could consider the theory and the taxpayer did not demonstrate surprise and disadvantage.

Tip of the Day

IRS isn't the only tax collector that does audits . . . Even if you manage to avoid an IRS audit, you could get hit with a state audit or adjustment. And, since the states usually send their results to the IRS, if you don't file an amended return, you'll most likely receive a letter from the Service. Businesses often have a higher chance of being audited by a state than the IRS because the states are also looking for unpaid sales and use taxes. And if your sales tax returns are adjusted because of underreporting, state examiners know that's a good indication you probably underreported your gross sales. And some states are particularly aggressive.

 

July 5, 2016

News

The IRS has again updated the disaster notice for Texas. Victims of the severe storms and flooding that took place beginning on May 26, 2016 in parts of Texas may qualify for tax relief from the IRS. The complete list now includes the counties of Austin, Bastrop, Brazoria, Brazos, Burleson, Eastland, Fayette, Fort Bend, Grimes, Harris, Hidalgo, Hood, Kleberg, Lee, Liberty, Montgomery, Palo Pinto, Parker, San Jacinto, Stephens, Travis, Tyler, Waller and Washington.

Notice 2016-42 sets out a proposed Qualified Intermediary ("QI") agreement revising and updating the current agreement, in Rev. Proc. 2014-39, published in July 2014. The revised QI agreement updates the current agreement by providing more detailed procedures regarding how qualified intermediaries satisfy their compliance review obligations and sets out terms and requirements for qualified intermediaries that want to act as qualified derivatives dealers with respect to transactions subject to Section 871(m). The proposed QI agreement, when finalized, would be effective beginning January 1, 2017.

Tip of the Day

State rules differ . . . We've mentioned this more than once. Many states follow the federal rules with regard to many of the rules. Typically a state starts with federal income and modifies it with more or less deductions. But taxes aren't the only area of difference. A number of states have a higher minimum wage than the federal mandate. The same is true for labor rules. One state requires special notification to the employee of their salary or wage rate. Some have different overtime requirements than the U.S. When it comes to special rules, there's even more divergence. Make sure you know the rules in your home state. If you do business in another state, check those too.

 

July 1, 2016

News

The IRS has updated the list of counties in West Virginia where victims of the severe storms, flooding, landslides, and mudslides that took place beginning on June 22, 2016 in parts of West Virginia may qualify for tax relief. The complete list of counties now includes Clay, Fayette, Greenbrier, Kanawha, Monroe, Nicholas, Pocahontas, Roane, Summers and Webster.

The IRS has announced it is performing scheduled systems maintenance that will impact the availability of the e-Services’ Transcript Delivery System. TDS will not be available for Centralized Authorization File (CAF) or Reporting Agent (RAF) users beginning Friday, July 1, 2016, at 12:01 a.m. EDT and ending on Tuesday, July 5, 2016, at 6:00 a.m. EDT.

The Service has reported that Filing Season Statistics for Calendar Year 2016 are now available. This table reports on tax returns processed through May 26, 2016 (processing cycle 21).

The IRS has issued final regulations (T.D. 9773) that require annual country-by-country reporting by certain United States persons that are the ultimate parent entity of a multinational enterprise group. The final regulations affect United States persons that are the ultimate parent entity of a multinational enterprise group that has annual revenue for the preceding annual accounting period of $850,000,000 or more.

Tip of the Day

IRA distributions to charity . . . At the end of last year Congress made permanent the provision that taxpayers at least 70-1/2 can exclude from income annual distributions of up to $100,000 made directly to a charity. While this sounds like a "so what?" there's a big benefit. By keeping the amount out of your gross income you avoid increasing your AGI. That's important because there are a host of negative tax implications associated with increases in AGI. For example, as your AGI increases your AMT exemption is phased out, as is the $25,000 rental loss allowance. Other phaseouts include itemized deductions, personal exemption, medical expenses, itemized deductions, etc. As your AGI increases you become liable for the net investment income tax. Caution. The amount must be made directly by the trustee. Check with your tax or financial advisor on the details.

 

June 30, 2016

News

Revenue Procedure 2016-37 (IRB 2016-29) sets forth the procedures for the determination letter program for individually designed plans and the six- year remedial amendment cycle system for pre-approved plans.

Under the Cohan rule the courts can allow a deduction for business expenses at their discretion, In Emmanuel Ugochukwu Amadi et ux. (T.C. Memo. 2016-120) the Tax Court noted it could not allow a deduction for any of the taxpayer's claimed travel expenses as those fell under the strict recordkeeping requirements of Section 274 and could not be approximated. The Court refused to allow any of the taxpayer's other unsubstantiated expenses because he provided no documentation for any of the expenses. Moreover, the Court did not find his testimony credible. Thus, there was no basis from which to estimate the expenses.

Tip of the Day

Ratio analysis . . . It's a quick and easy way to analyze your financials--days inventory outstanding, collection success on accounts receivable, return on investment, etc. But before you pat yourself on the back because results are better or scream for help, consider if your business has changed materially. For example, you're giving customers longer (or shorter) credit terms, your business used to be 75% product sales and 25% service and now it's flipped to just the opposite. The changes don't make ratio analysis meaningless, you just have to be careful how you interpret the changes. The same is true for many other numbers.

 

June 29, 2016

News

While most of your debts can be discharged in bankruptcy, there are at least two that can't be. One is any liability for Federal trust fund taxes (e.g., withheld taxes) and trust fund recovery penalties. In addition, other federal taxes incurred within three years of declaring bankruptcy are not dischargeable. That's what the District Court held in Dental Care Associates of Spokane Valley, PS, Dr. James G. Hood, DDS, and Karen J. Hood (U.S. District Court, E.D. Washington).

A reportable transaction is one of any number of types of transactions that are likely to be used for tax avoidance. They are supposed to be disclosed on the individual's or businesses' tax return and by any material advisor. Such transactions include ones where the assets of a corporation are sold following the purported sale of the corporation's stock to an intermediary and that these and substantially similar transactions are designated "listed transactions" (Notice 2001-16). In Estate of Richard L. Marshall, Deceased, Patsy L. Marshall, Personal Representative, and Patsy L. Marshall, Transferees, et al. (T.C. Memo. 2016-119) the shareholders wanted to cash out of a C corporation whose assets consisted largely of cash. Since the entity was a C corporation there would be a large tax price to pay if the entity was liquidated. The shareholders decided to enter into a transaction with an intermediary to avoid reduce this liability. The Court examined the transaction and found it had no economic effects other than the creation of a loss. The Court found the taxpayers liable as transferees for the corporation's unpaid Federal tax liability.

Tip of the Day

Cash transactions . . . Banks, financial institutions, and other businesses have to report to the IRS the receipt or withdrawal of cash if the amount is over $10,000. "Structuring" involves the illegal splitting up of cash deposits or withdrawals into smaller amounts in order to avoid a bank's discovery of large cash transactions. The Bank Secrecy Act requires that banks report cash deposits or withdrawals of over $10,000 to the IRS. "Structuring" is also a method employed by those attempting to evade taxes or hide income from the IRS. This is not like an IRS penalty. The monetary penalties can be substantial and jail time is not unheard of.

 

June 28, 2016

News

Victims of the severe storms, flooding, landslides, and mudslides that took place beginning on June 22, 2016 in parts of West Virginia may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of West Virginia. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced that affected taxpayers in West Virginia will receive tax relief. Individuals who reside or have a business in Greenbrier, Kanawha and Nicholas Counties may qualify 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 June 22, and on or before November 15, 2016 have been postponed to November 15, 2016. This includes individual returns on extension to October 17, the September 15 deadline for making quarterly estimated tax payments, the 2015 corporate and partnership returns on extension through September 15, and the August 1 deadlines for quarterly payroll and excise tax returns. In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after June 22 as long as the deposits were made by July 7, 2016. If an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date that falls within the postponement period, the taxpayer should call the telephone number on the notice to have the IRS abate the penalty. The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866-562-5227 to request this tax relief.

Section 274(h)(1) disallows deductions under Section 162 (business expenses) for expenses allocable to attendance of an individual at a convention, seminar, or similar meeting held outside the North American area unless the taxpayer demonstrates that the meeting is directly related to the active conduct of his or her trade or business and the location of the convention satisfies specified standards of reasonableness. Rev. Rul. 2016 -16 (IRB 2016-16) updates the definition of the North American area.

The Electronic Tax Administration Advisory Committee (ETAAC) was formed and authorized under the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98). ETAAC's primary charter is to provide input to the Internal Revenue Service (IRS) on the development and implementation of the IRS strategic plan for electronic tax administration. The ETAAC has just released its Annual Report to Congress (IRS Publication 3415).

Tip of the Day

Got a pool? . . . A dog? You might want to check the liability portion of your homeowner's policy. A new pool can be a good reason to up your coverage. A new dog could also be an issue. Rent out some stalls in your barn? Another reason to check. You don't want to have an accident and find out you're not or inadequately covered. In some cases the insurance company may want to inspect the pool or other property improvement. You may get a lower rate if you take certain precautions such as a fence, alarm, etc. for the pool (which may be required by town code).

 

June 27, 2016

News

The House has released a proposal for changes in the tax law. Some of the proposals include a cut in the corporate tax rate to 20%; three rates for individuals--12%, 25%, and 33%; and lowered rates on capital gains and dividends. Business income from S corporations, partnerships, or LLCs would be taxed at no more than 25%. Many deductions and credits would be eliminated as well as the alternative minimum tax (AMT). The IRS would be reduced in size and most individuals would be able to file on a postcard. While that's the general approach, it's far to early to speculate on the eventual outcome--which, of course, will depend on the upcoming elections.

The IRS has updated the disaster notice for Texas. Victims of the severe storms and flooding that took place beginning on May 26, 2016 in parts of Texas may qualify for tax relief from the IRS. The complete list now includes the counties of Austin, Bastrop, Brazoria, Brazos, Burleson, Eastland, Fort Bend, Grimes, Hidalgo, Hood, Lee, Liberty, Montgomery, San Jacinto, Stephens, Travis, Tyler, Waller and Washington.

The IRS has announced that as a precautionary step to protect taxpayers, that the electronic filing PIN tool is no longer available on IRS.gov or by toll-free phone following additional questionable activity.

Tip of the Day

Brexit vote . . . For most businesses and investors Britain's exit from the EU is not good news, but it's far from the financial crisis of 2008. That trip to Britain will cost you less; but we'll probably see less Brits visiting the U.S. The stock market plunged on Friday, but part of the reason was the unexpected outcome of the vote. It's likely at least the U.S. market will stabilize quickly. If it doesn't, it'll most likely be due to other factors. If you're in the market for the mid to long term--and that's the way you should look at stocks--this is not something to be worried about. That doesn't mean you shouldn't talk to your financial advisor about the risk to your portfolio if you hold individual stocks or have significant holdings in certain international funds. Some rebalancing may be appropriate. While this may hold down certain segments of the U.S. economy, there should be no significant effects. And offsetting any drag is that any near-term increase in interest rates by the Fed just got less likely.

 

June 24, 2016

News

The United States generally taxes its citizens and resident aliens on their worldwide income. Some taxpayers use offshore bank/financial accounts to hide assets and income outside the United States in an effort to evade their Federal tax obligations. Taxpayers who intentionally fail to report income earned on offshore accounts or who neglect to disclose foreign assets as required by law face significant penalties and possible criminal prosecution if discovered by the IRS. While giving noncompliant taxpayers the opportunity to resolve their potential tax delinquencies through the Offshore Voluntary Disclosure Program (OVDP), it is important for the IRS to ensure that these taxpayers actually become compliant with their tax obligations. The Treasury Inspector General for Tax Administration (TIGTA) performed an audit to assess how well the IRS is managing the OVDP and its efforts to improve taxpayer compliance and hold taxpayers who fail to report their offshore financial activities on their tax returns and Reports of Foreign Bank and Financial Accounts (FBAR) accountable. TIGTA found the IRS needs to improve its efforts to address the noncompliance of taxpayers who are denied access to or withdraw from the OVDP. TIGTA reviewed a stratified random sample of 100 taxpayers from a population of 3,182 OVDP requests that were either denied or withdrawn from the OVDP. Although 29 of these 100 taxpayers should have been potentially subject to FBAR penalties, the IRS did not initiate any compliance actions. Projecting the sample results to the population of denied or withdrawn requests, the IRS did not assess approximately $21.6 million in delinquent FBAR penalties. TIGTA also identified internal control weaknesses that led to delayed or incorrect processing of OVDP requests through poor communication among IRS functions involved in the OVDP. TIGTA recommended that the IRS: 1) review all denied or withdrawn offshore voluntary disclosure requests identified in this report for potential FBAR penalty assessments and criminal investigation; 2) develop procedures for reviewing denied and withdrawn cases for further compliance actions; 3) centrally track and control OVDP requests; 4) establish one mailing address for taxpayer correspondence; 5) ensure that employees adhere to timeliness guidelines throughout the entire OVDP process; and 6) classify OVDP certifications so that some can be worked by lower-graded revenue agents. To see the complete report, go to www.treas.gov/tigta/auditrepor ts/2016reports/201630030fr.pdf.

The statute of limitations remains open if you file a fraudulent tax return. In the case of John Finnegan et ux. (T.C. Memo. 2016-118) it was the fraud of the tax preparer that kept the statute open. The Court sided with the IRS in finding the taxpayers liable for tax deficiencies for 10 years. The court also found the taxpayers liable for the negligence penalty, noting that they did not review the returns or the question the entries, especially in light of the size of the refunds.

In Robert J. Squeri, et al. (T.C. Memo. 2016-116) the taxpayers' S corporation used the cash method of accounting and reported income based when the receipts were deposited in the bank. The IRS contended that under the duty of consistency, the taxpayers should be required to include on their 2009 returns amounts of 2008 income, as they originally reported. The taxpayers contended that gross receipts of $1,634,720 should be excluded from their 2009 income because they were actually received in 2008 and that respondent does not have authority to make adjustments for the taxpayers' 2008 tax year. The taxpayers further contended, and the IRS did not dispute, that the Tax Court did not have jurisdiction to make adjustments for their 2008 tax year and that the period of limitations for tax year 2008 was closed. The Court noted it has held that income properly accruable for one year is not deemed income for some other year, even if it was not reported for the proper year. Because the corporation was a cash method taxpayer, all of the checks received in 2008 should have been included in the corporation's gross income for that year. The duty of consistency, or quasi-estoppel, is an equitable doctrine which prevents a taxpayer from benefiting in a later year from an error or omission in an earlier year which cannot be corrected because the limitations period for the earlier year has expired. The Court noted that for the duty of consistency to apply, three requirements must be met. The Court found all three applied and concluded that the duty of consistency required that the $1,634,720 in gross receipts that the corporation received in 2008 but reported for 2009 be recognized as income for tax year 2009.

Tip of the Day

Divide and conquer . . . Ever have one of those projects that's so large or overwhelming you simply avoid tackling it? One approach to dealing with the problem is breaking it down into smaller pieces that you can deal with and complete. The completion of part of the project can provide enough satisfaction and confidence to be an incentive to continue on. Breaking down the project may also allow you to get help where that wouldn't be possible otherwise. While this sounds obvious, many times it's not to the person facing the job.

 

June 23, 2016

News

The House has passed a bill (HR 5447) that would permit small employers to offer stand-alone HRAs to their employees-referred to as a ‘qualified small employer HRA.’ This bill would also permit the use of the qualified small employer HRAs to purchase coverage in the ACA's public marketplaces.

The IRS has issued proposed regulations (REG-123854-12) that would clarify or modify certain specific provisions of the final regulations under Section 409A (T.D. 9321). This document also withdraws a specific provision of the notice of proposed rulemaking (REG-148326-05) published in the Federal Register on December 8, 2008 regarding the calculation of amounts includible in income under Section 409A(a)(1) and replaces that provision with revised proposed regulations. These proposed regulations would affect participants, beneficiaries, sponsors, and administrators of nonqualified deferred compensation plans.

The IRS has issued regulations (REG-147196-07) prescribing rules under Section 457 for the taxation of compensation deferred under plans established and maintained by State or local governments or other tax exempt organizations. These proposed regulations include rules for determining when amounts deferred under these plans are includible in income, the amounts that are includible in income, and the types of plans that are not subject to these rules. The proposed regulations would affect participants, beneficiaries, sponsors, and administrators of certain plans sponsored by State or local governments or tax- exempt organizations that provide for a deferral of compensation.

Tip of the Day

Rental expenses on co-owned property . . . You and your brother-in-law own a 50% interest in a two-family house that you rent. Your brother-in-law paid his half of the mortgage, but only $250 toward the $2,750 of insurance, maintenance, and other expenses. You paid the remaining $2,500. You can only deduct $1,375, your 50% share of the total. You should seek reimbursement for the other $1,125 from your brother-in-law.

 

June 22, 2016

News

The IRS has announced that all empowerment zone designations remain in effect through the end of 2016. Empowerment Zones are certain urban and rural areas where employers and other taxpayers qualify for special tax incentives. The announcement primarily affects businesses that would benefit from claiming the tax incentives for empowerment zones on their 2015 returns, either original or amended, and 2016 returns. The IRS issued Notice 2016-28 in March to address the relevant provision of the Protecting Americans from Tax Hikes Act of 2015. The notice provided that any nomination for an empowerment zone in effect on Dec. 31, 2014, will have a new termination date of Dec. 31, 2016, unless the governing state or municipality declined the extension in a notification to the IRS. The deadline for notification was May 24, 2016, and no state or municipality contacted the IRS to decline the extension. Therefore, all empowerment zone designations in effect on Dec. 31, 2014, remain in effect through Dec. 31, 2016.

Valuations of businesses and assets for estate purposes can be tricky. In Estate of Natle B. Giustina, Deceased, Laraway Michael Giustina, Executor (T.C. Memo. 2016-114) it was particularly so because the estate held a 41% interest in the partnership. The partnership was a going business with 12 to 15 employees that owned and cut timber on some 49,000 acres. The Tax Court first decided the case in T.C. Memo. 2011-141, giving weight to the value of the assets and to the ongoing business. The partnership was valued based on the cashflow, discounted to reflect risk and other factors. The case was appealed to the Ninth Circuit which reversed and remanded the case to the Tax Court. The Court of Appeals held that the value of the assets should not be considered, rather, to assume that the business would continue. The Tax Court revalued the estate property under the sole assumption the partnership would continue to carry on the business. Thus, the Tax Court revalued the property using the discounted cash flow method. In addition, the Court reduced the partnership-specific risk premium from 3.5% to 1.75%.

Tip of the Day

Make your offer upfront . . . If you're making an offer--20% off, free shipping, buy one-get one free, etc.--put the offer as early in your ad as you possible. Many prospects are no longer taking the time to read through a long ad, multi-page direct mail piece, etc. If the offer is a good one, it should grab their attention.

 

June 21, 2016

News

Fines and penalties are generally not deductible. That speeding ticket paid by your company isn't deductible, In Joseph P. Nacchio, Anne M. Esker (U.S. Court of Appeals, Federal Circuit) the taxpayer had been a CEO who engaged in insider trading. The taxpayer had reported the gain on his tax return and paid the taxes on the gain. Following his conviction on insider trading he had to forfeit his gains to the government. Trouble is, he had already paid the taxes. Following other cases, the Appeals Court ruled that the forfeiture was not deductible because it was punitive.

Splitting a business in a divorce proceeding can be particularly difficult. That's even more true if both parties were active in the business. In Joseph R. Belot (T.C. Memo. 2016-113) the taxpayer and his ex-wife had formed and jointly owned three businesses during their marriage. They were divorced in 2007. Pursuant to the settlement agreement entered into at the time of the divorce, they agreed to own and operate the businesses as equal partners. When it became clear that they were unable to operate the businesses together to their mutual satisfaction, the ex-wife filed a lawsuit against petitioner to gain full control over the businesses. In 2008, 16 months after the initial settlement and divorce, they entered into a settlement agreement under which the taxpayer transferred his interests in the businesses to his ex-wife in exchange for payment. The Court held the division of property held during the marriage accomplished by the 2008 settlement agreement qualifies for nonrecognition treatment under Sec. 1041.

Tip of the Day

FBAR due . . . The IRS is reminding taxpayers who have one or more bank or financial accounts located outside the United States, or signature authority over such accounts that they may need to file an FBAR by Thursday, June 30. By law, many U.S. taxpayers with foreign accounts exceeding certain thresholds must file Form 114, Report of Foreign Bank and Financial Accounts, (FBAR). It is filed electronically with the Treasury Department's Financial Crimes Enforcement Network (FinCen). In general, the filing requirement applies to anyone who had an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-Filing System website. If you exceed a higher threshold (generally beginning at $50,000) you may need to file Form 8938. Check the instructions.

 

June 20, 2016

News

Notice 2016-40 (IRB 2016-27) provides additional transition relief for employers claiming the Work Opportunity Tax Credit (WOTC) under Secs. 51 and 3111(e) of the Code, as extended and amended by the Protecting Americans from Tax Hikes Act of 2015. Specifically, this notice expands and extends by three months the transition relief provided in Notice 2016-22 (2016-13 IRB 488) for meeting the 28-day deadline in Sec. 51(d)(13)(A)(ii) of the Code. This notice applies to employers that (1) hire members of targeted groups (other than qualified long-term unemployment recipients) on or after January 1, 2015, and on or before August 31, 2016, or (2) hire members of the new targeted group of qualified long-term unemployment recipients on or after January 1, 2016, and on or before August 31, 2016. This notice does not otherwise modify or add to the guidance provided under Notice 2016-22.

It doesn't look like the IRS will be getting additional funding in the upcoming fiscal year (FY 2017). A Senate bill has funding at the same level as the current year. The House bill has an even lower level.

Tip of the Day

Rolling over an IRA? . . . If you receive property in an IRA distribution (e.g., stock, real estate, etc.), you can roll over the same property into another IRA or sell the property out of the first IRA and contribute cash to the second IRA. You cannot keep the property and substitute your own funds for property you received. If you sell the property in the IRA and roll over the entire proceeds, no gain or loss is recognized. For example, you purchased Madison Inc. in your IRA. You receive 500 shares which you sell to purchase a vintage car. The deal falls through and within the 60 days you contribute the $50,000 you received from selling the shares back to the original IRA. Because you didn't roll over the same property, the distribution is taxable and the early distribution can apply. To add insult to injury, the contribution of the $50,000 is an excess contribution subject to a 6% penalty. IRAs can be trickier than you might imagine. Check with your tax advisor to avoid mistakes.

 

June 17, 2016

News

The IRS has announced that the publicly available data on electronically filed Forms 990 will now be available for the first time in a machine-readable format through Amazon Web Services (AWS). Previously, this Form 990 data was only available in image files. This data, which includes filings from 2011 to the present, will now be available as an XML file that is downloadable from the web via AWS. The data includes Form 990, Form 990-EZ and Form 990-PF and related schedules with the exception of certain donor information. The IRS also redacts certain personally identifiable tax-identification numbers to prevent the data’s misuse. Data from Form 990-N (e- postcard) used by certain smaller exempt organizations is not available with this data, but it can be accessed through IRS.gov. Over 60 percent of all Form 990 returns are electronically filed with the IRS. Both paper and electronically filed 990 returns will continue to have image files made and these files will continue to be available by DVD.

The IRS has released guidelines on how wrongfully-incarcerated taxpayers can take advantage of the new retroactive exclusion from income for any civil damages, restitution or other monetary award received in connection with their incarceration. The guidelines are contained in a set of frequently-asked questions, posted on IRS.gov. Taxpayers who in the past received payments related to their wrongful incarceration and included those payments in taxable income can now file a refund claim for any income tax paid. To do this, eligible taxpayers must file Form 1040X for each year these payments were reported and write "Incarceration Exclusion PATH Act" at the top of each Form 1040X they submit. The new wrongful-incarceration exclusion was included in the Protecting Americans from Tax Hikes (PATH) Act enacted last December. This legislation provides a special one- year window during which an eligible wrongfully-incarcerated individual can file a refund claim based on any civil damages, restitution or other monetary award received and reported in a prior tax year, even if the normal statute of limitations had already expired for that year. Without this special provision, refund claims for tax-years 2012 and earlier would be barred in most cases. The deadline for mailing a claim under this special rule is Dec. 19, 2016.

Tip of the Day

Noncompete agreements . . . They're more common than ever. They're vital when you're buying a business, especially a professional one where the sellers are well known. They're also used to prevent employees or independent contractors from appropriating customers or trade secrets. But there's a limit on how restrictive the agreements can be. You can't prevent an employee or contractor from earning a living in the same field. Geographic restrictions can be used, but they can't be overly broad. The first time out you should definitely consider using an attorney qualified in the area. You don't want to use an agreement that won't hold up in court. That's can be as bad as having no agreement at all. And keep in mind that some states have their own restrictions on what can be included.

 

June 16, 2016

News

Victims of the severe storms and flooding that took place beginning on May 26, 2016 in parts of Texas may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of Texas. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Texas will receive tax relief. Individuals who reside or have a business in Austin, Brazoria, Brazos, Fort Bend, Grimes, Hidalgo, Hood, Montgomery, San Jacinto, Travis, Waller and Washington Counties may qualify 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 May 26, and on or before October 17, 2016 have been postponed to October 17, 2016. This includes the June 15 and September 15 deadlines for making quarterly estimated tax payments, the 2015 corporate and partnership returns on extension through September 15, and the August 1 deadlines for quarterly payroll and excise tax returns. In addition, the IRS is waiving the failure- to-deposit penalties for employment and excise tax deposits due on or after May 26 as long as the deposits were made by June 10, 2016.

You don't have to have an actual distribution from an annuity or life insurance policy to have taxable income. In Kenneth L. Mallory et ux. (T.C. Memo. 2016-110) the taxpayer had taken loans out on a life insurance policy. When the debt exceeded the cash value of the policy and the taxpayer did not make a minimum required payment, the company terminated the policy. The Tax Court held on the extinguishment of the policy the taxpayers had a constructive distribution of the cash value of the policy. The taxpayers had income to the extent the gross distribution exceed the insurance premiums. The Court also found the taxpayers liable for the accuracy-related penalty because they received a Form 1099-R showing the taxable amount and the only tax advisor they paid for advice indicated the amount was taxable.

Tip of the Day

Alternate, residuary, and life estate beneficiaries . . . Even if you're having a lawyer draft your will (and, unless you have a very simple one we suggest you get professional help) you've got to know your options. You may decide to leave that 1969 Camaro to your brother, but what if he predeceases you? You may not want his reckless son to get it. You can specify someone else as an alternate beneficiary. That person will receive the property based on conditions that you can spell out in the will. Residuary beneficiaries receive property that hasn't been expressly left to other beneficiaries. Naming one or more residuary beneficiaries is important since it's unlikely your will will detail all your property. You should also name an alternate residuary beneficiary to anticipate the death of a primary one. A life estate beneficiary receives an interest in the property only for as long as he lives. On his death the property passes to a final beneficiary. For example, you leave that '69 Camaro to your brother to enjoy while he's alive, but on his death the car goes to your son. If your brother dies before you do, the property passes directly to your son.

 

June 15, 2016

News

The IRS is reminding taxpayers that effective in 2017, a new law requires the IRS to hold all Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) refunds until Feb. 15. This is likely to affect some returns submitted early in the tax filing season. The IRS encourages tax professionals to begin preparing for this change now. Planning is underway for a wider communication effort this summer and fall to alert taxpayers.

The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether the IRS’s controls over the auditing of amended individual tax returns with claims ensure that claims are properly evaluated and accurately processed and are effective in preventing the inappropriate issuance of tax refunds or allowance of tax abatements. TIGTA found IRS controls over the examination of amended individual tax returns with claims did not always ensure that claims were properly evaluated and were not always effective in preventing the potentially inappropriate issuance of tax refunds and allowance of tax abatements. TIGTA reviewed a statistical sample of 84 Fiscal Year 2013 closed surveys and audits of amended individual returns with claims for refunds or abatements of taxes and found that 31 claims were not appropriately substantiated and/or had large, unusual, or questionable items on the tax return that were not adequately considered and investigated. TIGTA’s evaluation indicated that a combination of factors caused these problems and that actions can be taken to better ensure that claims are substantiated (appropriate supporting documentation is obtained) and that issues on the amended returns are recognized, considered, and properly investigated. For the full report go to www.treasury.gov/tigta/auditrepo rts/2016reports/201630032fr.pdf.

Tip of the Day

Retirement planning . . . Many individuals and more than a few advisors) think that they'll be in a lower tax bracket in retirement. Generally, that's probably true. It's more likely to be true if you've got a regular job. But many small business owners break the mold. They may be selling out to retire and sitting on a sizable payout. Some will sell rental properties they've owned for years. Chances are they were frugal during the years they owned the business or investment property and saved for a rainy day. Some individuals will work far past normal retirement. Some will inherit substantial amounts. The lesson is not to believe the general rule. Analyze your situation and plan accordingly.

 


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


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