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March 19, 2018
NewsForeclosures and short sales of homes are not that unusual. This full Tax Court case (Karl F. Simonsen et ux., 150 T.C. No. 8) provides an example of how to handle one situation. The taxpayerts bought their home with nonrecourse debt. Five years later they moved out and converted their home to a rental property. Not long after, they completed a short sale of the rental property, and the bank discharged the debt. The taxpayers claimed that the short sale and consequent debt forgiveness were two separate transactions, so they reported a substantial deductible loss and excludable cancellation-of-indebtedness (COI) income. The IRS determined that it was one sale or exchange, there was no COI income, and there was no loss. The IRS also determined the taxpayers were liable for an accuracy-related penalty. The Court held the short sale and debt forgiveness were part of one sale or exchange, and the amount realized included the discharged nonrecourse debt. There was no COI income. The Court also held the amount realized was greater than the taxpayers' loss basis in the property under Reg. Sec. 1.165-9(b)(2), but less than their gain basis in the property under that regulation. When property is sold for an amount between those bases, there is neither a gain nor a loss on the sale. Finally, the Court found the were not liable for the accuracy-related penalty.
Tip of the DayReporting home sale . . . If you sold your principal residence you may be able to exclude the gain if you used the home as your principal residence for two of the last five years. (There are several exceptions to the rule.) If you have to report the gain, use Form 8949. Check box C for a short-term gain; box F for a long-term gain. If you received a 1099-S but actually have a loss on the sale, check the instructions for Schedule D. You should also check the instructions for Form 8949. Most tax software programs have a home sale worksheet. That will make your work easier and help you avoid errors. You'll have to account for any depreciation if you used the property in part for business or as a rental.
March 16, 2018
NewsRevenue Procedure 2018-19 (IRB 2018-14) modifies Rev. Proc. 2018-4. Specifically, this revenue procedure changes one user fee set forth in Appendix A of Rev. Proc. 2018-4, Schedule of User Fees, with respect to applications on Form 5310, Application for Determination for Terminating Plan. That user fee is reduced from $3,000 to $2,300, effective January 2, 2018. Applicants who paid the $3,000 user fee listed in Rev. Proc. 2018-4 will receive a refund of $700.
If you're a real estate professional, you can deduct losses from rental properties without the usual limitations. But showing you qualify for that status can be difficult. The first requirement is that you work on real estate activities at least 750 hours a year. In Farrokh E. Pourmirzaie, et ux. (T.C. Memo. 2018-26) the taxpayers had several rental houses and a four-unit apartment building. The Court found the taxpayer did not keep contemporaneous records of the time spent in the activity. The offered calendars prepared from memory and their testimony did not advance their position. Entries in the calendar were not specific, but vague such as "paperwork and bill paying", "Home Depot". The Court also noted that despite a claimed considerable amount of time spent at the four-unit property, they had no office and stored no tools there. Finally, the Court cited time spent working on one of their West Coast properties while a bank statement showed them making food and other purchases in New York, Florida, and Pennsylvania. The Court found the taxpayers were not real estate professionals and could not deduct the passive activity loses.
Tip of the DayApril 1 deadline for required minimum distributions . . . If you turned 70-1/2 in 2017 most likely need to begin taking required minimum distributions (RMD) from your IRAs and pension plans. This deadline is a "grace period" for first-year recipients. Subsequent distributions must be taken by December 31. If you hit the magic number in 2017 and waited till now, you'll, have to take two distributions this year--one for 2017 and another for 2018. Your 2017 required minimum distribution is based on the balance in your account as of December 31, 2016. Your first distribution is most likely based on a period of 26.5 years or 0.037736 times the balance at the end of the prior year. That factor changes ever year as you get older. If your spouse is more than 10 years younger, a different factor applies. There's a stiff penalty for failing to take the RMD, so don't neglect this deadline. To be on the safe side, talk to your tax adviser or financial institution.
March 15, 2018
NewsThe IRS has announced (IR-2018-52) it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes. The IRS reported that since 2009 more than 56,000 taxpayers have used one of the programs to comply voluntarily, paying a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations. The number of disclosures has dropped dramatically from the 2011 high of 18,000. The IRS noted that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations. A separate program has helped about 65,000 additional taxpayers. Information on options available to U.S. taxpayers with undisclosed foreign financial assets is available at IRS.gov.
If you file your returns as married, joint you're resposible for the entire tax if your spouse doesn't pay. You may be able to avoid joint liability if you qualify for innocent spouse relief. In Jeffrey Wilfred Heedram (T.C. Memo. 2018-25) the Tax Court granted the taxpayer innocent spouse relief with respect to his wife's outstanding tax liability. The Court noted the taxpayer met the requirements for equitable relief. He continued to live with his ex-spouse only for financial reasons and was no longer living with her at the time of the trial. And, while the taxpayer knew about the couple's financial difficulties, he reasonably believed his spouse would pay an outstanding liability. The Court also noted the taxpayer was not involved in the family finances and was unsophisticated about them. The taxpayer claimed economic hardship and so testified, but provided no proof. The Court considered this factor neutral.
Tip of the DayS corporation and partnership returns due . . . That includes LLCs filed as partnerships. March 15th is the last day. If you're not ready to file, there's still time to request a six-month extension of time. In most cases no money is due with your federal return, but there may be amounts due on state returns. There's a penalty for failure to file the return on time and another penalty for failure to furnish K-1s to the shareholders or partners and that's a per K-1 penalty.
March 14, 2018
NewsThe IRS has provided additional information (IR-2018-53) to help taxpayers meet their filing and payment requirements for the Section 965 transition tax. The Tax Cuts and Jobs Act requires various taxpayers that have untaxed foreign earnings and profits to pay a tax as if those earnings and profits had been repatriated to the? U.S. The new law outlines details on the tax rates, and certain taxpayers may elect to pay the transition tax over eight years. As the March 15 and April 17 deadlines approach for various filers, the IRS released information today in a question and answer format. The Frequently Asked Questions address basic information ?for taxpayers affected by Section 965. This includes how to report section 965 income and how to report and pay the associated tax liability. The information on IRS.gov also provides details on several elections under section 965 that taxpayers can make. The IRS previously released three pieces of guidance related to Section 965 issues including Notices 2018-07 and 2018-13 and Revenue Procedure 2018-17?. The IRS will provide additional guidance and other information on IRS.gov in the weeks ahead.
The first step in going to court is going to the right one. In Cedric Ray Allen (T.C. Memo. 2018-24) the Tax Court held it did not have jurisdiction. It noted the IRS had not issued a notice of deficiency or determination. The taxpayer's claim for a refund was also misplaced. The Tax Court does not have jurisdiction over refund claims.
Tip of the Day1040 instructions changed . . . Because of changes by the Bipartisan Budget Act passed after the end of the year which extended certain tax benefits, the IRS has reissued the instructions for Form 1040. The tax benefits include:
March 13, 2018
NewsThe IRS is warning taxpayers against scam groups masquerading as charitable organizations, luring people to make donations to groups or causes that don't actually qualify for a tax deduction. These ‘fake’ charities attempt to attract donations from unsuspecting contributors, using a charitable reason and a tax deduction as bait for taxpayers. IR-2018-47 provides a number of tips on how to avoid such scams. Not only may your contribution be going to a scammer, they may also solicit personal information that can result in identity theft. You should be particularly careful of "pop-up" organizations following natural diasasters. You should also be careful of contributions to crowd funded sites. In the recent Florida school shooting a bogus website soliciting donations for one of the victims duped a number of people, including friends of victim. The IRS has a tool that allows you to search their database of exempt organizations. Go to EO Select Check.
Tip of the DayW-2 verification code . . . What is it? It's a code on many W-2s to provide additional security. For filing season 2018, the IRS has expanded the pilot to verify the authenticity of Form W-2 data. This initiative is one in a series of steps implemented by the Security Summit to combat tax-related identity theft and refund fraud. This year the verification code will appear on some 60 million 2017 Forms W-2. A W-2 without a verification code may include a blank box 9 or no box 9 at all. The verification code will be displayed in four groups of four alphanumeric characters, separated by hyphens. For example: XXXX-XXXX-XXXX-XXXX. The only valid characters are the letters A-F and the numerals 0-9. Taxpayers and tax professionals are urged to enter the verification code when prompted by software, as it can speed the processing of the return and the issuance of the refund. However, omitted and incorrect verification codes will not delay the processing of a tax return. The verification code only appears on copies B and C of your copies of the W-2.
March 12, 2018
NewsIn IR-2018-44 the IRS reported that unclaimed federal income tax refunds totaling about $1.1 billion may be waiting for an estimated 1 million taxpayers who did not file a 2014 federal income tax return. The median refund is $847. In order to collect, taxpayers must file their 2014 return by April 17. The IRS also advised that if you didn't file a return for 2015 and 2016 your 2014 check refund may be held until you do. In addition, the refund will be applied to any amounts still owed to the IRS or a state tax agency and may be used to offset unpaid child support or past due federal debts, such as student loans. (Two points. First, those other liabilities, such as past due IRS debts, won't go away if you don't file your 2014 return. Second, don't wait too much longer if you need professional help to file. Tax preparers get busier every day and may give priority to other clients.)
In Celia Mazzei, Angelo L. Mazzei and Mary E. Mazzei (150 T.C. No. 7) the taxpayers entered into a prepackaged plan to save taxes by routing funds from their family business through a Bermuda-based foreign sales corporation (FSC) and then into Roth IRAs created for this purpose. As part of the plan, in 1998 each taxpayer directly contributed $2,000, the applicable contribution limit, to his or her newly created Roth IRA, which then paid a nominal amount for stock in the FSC. From 1998 to 2002 the taxpayers routed payments totaling $533,057 from their family business, through the FSC, and into their Roth IRAs. The taxpayers contended that the Court should respect the form of these transactions as payments from the taxpayers' business to the FSC, followed by payments of dividends by the FSC to the Roth IRAs. The IRS contended that the payments from the FSC to the taxpayers' Roth IRAs represented, in substance, contributions from the taxpayers to their Roth IRAs. The IRS contended that because these payments exceeded the taxpayers' contribution limits for their Roth IRAs, they are liable for excise taxes under Sec. 4973 (tax on excess contributions). The Tax Court held that, on the facts presented, the taxpayers and not their Roth IRAs were the owners, for Federal tax purposes, of the FSC stock; in substance the FSC dividends were income to the taxpayers, who contributed the funds to their Roth IRAs. The Tax Court also held that pursuant to Sec. 4973 the taxpayers were liable for excise taxes on excess contributions to their Roth IRAs.
Tip of the DayHelp your tax preparer . . . More than a few taxpayers go to their tax preparer with a pile of unorganized papers and then complain about the bill. Many preparers base their fees on a formula (e.g., a certain amount per rental property, per form, etc.) but don't ignore the time involved. Most preparers who have been doing taxes for a while realize many individuals don't understand all the paperwork they receive, but virtually anyone can put the material in some order. Here are some tips.
March 9, 2018
NewsNotice 2018-21 provides rules claimants must follow to make a one-time claim for payment of the credits and payments allowable under Secs. 6426(c), 6426(d), and 6427(e) for biodiesel (including renewable diesel) mixtures and alternative fuels sold or used during calendar year 2017. These rules are prescribed under secs. 40406, 40407, and 40415, of the Bipartisan Budget Act of 2018. This notice also provides instructions for how a claimant may offset its Sec. 4081 liability with the Sec. 6426(e) alternative fuel mixture credit for 2017, as well as instructions for how a claimant may make certain income tax claims relating to biodiesel, second generation biofuel, and alternative fuel. In addition, this notice provides a temporary modified safe harbor for semimonthly deposits of the oil spill liability tax imposed by Sec. 4611, which was reinstated effective March 1, 2018, by the Act.
Recordkeeping is important for parties on both sides of the fence. The IRS is required to keep records of phone calls, meetings, mailings, etc. Taxpayers have a right to challenge both a tax deficiency assessed by the IRS and to address the payment of the deficiency. The two procedures are separate. The second procedure is called a hearing before levy or more commonly a collection due process hearing. In this hearing the taxpayer normally can't challenge his liability because he had a prior opportunity. An Appeals officer is supposed to verify the taxpayer had an opportunity to challenge the deficiency. However, in Rodney P. Walker (T.C. Memo. 2018-22) the taxpayer argued he did not have a chance to challenge the liability. The Court found the IRS's record of mailing, the mail logs, contained deficiencies and held that it could not decide whether the taxpayer was precluded from challenging his underlying liabilities for two of the years at issued because the record was inadequate for the Court to determine whether, in concluding that the taxpayer had had a prior opportunity, either settlement officer abused his discretion. The Court remanded for clarification or other appropriate action.
Tip of the DayChange your name? . . . Your name and social security number on your tax return have to match. If you change your name because of marriage, divorce should report the name change to the Social Security Administration (SSA). And don't forget to notify the SSA if your child's last name changes.
March 8, 2018
NewsThe IRS has announced (Rev. Rul. 2018-07) that interest rates on under- and overpayments increased for the calendar quarter beginning April 1, 2018. The rates will be:
The rates are one percentage point higher than the prior quarter. The rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.
If you don't keep good records or don't report all your income, the IRS can reconstruct your income using one of several methods. In Raghvendra Singh, Kiran Rawat (U.S. Court of Appeals, Ninth Circuit) the IRS used the bank deposits method to reconstruct the taxpayers' income. The Court held the Tax Court did not abuse its discretion in admitting Singh and Rawat's bank records and the summaries for said bank records, noting other courts have held bank records admissible under hearsay exception due to their “circumstantial guarantees of trustworthiness”. The Appeals Court also upheld the Tax Court's holding that the statute of limitations did not bar the IRS from assessing liabilities noting there is no statute of limitations in the case of false or fraudulent returns.
Tip of the DayMore than one sole proprietorship? . . . If you operate more than one sole proprietorship, you've got to file separate Schedule C's for each one. That's not always easy to ascertain. If you're operating an auto body shop out of the same location as your auto repair and the operations and recordkeeping are integrated, that's probably a single business. But if you have an auto repair business and also own a hardware store, you should be filing two Schedule C's.
March 7, 2018
NewsIn Alice Perkins and Fredrick Perkins (160 T.C. No. 6) the taxpayers claimed that income they earned from selling gravel mined from Seneca Nation land was exempt from tax under the General Allotment Act, the Canandaigua Treaty, and the Treaty of 1842 because the income was derived from Indian land. The IRS adjusted the taxpayers' income to include the gravel income. The IRS also determined that the taxpayers were liable for additions to tax and penalties under Sections 6651(a)(1) and 6662(a). The Tax Court held that the income earned from selling gravel mined from Seneca Nation land is taxable income that is not excluded by either treaty or by the General Allotment Act. The Court also held the taxpayers were liable for additions to tax under Section 6651(a)(1) (failure to timely file) but they may not be liable for penalties under Sec. 6662(a). The Court noted the Second Circuit recently held that Sec. 6751(b)(1) requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency.
Starting in April 2018, Medicare will begin mailing new cards to everyone who gets Medicare benefits to help protect your identity. Medicare is removing Social Security numbers from Medicare cards replacing it on the new cards with a unique Medicare Number. This will happen automatically. You don’t need to do anything to get the new card. Medicare will mail your card, at no cost, to the address you have on file with the Social Security Administration. If you need to update your official mailing address, visit your online Social Security account or call 1-800-772-1213. When you get your new card, your Medicare coverage and benefits will stay the same.
Tip of the DayBought bonds at a discount? . . . In general, a capital gain from the disposition of a market discount bond is treated as interest income to the extent of accrued market discount as of the date of disposition. You can find more information in the instructions to Form 8949 and in IRS Publication 550.
March 6, 2018
NewsThe IRS reported that tax preparers who submit two or more paper returns claiming any of three refundable tax credits without attaching Form 8867, Paid Preparer’s Due Diligence Checklist, will receive follow-up letters from the IRS. Congress recently expanded due diligence requirements. Now, preparers who file returns claiming the Child Tax Credit/Additional Child Tax Credit (CTC/ACTC) and the American Opportunity Credit (AOC) must follow due diligence requirements and properly complete and submit Form 8867, certifying they have confirmed their clients’ eligibility for the credits. Previously the due diligence requirements applied only to Earned Income Tax Credit (EITC) returns.
IRS is reminding taxpayers that Taxpayer Assistance Centers (TACs) are a source for free, personal tax help when you believe your tax issue cannot be handled online or by phone. Many questions can be resolved online without visiting a TAC. Here is how it works. Instead of going directly to your local TAC with a tax issue, you should now call a special toll-free number, 844-545-5640, to reach an IRS representative, who is trained to either help you resolve it or schedule an appointment for you to get the help you need. You may be able to resolve your tax issue by calling, getting guidance and eliminating the need to even travel to a TAC, which sometimes can be a pretty significant trip. . Please always check IRS.gov or check the IRS2Go app for days and hours of operation as well as services offered at the IRS TAC location you plan to visit.
Notice 2018-12 clarifies that a health plan providing benefits for male sterilization or male contraceptives without a deductible, or with a deductible below the minimum deductible for a high deductible health plan (HDHP) under Section 223(c)(2)(A), is not an HDHP under current guidance interpreting the requirements of Section 223(c)(2) of the Code. This notice further provides transition relief for periods before 2020 during which coverage has been provided for male sterilization or male contraceptives without a deductible, or with a deductible below the minimum deductible for an HDHP.
Tip of the DayComputing basis . . . To calculate your gain or loss on the sale of an asset you need two pieces of information--your cost and the selling price. Selling price is almost always easy to determine. Cost, far less so. Actually it's not cost, but basis that's important. In the simplest situations your basis is what you paid for the asset. But that can be adjusted by costs to acquire (e.g., legal fees) or improvements to the property. If the property has been depreciated for tax purposes, your basis is cost (plus additional expenses) less depreciation to date. If you inherited the property it's usually the fair market value on the date of death. If you got the property as a gift it's generally the same as the basis of the property in the hands of the donor (but a special rule applies if there's a loss). Did a like-kind exchange for another property. Your basis in the property acquired is generally the same as your basis in the old property (adjusted for recognized gain or loss). Your basis in stock can be complicated by mergers, spinoffs, splits and reverse splits, reinvested dividends and nondividend distributions can all affect your basis in the stock. Get good advice.
March 5, 2018
NewsThe IRS has published (Rev. Proc. 2018-18; Internal Revenue Bulletin 2018-10) revised cost-of-living adjustments for the 2018 tax year to reflect the Tax Cuts and Jobs Act of 2017. The Notice updates the standard deduction, alternative minimum tax exemption, tax tables, Section 179 election to expense depreciable property, among others.
In December 2015, Congress enacted the Protecting Americans from Tax Hikes (PATH) Act of 2015, which contains a number of integrity provisions intended to reduce improper Earned Income Tax Credit (EITC), Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), and American Opportunity Tax Credit (AOTC) claims. These provisions are projected to save approximately $7 billion over 10 years by reducing fraud, abuse, and improper payments in refundable tax credit programs. In an audit, the Treasury Inspector General for Tax Administration (TIGTA) identified 1.4 million tax returns with a discrepancy in wages reported on the tax return and wages reported on third-party Forms W-2, Wage and Tax Statement, that were not reviewed by the IRS prior to refunds being released on February 15, 2017. These taxpayers received approximately $8.2 billion in refunds that included $4.3 billion in the EITC and $1.7 billion in the ACTC. The IRS received no third party Forms W-2 prior to the refunds being released for 660,141 of the more than 1.4 million tax returns. These returns had refunds totaling almost $3.7 billion. Late and missing Forms W-2 reduce the IRS’s ability to verify EITC and ACTC claims before refunds are paid. The effectiveness of IRS efforts to verify wages reported on tax returns claiming the EITC and the ACTC is directly dependent on employers timely filing Forms W-2. In addition, TIGTA found that for 4,509 tax returns associated with a retroactive refundable credit claim the IRS allowed almost $9.8 million in refundable tax credits. Furthermore, the IRS incorrectly rejected credits totaling $489,423 on 289 returns in which the taxpayer’s Individual Taxpayer Identification Number (ITIN) was issued before the return due date and entitled the taxpayer to the refundable credit claimed. Finally, for the 2017 Tax Filing Season, the IRS did not program the Modernized e-File system to systemically verify the ITIN issuance date for electronically filed prior year refundable credit claims. Instead, all previous year electronically filed tax returns are sent to the Error Resolution System function for employees to manually revalidate the ITIN at a total estimated cost of $400,570. In addition, the methodology for correcting the ITIN issuance date continued to result in errors. To see the full report, go to www.treasury.gov/tigta/auditreports/2018reports/201840015fr.pdf.
Tip of the DayNondeductible losses . . . You can generally deduct losess on the sale of stock or other investment property. Losses on the sale of most business assets (e.g., machinery, trucks) can also be deducted. But there are restrictions. You can't deduct losses on sales to related parties. Related parties include members of a family, a corporation and an individual who directly (or indirectly) owns more than 50% of the corporation's stock, a fiduciary and a beneficiary of the same trust, and an executor of an estate and a beneficiary of that estate unless the sale was to satisfy a pecuniary bequest.
March 2, 2018
NewsThe IRS has announced that S corporations are subject to the extended three year holding period for applicable partnership interests and that regulations will be issued soon. Carried interests are ownership interests in a partnership that share in the partnership’s net profits. Carried interests often are issued to investment managers in connection with the investment manager’s services. These interests often result in the holder receiving capital gains which are taxed at a lower rate, rather than ordinary income. The Tax Cuts and Jobs Act extended the holding period with respect to certain carried interests (i.e. applicable partnership interests) to three years. The IRS has issued Notice 2018-18 (IRB 2018-12) which states that it will be issuing regulations clarifying that taxpayers will not be able to circumvent the three-year rule by using "S corporations." Under the tax reform law (IRC Sec. 1061), the three-year rule took effect for tax years beginning after Dec. 31, 2017. Treasury and IRS intend to issue regulations that are also effective for tax years beginning after that date.
Distributions from an IRA to a spouse in a divorce proceeding are not taxable, but only if made under a court order and then directly to the nonparticipant spouse via a trustee. Failure to follow the strict rules can be costly. In John R. Kirkpatrick (T.C. Memo. 2018-20) the taxpayer was order in a divorce proceeding interim order to transfer $100,000 directly and nontaxably into an IRA titled in the wife's name and further to pay W $40,000 for attorney's fees and suit money. The taxpayer directed distributions from his IRAs into a checking account from which he wrote checks to his wife and to third parties. The Court noted that two commonly used methods of transferring an interest in an IRA are to (1) change the name on the IRA to that of the nonparticipant spouse or (2) direct the IRA's trustee to transfer the IRA assets to the trustee of an IRA owned by the nonparticipant spouse. The taxpayer did neither, receiving the funds directly. The Court held the distribution was fully taxable.
Tip of the DayMortgage insurance premiums deductible . . . Mortgage insurance premiums had been deductible as mortgage interest for a number of years, subject to certain restrictions, including a phaseout for taxpayers with adjustable gross income in excess of $100,000. This provision officially expired at the end of 2016. It was extended through the end of 2017 in the Bipartisan Budget Act of 2018 that was passed in early February of this year. Thus, taxpayers can deduct as interest amounts paid before January 1, 2018. However, some mortgage companies apparently assumed the provision would not be extended and have not included the amount on Forms 1098 and, in some cases, advised taxpayers on those forms that the insurance was not deductible.
March 1, 2018
NewsThe IRS has released an updated Withholding Calculator on IRS.gov and a new version of Form W-4 to help taxpayers check their 2018 tax withholding following passage of the Tax Cuts and Jobs Act in December. The IRS urges taxpayers to use these tools to make sure they have the right amount of tax taken out of their paychecks. The Tax Cuts and Jobs Act made changes to the tax law, including increasing the standard deduction, removing personal exemptions, increasing the child tax credit, limiting or discontinuing certain deductions and changing the tax rates and brackets. The Withholding Calculator gives employees the information they need to fill out a new Form W-4, Employee’s Withholding Allowance Certificate. Employees will submit the completed W-4 to their employer. You can find more information at Withholding Calculator Frequently Asked Questions. Generally, all taxpayers should check their withholdings for 2018. Some taxpayers in other than high-tax states could find themselves underwithheld.
Waiting for a refund? If you claimed the earned income tax credit or the additional child tax credit you refund was held up because a 2015 law requires the IRS to hold the refund until mid-February. The IRS has announced that refunds on the earliest filed returns claiming those credits should have begun showing up in bank accounts and debit cards. Keep in mind that their could be other reasons for your refund being held up.
You may not get much sympathy if you don't keep adequate records. In Duncan Bass (T.C. Memo. 2018-19) the Tax Court sided with the IRS in disallowing a number of unsubstantiated deductions. The Court declined to apply the Cohan rule to estimate certain expenses, noting the taxpayer presented only general and uncorroborated testimony to substantiate certain expenses. The Court noted it was prohibited from applying the Cohan rule to car and truck expenses because they come under a strict set of substantiation rules.
Tip of the DayGetting a refund? . . . Many taxpayers use the money for a vacation, deposit on a new car, etc. That refund is really taxes you overpaid in the prior year: it's not lottery winnings. You'd be better off using a small portion of the refund to splurge on dinner and depositing the remainder in an IRA--either a deductible one or a Roth. Don't want to use the funds for retirement? Then use the amounts to pay down credit card debt.
February 28, 2018
NewsNotice 2018-19 (IRB 2018-12) extends the relief Notice 2017-56 provides to residents of Puerto Rico and the U.S. Virgin Islands who evacuated or couldn’t return because of Hurricane Irma or Hurricane Maria. Most such individuals may otherwise lose their status as “bona fide residents” of Puerto Rico or the U.S. Virgin Islands for tax filing and reporting purposes. Notice 2018-19 further extends the usual 14-day absence period to 268 days, beginning September 6, 2017 and ending May 31, 2018, for the presence test for residency under the tax rules. Further, an individual who is absent from either U.S. territory on any day during this 268-day period will also be treated as leaving or being unable to return to the relevant U.S. territory as a result of Hurricane Irma and Hurricane Maria on such day.
Securing a deduction for a bad debt as an individual is possible, but it's not easy. The first step is proving a bona fide debt existed. If the money provided to the business or individual isn't debt, it could be something else such as a gift or an equity contribution to a business. In Michael J. Burke et ux. (T.C. Memo. 2018-18) the taxpayer advanced money to his friend's scuba-diving business. Over the course of over 15 years the taxpayer advanced increasing amounts totaling over $11 million (only a portion of that was deducted on the tax return as bad debt). While the business was growing it seemed to always need cash and never was truly profitable. The Court looked at the indicia normally associated with debt and found them absent. There was a lack of formal documentation, the loans had no maturity date, the business was thinly capitalized and the taxpayer expected to be repaid from the profits of the business or from its eventual sale. These factors indicate an equity investment, not a loan. The Court denied a deduction for the claimed bad debt.
Tip of the DaySection 179 recordkeeping . . . We've discussed section 179 before. It allows you to write off up to $510,000 (2017 amount; $1 million for 2018) in equipment each year. Because you're writing off the property rather than depreciating it, you may think that you don't have to keep any records. That's not true. The writeoff is more like taking all the allowable depreciation in one year. Should you sell or otherwise dispose of the equipment, you may have to recapture some or all of that deduction. The best approach is to treat it like any other fixed asset (e.g., desks, computers, etc.). Most tax preparation programs have a fixed asset section. Enter it there and make the 179 election. The program should do the rest. And then make sure you keep bill of sale or other documentation for at least four years after you dispose of the equipment.
February 27, 2018
NewsYou may be entitled to litigation costs and attorney's fees if you win a dispute with the IRS. But it doesn't happen as often as you might think. Following IRS inaction on Friends of the Benedictines in the Holy Land, Inc. (150 T.C. No. 5) application for recognition of tax-exempt status, the petitioner filed a petition for a judgment declaring it to be an organization exempt from Federal income tax under Sec. 501(a). The IRS subsequently issued a favorable determination letter and, before even filing an answer, the IRS conceded. The petitioner moved for an award of reasonable administrative and litigation costs under Sec. 7430. The Tax Court held that the submission to the IRS of an application for recognition of exemption from tax under Sec. 501(c)(3) begins an administrative proceeding for the purposes of Sec. 7430 but the petitioner was not entitled to administrative costs and that the petitioner was not entitled to litigation costs because the IRS's litigation position was substantially justified.
Tip of the DayNew bonus depreciation . . . The new law increases the prior 50% bonus depreciation to 100%, at least through December 31, 2022. For 2023, bonus depreciation drops to 80% and in steps to 20% for property placed in service before January 1, 2027. The prior 50% bonus depreciation was scheduled to drop to 40% in 2018 and then decline to 30% before expiring. But the new law makes two other significant changes. First, bonus depreciation applies to both new and used assets. Under prior law only new assets qualified. The new law also raises the annual depreciation cap for autos and light trucks. But the law also includes a number of rules to prevent abuse. For example, you can't sell your bulldozer to your brother and then buy it back to claim the bonus depreciation. And you might not want to claim all that depreciation in any one year only to have your income increase significantly in a subsequent year.
February 26, 2018
NewsThe IRS is reminding farmers and fishers about the March 1 deadline to take advantage of special rules that can allow them to forgo making quarterly estimated tax payments. Anyone with income from a farming or fishing business may be able to avoid making any estimated tax payments by filing their 2017 return and paying the entire tax due on or before March 1, 2018. This rule generally applies if farming or fishing income was at least two-thirds of the total gross income in either 2017 or the preceding tax year. Taxpayers can use IRS Direct Pay to quickly pay an individual tax bill or make an estimated tax payment directly from a checking or savings account at no cost. Payments can be scheduled 24 hours a day, seven days a week, up to 30 days in advance without any fees or pre-registration.
Congress recently renewed for tax year 2017 numerous individual and business tax benefits that expired at the end of 2016. The IRS is now processing returns claiming three of the most popular tax benefits that were renewed retroactively. Taxpayers can now file returns claiming:
A January 2, 2018 FEMA announcement that, as a result of severe storms and flooding from October 29, to November 1, 2017, certain areas of New Hampshire were declared eligible for assistance from the federal governement has been amended. To the original counties of Cheshire, Hillsborough, Rockingham, and Stafford, the amendment adds Merrimack County. Taxpayers in these areas who sustained losses may deduct them on their 2017 or 2016 tax returns.
Tip of the DayHome equity interest . . . There has been some confusion on deducting home equity loan interest beginning this year. The new law eliminates the deduction of interest on a home equity loan. But the IRS has recently clarified that whether or not interest on such a loan is deductible depends on the use of the funds taken down with such a loan. For example, Fred takes down $90,000 of a $100,000 home equity loan and uses the funds to purchase a new car. Interest on that $90,000 won't be deductible. Sue does the same thing, adds a new bedroom and bath to her home with the $90,000. The interest on her loan would be deductible. If, instead of using a home equity loan Sue refinanced the $250,000 outstanding on her home mortgage and took out an additional $90,000 and used the funds for her addition, the interest would be deductible. If Fred did the same refinancing, but used the money for a new car, the interest would not be deductible. The same rules apply to existing home equity loans. If the funds were used for capital improvements, the old loan would be deductible. Keep in mind that there are a number of other restrictions involved in mortgage interest, including not exceeding the fair market value of the home and the new $750,000 of principal limit.
February 23, 2018
NewsIn Gary E. Krantz (T.C. Memo. 2018-17) the taxpayer first appeared to contend that the IRS's concessions in the Notice CP2000 rendered the notice of deficiency invalid because they were made after petitioner filed his petition. The Court noted the IRS's concession of an issue or issues does not destroy the presumption of correctness of the notice of deficiency as to the remaining issues. The Court held the notice of deficiency was valid. The taxpayer also appeared to contend that the IRS was precluded from assessing a deficiency for the year at issue because it issued the petitioner a refund for the same taxable year. The Court held a refund is not binding on the IRS in the absence of a closing agreement, valid compromise, or final adjudication. It is well settled that the granting of a refund does not preclude the Commissioner from issuing a notice of deficiency merely because he accepted a taxpayer's return and issued a refund. Further, refunds are subject to final audit and adjustment, and thus are not final determinations that would preclude subsequent adjustment.
Tip of the DayMunicipal bond funds . . . There are some funds that invest exclusively in the obligations of one state such as California, New York, Massachusetts, etc. But for even those you've got to check carefully. Some of the interest may be a preference item for alternative minimum tax purposes. If your fund has holdings in a number of states, the fund will give you a percentage breakdown of the income by state (as a percentage). Be careful when computing the amount excludable in your home state. Usually it's entered as an "add back". For example, Madison Fund has paid you $1,000 in muni bond interest. For federal purposes it's all nontaxable. But only 9% of the income came from your home state. That means $910 (91%) of the amount excluded for federal purposes has to be added back on your state return. If you're using a tax program, they'll be a place to enter state information. If you have to file in more than one state check carefully how your software works.
February 22, 2018
NewsREG-133491-17 and NPRM REG-133491-17 contain proposals amending the definition of short-term, limited-duration insurance for purposes of its exclusion from the definition of individual health insurance coverage. This action is being taken to lengthen the maximum period of short-term, limited-duration insurance, which will provide more affordable consumer choice for health coverage.
The IRS is advising tax professionals that the e-help Desk receives phone calls from taxpayers because their tax preparer referred them for assistance resolving rejected returns, tax law and tax account matters. This increases the taxpayer’s burden and causes lengthier delays for everyone. The e-help desk cannot help these callers and must direct them to other sources for assistance--typically IRS.gov including Publication 5136, IRS Services Guide. The EPSS e-help Desk is intended specifically to assist tax professionals (Enrolled Agents, Reporting Agents, Electronic Return Originators, Certified Public Accountants, etc.) with non-account related questions and issues concerning e-products. They do not provide support to individual taxpayers experiencing e-filing issues.
Tip of the DayNew for 2017 returns . . . The IRS is reminding taxpayers that most of the tax law changes in the Tax Cuts and Jobs Act passed in Decembe, 2017 don't take effect until the beginning of 2018. The two notable exceptions are the 7.5% threshold for medical expenses (which applies to 2017 returns) and the new bonus depreciation rules which take effect with assets acquired after September 27. 2017.
February 21, 2018
NewsIf you don't produce records the IRS is requesting it can issue a third-party summons to get bank statements, canceled checks, etc. from your bank, invoices from a supplier, etc. In order for a court to uphold a summons it must be for a legitimate purpose, the information sought must be relevant to its investigation, the information can't be in the IRS's possession, and the IRS must take certain administrative steps in obtaining the summons. A taxpayer can challenge the summons. In Kenneth Davidson (U.S. District Court, S.D. Texas, Houston Div.) the Court found the taxpayer failed to file his petition within the deadline of 20 days after the notice was mailed. But, the Court noted that even if the petition was timely, it would have been rejected because the summons were issued for a valid purpose.
Tip of the DayEarly filers . . . If you've got a simple return you may be in the clear, but the recently passed Bipartisan Budget Act of 2018 contains a number of tax provisions that extend benefits that had expired and affect 2017 returns. Some tax software providers are just now releasing or about to release updates that reflect the new law. You might want to wait a little longer before filing.
February 20, 2018
NewsThe IRS is reminding U.S. persons having transactions with a foreign trust, such as transfers to, or distributions from, a foreign trust must file Form 3520. A U.S. person who is treated as the owner of a foreign trust under the grantor trust rules (IRC Section 671 through 679) must also file Form 3520–see Part II--even in a year where the U.S. owner did not have any transactions with the foreign trust. Penalties apply if a taxpayer files Form 3520 late, incompletely or incorrectly. For Parts I and III of Form 3520, the initial penalty is the greater of $10,000 or 35 percent of the gross reportable amount. For Part II of Form 3520, the initial penalty is equal to the greater of $10,000 or 5 percent of the gross value of the portion of the foreign trust's assets treated as owned by the U.S. person at the close of the taxable year. Additional penalties will apply if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting. (Other penalties may apply.)
If you plan to submit files through the Filing Information Returns Electronically (FIRE) system, ensure you can access the system before the Feb. 28 and March 31 deadlines to file. A valid username, password, PIN and secret phrase are required for a successful login. If you encounter difficulties logging in, check that you have correctly entered your information. If you get locked out of your FIRE account, call Information Returns Customer Service at 866-455-7438 (International toll call at 304-263-8700) for assistance with resetting your password, PIN, or secret phrase. Before calling, have your business name, employer identification number, and user ID on hand. Do not revert to paper filing. Plan ahead as wait times might be longer than usual if you call close to the filing deadline.
Tip of the DayDisability pensions . . . The general rule is that if your employer paid for the disability plan, the amounts you receive are taxable. If you paid the full amount of the plan, the benefits are not taxable. If you and your employer shared the cost of the plan, the benefits are partially taxable. Military nd government disability may or may not be taxable. You may be able to exclude the payments from income if the payments result from active service in the armed forces of any country, the National Oceanic and Atmospheric Administration, the Public Health Service or the Foreign Service. You can exclude the payments if you were entitled to the payments before September 25, 1975, received the disability payments for a combat-related injury, or would be entitled to receive disabilty compensation fro the VA. Check with your tax advisor on the details.
February 16, 2018
NewsEmployment-related identity theft (employment identity theft) occurs when an identity thief uses another person’s identity to gain employment. Employment identity theft can cause a significant burden to innocent taxpayers, including the incorrect computation of taxes based on income that does not belong to them. In an audit by the Treasury Inspector General for Tax Administration (TIGTA) found most identified victims remain unaware that their identities are being used by other individuals for employment. A programming error limited the IRS notifications to only those victims who were not identified in prior years. As a result, the IRS did not notify 458,658 repeat victims of employment identity theft that it identified in PY 2017 and on a tax return processed prior to PY 2017. On September 27, 2017, the IRS prepared an information technology request to correct this programming error. For the complete report go to www.treasury.gov/tigta/auditreports/2018reports/201840016fr.pdf.
In Christopher C.L. Ng MD, Inc. APC (T.C. Memo. 2018-14) the taxpayer, a C corporation, rented space in the sole shareholder's home. While there is no prohibition on this, the taxpayer failed to prove the arrangement between him and his C corporation was a bona fide rental arrangement. The taxpayer did not produce any evidence of a written rental agreement or other documentation to support its position that the amounts claimed were actually rent. The taxpayer also did not treat the arrangement with petitioner as a bona fide rental arrangement as he did not report any reciprocal rental income on his 2012 and 2013 Schedules E. The Court sided with the IRS and disallowed the rent deductions.
Tip of the DayNote as wages . . . If you're working for a startup you may receive a note instead of a check for part of your services. If the note is secured you've got to include the fair market value of the note (discounted by an amount that depends on the payment terms) in income. Later payments on the note will be partly nontaxable and partly taxable. On the other hand, if the note is unsecured and nonnegotiable, only when you receive payments on the note are they includible in income as compensation.
February 15, 2018
NewsThe Department of the Treasury has proposed repealing 298 tax regulations that are unnecessary, duplicative or obsolete and force taxpayers to navigate needlessly complex or confusing rules. President Trump issued an Executive Order on April 21, 2017, directing Treasury to review tax regulations to ensure a simple, fair, efficient, and pro-growth tax system. Today's actions are a direct result of that review. The regulations proposed to be repealed fall into three categories:
The affected Code Sections are 23, 42, 46, 56, 56A, 61, 101, 103, 132, 148, 161, 165, 168, 177, 178, 179A, 244, 341, 401, 402, 404, 405, 410, 411, 412, 453, 453A, 475, 483, 501, 503, 551, 552, 553, 554, 555, 556, 586, 593, 595, 621, 665, 667, 669, 704, 802, 803, 806, 809, 810, 821, 822, 823, 825, 831, 832, 856, 921, 922, 923, 924, 925, 926, 927, 941, 943, 951, 962, 963, 1034, 1232, 1232B, 1247, 1491, 1492, 1493, 1494, 4041, 4091, 4251, 4252, 4263, 4972, 4980A, 4981, 4981A, 6048, 6049, 6050H, 6096, 6241, 6245, 6501, 6511, 6654, 6723.
Taxpayer Advocate Nina Olson has indicated that there is already confusion about the new tax law and predicted even more questions for the IRS in coming months. She also indicated the IRS is not prepared to handle the anticipated influx of phone calls that will emerge. In addition, a survey found that, despite the availability of internet tools, many taxpayers still prefer to get their answers over the phone and that the IRS needs to better prepare for that.
In order to be a nonprofit organization, the benefits of the organization can't inure to private individuals. In David Muresan Scientific Research Foundation (T.C. Memo. 2018-13) the taxpayer organization was intended to do research, but the patents and other results of the research would belong to the organization's founder or his for-profit entity. The petitioner also revealed that that he anticipated receiving another unrelated benefit from operating as a not-for-profit entity. The Court found the organization failed to meet the requires of a Section 501(c)(3) and was not exempt from tax.
Tip of the DayRent out property? . . . If you rent out property, either residential or commercial, include advance rents in income in the year received. Security deposits may or may not be rent. If you intend to return the deposit to the tenant, it's not income. However, if you intend for the deposit to cover the last month's rent (e.g., you don't bill the tenant for the last month, you let him use his security deposit) the amount is income. You don't have to receive cash to have rental income. The tenant may pay in goods or services. In that case you need to include the fair market value of the goods or services as rental income. If the goods or services provided benefit the property, you can deduct a corresponding amount as an expense. For example, in lieu of one month's rent the tenant the tenant, a licensed plumber, installs a new hot water heater. The fair market value of the work is income and can be taken as deduction, or, in this case, capitalized and depreciated.
February 14, 2018
NewsThe IRS is warning (IRS Tax Tip 2018-23) tax professionals that cybercriminals are at work now that the nation’s tax season is here. Thieves file fraudulent tax returns and use the stolen information to get tax refunds using their victims’ information. Tax preparers who experience a data theft can follow the steps listed in the Tax Tip. The IRS is also reminding tax professionals that toll-free assistors cannot accept third-party notification of tax-related identity theft. Clients should file a Form 14039, Identity Theft Affidavit, only if their electronic return is rejected as a duplicate, or they’re directed to do so.
The IRS is also warning (IR-2018-18) taxpayers of a quickly growing scam involving erroneous tax refunds being deposited into their bank accounts and sometimes via a paper check. The IRS also offered a step-by-step explanation for how to return the funds and avoid being scammed. Following up on a Security Summit alert issued Feb. 2, the IRS issued this additional warning about the new scheme after discovering more tax practitioners’ computer files have been breached. In addition, the number of potential taxpayer victims jumped from a few hundred to several thousand in just days. The IRS Criminal Investigation division continues its investigation into the scope and breadth of this scheme. These criminals have a new twist on an old scam. After stealing client data from tax professionals and filing fraudulent tax returns, these criminals use the taxpayers' real bank accounts for the deposit. Thieves are then using various tactics to reclaim the refund from the taxpayers, and their versions of the scam may continue to evolve. The IRS also warned that taxpayers who receive an erroneous refund by direct deposit should discuss the situation with their bank and may want to close the affected accounts.
The IRS processed more than five million Employer Identification Number (EIN) applications in Fiscal Year 2016. Business identity theft is a growing threat to tax administration. As such, it is essential that the IRS develops processes to both authenticate individuals applying for an EIN and to ensure that there is a valid business reason to obtain an EIN. The Treasury Inspector General for Tax Administration (TIGTA) performed an audit because many EINs are not used to file business tax returns and may be at risk for fraud or business identity theft. This audit evaluated the processing of EIN applications to ensure the accuracy and reliability of the data captured by the IRS. TIGTA found that programming errors resulted in the incorrect assignment of more than 227,000 EINs to sole proprietors and that processing of paper EIN applications results in a high number of errors and and an inefficient use of resources. For the full report, go to www.treasury.gov/tigta/auditreports/2018reports/201840013fr.pdf.
Tip of the DayDon't ignore those alerts . . . Many banks, other financial institutions, the Social Security Administration, etc. will alert you to unusual activity on your account. Sometimes you have to set a threshold. For example, an ATM withdrawal over $300. That alert could be by email, text, phone call, or regular mail. Don't ignore these alerts. If you didn't change your email address or password, didn't apply for a new account, didn't withdraw $1,000 from an ATM, or weren't trying to ship a 65-inch TV to Nigeria via FedEx, etc. act immediately. Your account may have been compromised or your identity stolen. And it may not be an account at your financial institution. We know of one business that had it's FedEx number hacked to be used in paying for expensive freight charges. Have older parents or relatives? Make sure someone is monitoring their accounts.
February 13, 2018
NewsThe protection of the Fifth Amendment isn't without limits. In George Pate, Cookie G. Pate Respondents-Appellants (U.S. Court of Appeals, Eight Circuit) the taxpayers invoked the Fifth Amended privilege in response to every question, including those about their names, telephone numbers and date of birth. The IRS petitioned to enforce the summonses in district court. The district court referred the case to a magistrate judge, who held a hearing. The taxpayers did not testify, but their attorney argued that they reasonably feared prosecution largely due to the IRS's interest in a criminal referral for the case. The taxpayers' attorney did not identify particular objectionable questions, however, even though the IRS had argued in a prior brief that the blanket assertion of the Fifth Amendment privilege was improper. The magistrate judge recommended enforcing the summonses, and the district court adopted that recommendation. The taxpayers appealed. The Court noted The Fifth Amendment privilege, however, does not encompass the complete refusal to disclose any information relating to income. The Court held that because the taxpayers asserted the privilege in response to all of the IRS officer's questions, including ones innocuous on their face, the Appeals Court affirmed the district court's enforcement of the summonses.
In order to sue for a refund you must have some standing. In Mike H. Samadi and Helen Samadi, a/k/a Helen Samadi Diamond (U.S. District Court, D. South Carolina, Columbia Div.) the Court dismissed the husband's refund suit. He had filed a tax return with his ex-wife. The Court dismissed the case noting he had no standing to pursue a claim because his former wife paid the couple's tax liability for that year. The Court did allow the ex-wife to intervene over the objections of the IRS.
Tip of the DayReceive gifts from a foreign source? . . . Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, is due on the date that your income tax return is due, including extensions, if you are the recipient of certain large gifts or bequests from certain foreign persons. This requirement applies, generally, if you are a U.S. person who received during the current tax year:
A U.S. person can be a U.S. citizen or resident alien; domestic partnership, trust or corporation; or an estate.
February 12, 2018
NewsCongress has passed and the president has signed the Bipartisan Budget Act of 2018. The Act contains a significant number of tax provisions, many of them extend through 2017 tax laws that expired at the end of 2016. Some of the more important ones include:
Tip of the DayState returns . . . If you're doing your own return and using tax preparation software, you should be aware that most items carry automatically to your state return. That's one of the advantages of computers. But, depending on the state, the software may not handle all the special items. Some require an entry on the state return. That's especially true for nonresident and part-year resident returns. Check the instructions for any lines that require a special entry. Some states provide a special credit for volunteer firemen; some don't tax certain pensions.
February 9, 2018
NewsThe Guidance Priority List from the IRS is used to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance during the year. The IRS has just published the 2017-2018 Second Quarter Update. You can find the initial version and the Update at Priority Guidance Plan.
Notice 2018-17 (IRB 2018-9) expands the hurricane related disaster relief in the form of relief to the owners of qualified low-income housing projects provided in Rev. Proc. 2014-49 and Rev. Proc. 2014-50. The expanded relief in this notice is limited to the Hurricane Maria PR Major Disaster (as defined in the notice). This notice also solicits public comment regarding any desirable amendments to Rev. Proc. 2014-49 and Rev. Proc. 2014-50.
Under Revenue Procedure 2018-15 (IRB-2018-9), the IRS generally will not require a new exemption application from a domestic Section 501(c) organization that changes its form or place of organization. Rev. Rul. 67-390 and Rev. Rul. 77-469 are obsoleted.
The IRS has announced that the MeF maintenance build window is being extended on Sunday, February 11, 2018. Both ATS and Production systems will be unavailable from 12:00 a.m. until 12:00 p.m. Eastern. The build will deploy critical system updates.
Repair costs are deductible as an ordinary expense by a business, but capital improvements are not. Recognizing the difference is often hard, even for professionals. In Marion J. Wells (T.C. Memo. 2018-11) the taxpayer, a farmer, replaced some 1,800 of leaking water line (some 47% of the total length) and an access road that was destroyed by flooding. There was some additional work on the farm. She deducted the full cost of the work for the two years at issue. The expenditures for a significant part of the work for one year amounted to $198,000. The IRS disallowed the deduction, requiring the taxpayer to capitalize the expenditures finding they were a capital improvement and not a deductible repair. The Court noted that the water line was replaced, not repaired, and the new line was made of sturdier pipe of greater value and useful life than the pipe that it replaced. The access road was also completely reconstructed, not simply repaired. The Court found that the expenditures had to be capitalized. The Court also noted she spent extensive time and effort researching and preparing her tax return but honestly misunderstood both the facts and the law applicable to her case. Taking into account the taxpayer's relative inexperience preparing tax returns, her lack of knowledge with respect to the sometimes complicated issue of whether an expenditure must be capitalized, and the fact that she did have extensive records showing in detail the expenditures that had been made the Court found the taxpayer had reasonable cause for the underpayment and did not assess the accuracy-related penalty.
Tip of the DayCalling the IRS? . . . If you're asking questions related to your return, be ready to answer some questions specific to prior-year tax returns such as filing status and adjusted gross income (AGI) so the IRS can authenticate your identity. You should have a copy of the return handy. And you'll do well to avoid calling on Tuesday, February 20. That's the day after Presidents Day and the day the IRS receives more phone calls than any other day of the year.
Copyright 2018 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