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August 31, 2015
The IRS has issued proposed regulations (REG-132075-14) would remove the automatic 30-day extension to file all information returns with the IRS. Beginning with the 2017 filing season only a single non-automatic 30-day extension would be allowed.
The IRS has recently updated its Web page on Frequently Asked Questions on Estate Taxes.
Tip of the Day
Property given to employees . . . Companies often give used office furniture, computers, etc. to employees. You should be aware that such gifts are taxable as compensation to the employees. The amount to include on the employee's W-2 is the fair market value of the property. In the case of a bargain purchase (e.g., the employee pays $50 for a desk with a fair market value of $200), only the bargain element ($150 in the example) is additional compensation. As always, there are some exceptions. Property you give the employee so that he can do his work isn't taxable. For example, you expect the employee to work out of his house. A computer, desk, etc. that you provide him for use in the home office wouldn't be additional compensation. Special rules apply to products taken home for testing, merchandise sales at a discount, etc.
August 28, 2015
The IRS has issued final and temporary (T.D. 9731) and proposed (REG-136459-09) regulations relating to the allocation of W-2 wages for purposes of the W-2 wage limitation on the amount of a taxpayer's deduction related to domestic production activities. Specifically, the temporary regulations provide guidance on the allocation of W-2 wages paid by two or more taxpayers that are employers of the same employees during a calendar year. The proposed regulations also provide guidance on determining domestic production gross receipts; the terms manufactured, produced, grown, or extracted; contract manufacturing; hedging transactions; construction activities; allocating cost of goods sold; and agricultural and horticultural cooperatives.
Alimony or child support? Alimony is deductible to the payor and income to the payee. Child support is neither. Alimony must meet a number of criteria. One of the bright line definitions is that the obligation to pay alimony must cease on the death of the payee. In Esther P. Crabtree (T.C. Memo. 2016-163) the agreement was silent as to whether the payments would terminate before the end of the specified time if the payee spouse should die. The Court noted that the payments might still constitute alimony if the payments would terminate by operation of State law on the death of the payee spouse. In this case State (Delaware) law was of no help because of the method by which the settlement was agreed upon. The Court held the payments were not alimony and not income to the payee.
Tip of the Day
Buying a business? . . . It may look cheap based on the purchase price, but that may be only the tip of the iceberg. Take a good look. In order to make it viable do you have to increase inventory, beef up advertising, replace equipment, etc.? It's not unusual in the sale of a small business for the seller to retain and collect the receivables. That means you'll have use capital to finance future sales. A seasonal business could require additional capital if it's purchased at the wrong time. Equipment may have to be upgraded, the office or retail space redone, etc. All that's assuming the business is profitable and will generate enough cash flow for you to live on. If not, your required capital will be even more. Don't fall in love with the business. Talk to your accountant and do your homework.
August 27, 2015
When taxpayers do not pay delinquent taxes, the IRS has the authority to work directly with financial institutions and other third parties to seize taxpayers’ assets. This action is commonly referred to as a “levy.” The law requires the IRS to notify taxpayers at least 30 calendar days prior to the issuance of a levy and allows taxpayers the opportunity to request a Collection Due Process hearing prior to the first levy on a delinquent account. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit because it is responsible for annually determining whether the IRS complied with the IRS Restructuring and Reform Act of 1998 requirement to notify taxpayers prior to issuing levies. The overall objective of this review was to determine whether the IRS has complied with the legal requirement to timely notify taxpayers prior to issuing levies per Internal Revenue Code Section 6330, Notice and Opportunity for Hearing Before Levy. TIGTA found The IRS is generally protecting taxpayers’ rights when issuing systemic and manual levies in cases for which additional assessments were not included in the levy. TIGTA reviewed statistical samples of systemic and manual levies issued by the Automated Collection System and the Integrated Collection System and determined that controls ensured that most taxpayers were given notice of their Collection Due Process rights at least 30 calendar days prior to the issuance of the levies. For the full report, go to www.treas.gov/tigta/auditreports/2015reports/201530058fr.html.
The IRS has announced the availability of Statistics of Income—2013, Individual Income Tax Returns Complete Report (Publication 1304). U.S. taxpayers filed almost 147.4 million individual income tax returns for tax year 2013, up 1.7 percent from 2012. The adjusted gross income less deficit reported on these returns fell $6.5 billion, which is a 0.1-percent decrease from the prior year. The Statistics of Income report is based on a sample drawn from the 147.4 million individual income tax returns filed for tax year 2013 and provides estimates on sources of income, adjusted gross income, exemptions, deductions, taxable income, income tax, modified income tax, tax credits, self-employment tax, and tax payments. Classifications include tax status, size of adjusted gross income, marital status, age, and type of tax computation. A brief text reviews the requirements for filing tax returns, explains the changes in tax law, and describes the sample used to produce the report. Publication 1304 is currently available for download at irs.gov/taxstats.
A general hardship won't exempt a distribution from a qualified plan from income tax or the 10% early withdrawal penalty (i.e., before age 59-1/2). In Charles Dereck Adams et ux. (T.C. Memo. 2015-162) made withdrawals from a federal Thrift Savings Plan following his loss of employment. He used the funds for living expenses. The Court ruled the distributions were fully taxable and subject to the 10% penalty tax. (There are exceptions to the penalty including certain medical expense deductions, qualified reservist distributions, etc.)
Tip of the Day
Doing some capital improvements on your home? . . . Don't forget to tell your insurance company when you're done. Many improvements are costly and add significantly to the value of your home. You don't want to be underinsured after going through all the cost and work of getting the improvement done. You may also have to inform the local tax assessor. (That's usually automatic if you need a building permit from the town for the improvements.) It'd be nice to get away without paying tax on the improvement, but some localities have penalties for failing to report additions.
August 26, 2015
The IRS is advising taxpayers they must file a tax return to reconcile any advance credit payments you received in 2014 and to maintain eligibility for future premium assistance. If you do not file, you will not be eligible for advance payments of the premium tax credit in 2016. The IRS is currently sending Letters 5591, 5591A, and 5596 to taxpayers who received 2014 advance payments, but have not yet filed their tax return, to remind them of the importance of filing. For more information, go to Affordable Care Act Tax Provisions for Individuals and Families.
The Financial Crimes Enforcement Network (FinCEN) has proposed a rule requiring certain investment advisers to establish anti-money laundering (AML) programs and report suspicious activity to FinCEN pursuant to the Bank Secrecy Act (BSA). FinCEN also proposed to include investment advisers in the general definition of “financial institution,” which, among other things, would require them to file Currency Transaction Reports (CTRs) and keep records relating to the transmittal of funds. Go to New Release or Proposed Rule for more details.
Any type of business can face a challenge by the IRS that it's not engaged in with a profit motive. Often it's related to horses or some recreational activity such as auto racing, yacht charter, etc. But not always. In Valery Choutou Pouemi and Sandrine Atemekeng (T.C. Memo. 2015-161) the taxpayer was involved real estate sales. He had both a Maryland and Virginia real estate license. But he was not pursuing a real estate career on a full-time basis. Rather, he had a regular job and did real estate on weekends. He made one sale during the three-year period under audit and his expenses were substantially higher than his income for the period. The Court found the taxpayer was not engaged in the activity with continuity, regularity, or for the purpose of making a profit and disallowed the losses. The Court went on to note that even if he were found to be in a trade or business, he failed to substantiate the expenses underlying his claimed deductions.
Tip of the Day
Structuring cash transactions . . . If you're in business you know the requirement to report cash receipts from a customer that exceed $10,000. Banks have a similar reporting requirement. (Cash includes more than just U.S. and foreign coin and currency.) The law contains a provision to prevent circumvention of the law by making several deposits under $10,000 to avoid the reporting requirements. For example, a customer gives you $12,000 for a construction job. To avoid the requirement you deposit $7,000 in one bank account and the following day put $5,000 in another bank. It's called "structuring" and the penalties can be confiscatory. In one case the taxpayer's activities involved more than 100 transactions over a two-year period in amounts totaling more than $870,000. The court ordered the taxpayer to forfeit the entire amount, and, in addition, the taxpayer was sentenced to 36 months imprisonment. If you're not familiar with the rules, talk to your accountant.
August 25, 2015
Victims of severe storms, tornadoes, straight-line winds and flooding in Missouri during the period of May 15 to July 27, 2015 may be eligible for disaster assistance and those who sustained losses related to the disaster may deduct them on their 2014 return. The affected counties include Adair, Andrew, Atchison, Audrain, Barry, Bates, Benton, Buchanan, Caldwell, Chariton, Christian, Clark, Clay, Clinton, Cole, Crawford, Dade, Dallas, Daviess, DeKalb, Douglas, Gentry, Harrison, Henry, Hickory, Holt, Jefferson, Johnson, Knox, Laclede, Lafayette, Lewis, Lincoln, Linn, Livingston, McDonald, Macon, Maries, Marion, Miller, Moniteau, Monroe, Montgomery, Morgan, Osage, Ozark, Perry, Pettis, Pike, Platte, Polk, Putnam, Ralls, Ray, Ste. Genevieve, Saline, Schuyler, Scotland, Shannon, Shelby, Stone, Sullivan, Taney, Texas, Washington, Webster, Worth and Wright.
The IRS has updated its list of Retirement Plan and IRA Required Minimum Distributions FAQs.
The Tax Court is generally sympathetic to taxpayers who represent themselves, but that only goes so far. In Ethel Miriam Putnam (T.C. Memo. 2015-160) the taxpayer filed a response to the IRS's first request for admissions, objecting to the IRS's requests because "they are not relevant until the Respondent (IRS) provides the evidence to prove its allegations against the Petitioner (taxpayer)." The taxpayer also asked the IRS to show it had jurisdiction over the taxpayer, the US Constitution and the tax laws apply to the taxpayer, etc. The taxpayer failed to respond to several orders by the Court to file a response to the IRS. The Court warned the taxpayer there would be sanctions for failure to comply. The taxpayer failed to be present at the trial. The Court held that the taxpayer's failure to appear at trial and to comply with the Court's rules and specific orders warrants holding here in default under Rules 123 and 104. The Court found the IRS showed the taxpayer had substantial unreported income over a number of years and failed to file returns. The Court noted that several of the "badges of fraud" were present and found her liable for the fraud penalty.
Tip of the Day
Too many brands? . . . Often having a number of brands or varieties for your customer to select from increases your total sales. But you can get carried away. And each version requires some expense--package design, formulation, marketing, etc. In some cases you could be spending more to differentiate a product than you're making in gross profit. That's when deleting some of those choices can increase profits. The first step is a profit analysis. Are you making money on the option or is it just taking shelf space? The second is to do a test to see if customers will switch to one of your other options or go to a competitor. Sometimes marketing an offbrand can cannibalize sales from more profitable items.
August 24, 2015
Notice 2015-57 (IRB 2015-36) provides guidance on the delayed application of the new basis reporting requirements on property acquired from a decedent. (Under the new rules a basis statement must be provided to beneficiaries no later than 30 days after the due date of the estate tax return or the date it is filed.) Notice 2015-57 provides that the due dates for such statements that would have been due before February 29, 2016 are delayed until that date. Additional guidance is expected.
The Office of Appeals (Appeals) is an independent function within the IRS whose mission is to resolve disputes on a fair and impartial basis without litigation. Appeals has the authority to abate certain taxpayer penalties when the abatement has been denied by other functions within the IRS. In Fiscal Year 2013, Appeals abated approximately $127 million in penalties. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to evaluate whether penalties assessed against taxpayers were fully or partially abated in accordance with Appeals criteria. TIGTA found that in most cases Appeals properly accepted cases in which the IRS operating divisions had previously denied the taxpayer’s request for abatement and sufficiently documented the reasons for penalty abatements in case files. However,TIGTA found that 59 of 140 sampled penalty appeal cases were not abated in accordance with Appeals criteria because operating divisions had not denied the abatement or because case files did not support the abatement. Based on these results,TIGTA estimates that in Fiscal Year 2013, 1,411 penalty appeal cases and more than $39 million in penalty abatements did not comply with Appeals criteria. For 57 cases, TIGTA could not determine the justification Appeals personnel used to abate the penalties. For example, Appeals used its authority to abate penalties based on the hazards of litigation, which reflects the uncertainty of the court’s decision if the taxpayer were to take his or her case to trial. However, for some cases, Appeals did not document how it arrived at its determination by outlining the hazards of litigation. TIGTA also identified a small number of other processing errors and control weaknesses affecting taxpayer accounts. For example, Appeals managerial case review policy does not specify that high-dollar abatements by Appeals Officers and Settlement Officers must be reviewed by a manager. Specifically, in four cases, Appeals Officers abated a total of more than $580,000 in penalties without managerial approval. Appeals Officers did not violate IRS policy because they have been delegated the authority to abate unlimited penalty amounts without managerial approval. For the full report go to www.treas.gov/tigta/auditreports/2015reports/201510059fr.html
The IRS is reminding truckers and other owners of heavy highway vehicles that in most cases their next federal highway use tax return is due Monday, Aug. 31, 2015. The deadline generally applies to Form 2290 and the accompanying tax payment for the tax year that begins July 1, 2015, and ends June 30, 2016. Returns must be filed and tax payments made by Aug. 31 for vehicles used on the road during July. For vehicles first used after July, the deadline is the last day of the month following the month of first use.
Tip of the Day
Contemporaneous records . . . The IRS and the courts give more value to diary entries, etc. made near the time of the action. For example, a car log entry regular made at the time of the trip has more value than one made at the end of the week and much more value than one made at the end of the month. The IRS and the courts can usually spot a log you made the night before you saw the IRS agent. But the IRS and courts also look at other aspects such as do you regularly keep such records. A single entry in your diary for a six-month period showing the detail of a certain transaction carries less weight than if you made regular entries. Finally, sometimes a well-kept diary or log can substitute for missing receipts. But there are some areas of tax law where strict recordkeeping rules won't allow that, e.g., in the case of travel and entertainment receipts, charitable contributions, etc. The law requires a receipt and the neither the IRS nor the courts can waive that rule.
August 21, 2015
If you're going to claim to be operating as a nonprofit or tax exempt organization, you generally will have to apply to the IRS for exempt status, file annual returns, and meet certain organizational requirements. In Daniel H. George (T.C. Memo. 2015-158) the taxpayer claimed he qualified under these rules (Sec. 501(c)(4)). The Court addressed the first requirement, that there must be a civic organization. The taxpayer failed to show any distinct existence of an organization during the years at issue. The Court noted that neither the taxpayer his core group maintained financial records, kept minutes, drafted organizing documents or bylaws, requested an employer identification number, or put in place any structures that would be expected from a continuing organization. The Court further noted that there was no separation between the taxpayer and the organization. There was no separate bank account. The 1996 Form 990 was filed in 2011. The Court looked at a number of other factors and concluded the fraudulent failure to file penalty applied not only to the years for which the taxpayer's convictions under Sec. 7201 applied but to three other years.
What constitutes "filing a return?" In Steven Frank Boitano (U.S. Court of Appeals, Ninth Circuit) the taxpayer had not filed returns for a number of years. He finally prepared returns that he handed to a Special Enforcement Program Agent. The returns claimed credit for estimated tax payments but the IRS had no record of having received the payments. When requested to do so, the taxpayer did not substantiate the payments. The taxpayer was indicted and charged with three counts of making false statements under Sec. 7206(1). That section establishes that it is a felony for any person to "willfully make and subscribe any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter." The taxpayer argued that filing is an essential element and that his act of handing the returns to the IRS agent did not constitute "filing" within the applicable IRS statute and regulations. The Court held that "filing" is an element of a conviction under the applicable statute, and that since the IRS now conceded that the returns were not filed, the Court reversed the taxpayer's conviction by a lower court.
Tip of the Day
IRS Collection Launches Early Interaction Initiative . . . In line with IRS-wide efforts to provide timely service, IRS Collection is launching an Early Interaction Initiative. The goal of the initiative is to help employers understand and meet their payroll tax responsibilities, prevent missed payments from becoming delinquencies and delinquencies pyramiding out of control. For many years, Collection’s field staff has been assigned Federal Tax Deposit Alerts (FTD Alerts) where IRS records indicate that an employer’s payroll tax deposits have declined. These cases were sent to Field Collection staff near the end of the quarter but before the quarterly payroll tax return was due. Then as now, the goal was to meet the employer, determine whether there was a missed payment or delinquency, and if so, help to get it paid and the employer to sustain payroll tax compliance. For the complete Fact Sheet go to www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/IRS-Collection-Launches-Early-Interaction-Initiative.
August 20, 2015
Victims of severe storms, straight-line winds, flooding, landslides and mudslides during the period of July 10 to 14, 2015 in certain areas of West Virginia are eligible for government assistance and may deduct the losses on their 2014 return. The affected areas are the counties of Braxton, Clay, Lincoln, Logan, Nicholas, Roane, Webster and Wood.
A taxpayer may deduct educational expenses if they maintain or improve the skills required in his employment or other trade or business. The expense is deductible only if you're established in the trade or business where you'll incur the expenses. In Colleen J. O'Connor and Mark C. Tracy (T.C. Memo. 2015-155) the taxpayer studied and met the minimum requirements of the legal profession in Germany. The taxpayer argued he met the minimum requirements of the legal profession. The Court noted that was generally true, but went on to note that fact did not automatically qualify him to be a legal professional in the U.S. The Court found the taxpayers had not provided any evidence to show that the requirements of New York State (where he sat for the bar) were met before he completed his J.D. and that he had not established himself in the legal profession in the U.S. The Court disallowed the taxpayer's educational expenses.
In Scott E. Charnas (T.C. Memo. 2015-153) the taxpayer had unpaid income taxes. Following a collection due process hearing the settlement officer denied the taxpayer's request for and offer in compromise or an installment agreement. The Tax Court found the IRS settlement officer did not consider the relevant issue raised by the taxpayer, his fluctuations in income. In addition, the IRS contended the taxpayer did not sufficiently participate in the hearing. However, the Court found the taxpayer, based on the record, did not have a fair opportunity to do so. The Court remanded the case to the IRS Appeals Office so the taxpayer could have a fair hearing.
Tip of the Day
Record ownership . . . Selling your business? Liquidating? If you're audited down the road you may need access to those records. It's common to provide records to the new owner, but make sure you either keep a copy or include language in the contract allowing you access to them for the appropriate period of time. There's no reason you shouldn't be able to retain a copy of any electronic data, e.g., your accounting files. Chances are the info will fit on a couple of CD's. Talk to your accountant and attorney.
August 19, 2015
If you present an expense report to your employer (even if the employer is related) and adequately document the expenses, any reimbursement is not taxable income to you. But you can't deduct the expenses; your employer gets to take the deduction. In Scott A. Whittington (T.C. Memo. 2015-152) the taxpayer did not claim the expenses in his petitions or pretrial filings, but argued the point at the end of the trial. The Court noted that he was not an employee but a partner and received guaranteed payments. Thus, he was not entitled to exclude the reimbursements under Sec. 62(a)(2). In addition, there were no documents supporting his reimbursement claims and he failed to meet the documentation requirements for deducting vehicle expenses.
In Vincente Ocampo Junior et ux. (T.C. Memo. 2015-150) the taxpayer operated a landscaping business as a sole proprietorship. The Tax Court sided with the IRS in denying the taxpayers a deduction for interest expense on Schedule C. The amount was reported on Form 1098 (home equity line of credit loans), but the taxpayers could show no business purpose for the loans. The Court denied any deduction for car and truck expenses in excess of that allowed by the IRS. The taxpayer's logs were not credible as they did not establish the business purpose of the travel, the time, or amount of the expense.
Tip of the Day
Who controls your personal finances? . . . Is it you, or your spouse? While someone can be in charge, both of you should have a good idea of your financial status. How many credit cards do you have--jointly and separately? What are the approximate balances on the cards? Personal loans? Bank accounts? Investments? Life insurance? The list can get pretty long. There may not be anything wrong with a spouse having a small credit card or bank account the other spouse doesn't know about for emergency purposes or to feel independent. How much your spouse should be involved depends on a number of factors. Got a small business and you're the CEO, CFO, etc.? Your spouse should have a working knowledge of the business. Got a larger business with an in-house CPA and one or more second-in commands? Chances are the business will run for a while if something happens to you. We know of more than one couple where one of the spouses has a number of real estate holdings and the other spouse would be hard pressed to name all the locations. The smartest way to approach the problem is to make a list of holdings with appropriate details. (E.g., account numbers, and logins and passwords). Don't forget to make a list of debts. Reviewing your tax return together is another way to familiarize your spouse with your holdings. A well organized list of debts, accounts, monthly payments, etc. can be critical. You might try switching duties. If your spouse always writes the monthly checks, you should take on the job (or part of it) for a couple of months. Unsure of how to proceed? Talk to your financial advisor or CPA.
August 18, 2015
The IRS has reported that the hack of the "Get Transcript" program was much larger than reported in May. Almost three times as large. It appears that some 334,000 accounts were accessed, rather than the originally reported 114,000. The application allows taxpayers to view their tax transcript. While 334,000 accounts were accessed, the IRS does not know the extent of the information stolen.
Victims of severe storms, tornadoes, straight-line winds and flooding during the period of June 20 to 25, 2015 in certain areas of Iowa are eligible for government assistance. Taxpayers in the counties of Allamakee, Appanoose, Butler, Clayton, Dallas, Davis, Des Moines, Guthrie, Howard, Jefferson, Lee, Lucas, Marion, Mitchell, Monroe, Warren, Wayne, Winneshiek and Wright may deduct the loss on their 2014 return.
Thinking of going into the medical marijuana business? You might want to reconsider. Federal tax law (Sec. 280E) prohibits taxpayers from deducting any expense of a trade or business that consists of trafficking of a controlled substance such as marijuana. (Note, the taxpayer did business in California where his dispensary was legal, at the state level.) In Jason R. Beck (T.C. Memo. 2015-149) the Tax Court disallowed a deduction under cost of goods sold for some $600,000 worth of marijuana seized by the Drug Enforcement Administration (DEA). The Court also refused to allow a deduction under an alternative theory that the seizure was a loss under Sec. 165. (The Court also discussed the fact that the taxpayer did not substantiate the amount of the loss.)
Tip of the Day
Qualified dividends . . . They're taxed at a lower rate (0%, 15% or 20%, depending on your regular tax bracket), but not all dividends are qualified. In addition to meeting a test at the corporate level (e.g., dividends from real estate investment trusts aren't qualified), you've got to meet a holding period test. You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. For preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. The period you held the stock is reduced where your risk of loss is diminished. In determining if you meet the minimum holding period, you cannot count any day during which you had an option to sell or had made (and not closed) a short sale of substantially identical securities or you were the grant of an option to buy substantially identical securities. Payments in lieu of dividends (e.g., the broker has loaned your stock to another party), may not qualify. There are other fine points. Talk to your tax adviser.
August 17, 2015
Notice 2015-56 (IRB 2015-35) informs claimants about the federal income tax treatment of credits under Sec. 6426(c) and (d) that are paid in cash under the one-time claim submission process of Section 160(e) of the Tax Increase Prevention Act of 2014 and implemented by Notice 2015-3. Specifically, a claimant must reduce its income tax deduction for (or cost of goods sold deduction attributable to) Sec. 4081 excise taxes (or, if applicable, Sec. 4041 excise taxes) for each calendar quarter during 2014 by the amount of the Sec. 6426(c) credit (or, if applicable, Sec. 6426(d) credit) for fuel mixtures sold or used during that calendar quarter.
Victims of the severe storms, tornadoes, straight-line winds, flooding, landslides, and mudslides that took place beginning on July 11, 2015 in parts of Kentucky may qualify for tax relief from the IRS. The President has declared Carter, Johnson, Rowan, and Trimble counties a federal disaster area. Individuals who reside or have a business in these 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 July 11, and on or before Nov. 2, have been postponed to Nov. 2, 2015. This includes the Sept. 15 estimated tax deadline and the Oct. 15 deadline for those who received an extension to file their 2014 return. A variety of business tax deadlines are also affected including the July 31 deadline for quarterly payroll and excise tax returns and the Aug. 31 highway use tax return deadline for most truckers. In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after July 11, as long as the deposits were made by July 27, 2015.
You've got to stick to the year at issue if you're arguing with the IRS. In Nathaniel Hawthorne (T.C. Memo. 2015-148) the IRS settlement officer informed the taxpayer that the Appeals Office administrative hearing would be limited to a discussion of his unpaid tax for 2011 and that the levy action relating to his 2002 tax liability would not be considered. During the hearing he did not dispute his underlying tax liability or offer a collection alternative for 2011. In his Tax Court petition the only issue the taxpayer raised was the propriety of the levy action for 2002. The Court reviewed the record and found the Appeals Office verified that the requirements of all applicable laws and administrative procedures were followed in processing the lien and held the IRS did not abuse its discretion in upholding the lien action.
Tip of the Day
Don't overbuy quality . . . If you're a mechanic, plumber, etc. you've probably got hand tools from your first day on the job. We know homeowners who have hand tools from their parents--over 60 years old. Such quality is harder to come by today, but you may still not need it. A top-of-the-line chainsaw could be several times the cost of a big-box special. If you only use it a couple of times a year, you're probably better off with the cheap version. Spend 15 hours a month cutting wood on your property? Go for quality. The same rules apply to shop equipment. For technological products there are two considerations--amount of use and changes in technology. In some areas rapid tech changes mean that a product purchased only a few years ago is economically obsolete. It may still work, but there are cheaper and better units on the market.
August 14, 2015
The IRS has issued final and temporary regulations (T.D. 9730) that remove the automatic extension of time to file information returns on forms in the W-2 series (except Form W-2G). The temporary regulations allow only a single 30-day non-automatic extension of time to file these information returns. These changes are being implement to accelerate the filing of forms in the W-2 series so they are available earlier in the filing season for use in the IRS's identity theft and refund fraud detection processes. The regulations are effective on July 1, 2016 and apply to forms required to be filed for 2016, that is, for the 2017 filing season. The IRS anticipates that it will grant a non-automatic extension of time to file only in extraordinary circumstances or catastrophe, such as a natural disaster or fire destroying the books and records a filer needs for filing the information returns.
Announcement 2015-22 (IRB 2015-35) states that the IRS will not assert that an individual whose personal information may have been compromised in a data breach must include in gross income the value of the identity protection services provided by the organization that experienced the data breach. Additionally, the IRS will not assert that an employer providing identity protection services to employees whose personal information may have been compromised in a data breach of the employer’s (or employer’s agent or service provider’s) recordkeeping system must include the value of the identity protection services in the employees’ gross income and wages.
In Larry W. Kline (T.C. Memo. 2015-144) the taxpayer had a charter boat business in the Virgin Islands consisting of two boats. While the taxapyer employed a management company but was involved in the day-to-day activities of the business including advertising the boats, preparing for charters, piloting the boat, studying weather, water, and sailing conditions, renting cars, arranging for food, etc. The taxpayer was a retired airline pilot and a graduate of the Merchant Marine Academy. While the taxpayer did not keep contemporaneous logs of the time he spent in the activity, using email correspondence and records of the length and destination of the charters, the taxpayers were able to develop a log of the time spent. The taxpayer and his wife spent 470 hours for 2007 and 732.5 hours for 2008. The taxpayer satisfied one of the material participation tests--he (and his spouse) spent more than 100 hours in the activity and their total time for each year was more than any other individual. The Court held the taxpayer satisfied the material participation requirements. Thus, the activity was not a passive one and the taxpayers could deduct the losses.
The IRS may request time to extend the statute of limitations and a taxpayer may consent by signing Form 872-P (for partnerships). In Summit Vineyard Holdings, LLC, Summit SV Holdings, LLC (T.C. Memo. 2015-140) the Tax Court held that the person signing the form, although not the designated tax matters partner for the year at issue, had apparent authority and the IRS reasonably believed he had authority to act for the partnership. The Court noted he signed the tax return and was a managing member of the partnership.
Tip of the Day
What's your's is your's, what's mine is mine . . . The line between business and personal assets and expenses is often crossed in a closely held business. But that's exactly what the IRS often looks for in an audit, and, while usually unintentional, it can prove costly. For example, you purchase a building in your own name and lease it to your S corporation. Your attorney helps you draft a lease where the corporation pays you $5,000 a month (a fair rental). You're responsible for taxes, utilities, etc. You're off to a good start, but some time later things start to go awry. Here are some actions taxpayers have taken that can cause both tax and legal problems:
Some mistakes can be more costly than others. Some can be corrected, by accounting entries. Talk to your accountant. If legal assistance is needed, talk to your attorney.
August 13, 2015
The IRS has issued final regulations (T.D. 9729) that provide rules for determining a taxable beneficiary's basis in a term interest in a charitable remainder trust (CRT) upon a sale or other disposition of all interests in the trust to the extent that basis consists of a share of adjusted uniform basis. (Amendments to Reg. Secs. 1.1001-1 and 1.1014-5.) These regulations apply to sales and other dispositions of interests in CRTS occurring on or after January 16, 2014.
Revenue Procedure 2015-40 (IRB 2015-34) provides guidance on the process of requesting and obtaining assistance under U.S. tax treaties from the U.S. Competent Authority, acting through the Advance Pricing and Mutual Agreement Program and the Treaty Assistance and Interpretation Team of the Deputy Commissioner (International) Large Business and International Division of the Internal Revenue Service.
Revenue Procedure 2015-41 (IRB 2015-35) provides guidance on the process of requesting and obtaining an Advance Pricing Agreement (“APA”).
The IRS has published Health Care Tax Tip 2015-48 dealing with the reporting requirements on the health care law that are apply to applicable large employers, which is generally those with 50 or more full-time equivalent employees.
Tip of the Day
Buying a business for growth? . . . A fast growing company is deemed more valuable than one growing slowly. That's because you're buying future sales and earnings. But when it comes to smaller businesses outsized growth can be short-lived. It's often easy to grow 30%, 40%, or more per year when sales are less than $500,000. It can become much more difficult when they're $20 million. Doubling sales from $500,000 to $1 million means adding $500,000; doubling sales at $20 million means adding $20 million. It's certainly doable (and has been done) if your market is broad based (e.g., nationwide or all consumers), but more difficult if your market is narrow or local. Another factor is competition. If you're enamored with growth, take a good look behind the numbers. Is there a secret formula or process, a patent, special skills, etc. that will be hard to copy? And make sure the product isn't a fad.
August 12, 2015
The Department of Justice and the IRS announced that eight residents of Alabama and Georgia were sentenced to serve more than 31 years in prison, collectively, for their roles in a $24 million stolen identity refund fraud conspiracy. Sentences ranged from two years probation an $5,047 in restitution to the IRS to 159 months in prison and a forfeiture judgment of $329,242. Total restitution for the eight was some $2.7 million. Two other defendants were sentenced earlier to 145 months and 87 months and one defendant is to be sentenced shortly. The defendants filed false tax returns using IRS Electronic Filing Numbers (EFINs) in the names of sham tax businesses.
In Sheri Flying Hawk (T.C. Memo. 2015-139) the Tax Court sided with the IRS in denying the taxpayer a home office deduction. The Court noted the taxpayer could not meet the principal place of business, the place of business used by clients or customers, or the separate structure tests. The claimed home office failed the principal place of business test because the taxpayer had another fixed location where she could perform substantial administrative or management activities. The Court also denied a deduction for a car. She could not use the standard mileage rate because she did not own or lease the vehicle.
Tip of the Day
Confirmation . . . There was a recent case where a company received an e-mail from a vendor informing the company of a new bank account for electronically transferring payment. The accounts payable clerk wired a substantial payment to the new account. Unfortunately, it wasn't the vendor, but a scam artist, who sent the e-mail. This isn't the only type of scam perpetrated by e-mail. Update your Madison credit card by clicking on the link below. That's the one we frequently see. While you can't stop every cyber attack, there are some simple steps you can take. Before changing the destination of any vendor payments simply call the vendor to confirm the change (use an existing telephone number; not one in the scam e-mail). In a business environment an accounts payable clerk should talk to someone in purchasing if there's a change in address, etc. That individual most likely has closer ties to the vendor. See an e-mail you're unsure of? Before clicking on the link call the company using a known good number--e.g., one from your monthly credit card bill. Check any web address before hitting "go". Unsure? Don't do it. There may be other options. Your accountant may have ideas. There's no question that being vigilant is the first step.
August 11, 2015
The IRS has issued draft instructions for Form 2848, Power of Attorney, updating the description and representation requirements for unenrolled return preparers. Registered tax return preparer has been removed. The unenrolled return preparer designation includes individuals who passed the IRS registered tax return preparer competency test that was offered between November 2011 and January 2013. To view the draft instructions go to www.irs.gov/pub/irs-dft/i2848--dft.pdf.
In Henry J. Haff et ux. (T.C. Memo. 2015-138) the taxpayers claimed a theft loss for an investment in a partnership that turned out to be a Ponzi scheme. There were two parts to their investment. The first was a substantial cash investment and some $730,786 that the taxpayers allege the partnership the taxpayer as fees for his services in development, sales, marketing and construction. The $730,786 was never included in the taxpayers' income for tax purposes. The IRS allowed a theft loss deduction for the taxpayers' cash investment, but denied any deduction for the services he provided. The Court noted that the amount of any theft loss is limited to the adjusted basis of any property. Basis does not include the value of any services performed unless and until the value of those services has been subjected to tax. The Court held the safe harbor provision of Rev. Proc. 2009-20 did not apply. Any deduction for the value of the service provided was denied by the Court.
Tip of the Day
Vacation home market . . . Some vacation home markets are heating up again. Some of them are the same ones that were hot before the housing bust--some aren't. Thinking of jumping in? You're on safer ground if there's something special about the location. Lake front or beach front property seems to almost always be in demand and it's limited in availability. But long-term pricing isn't guaranteed in all cases. Some lakes have shrunk and beach front in some areas has become less attractive because of hurricanes. Property near a theme park, one within a reasonable distance of a major city, those with a great view, will do better than run-of-the-mill properties. While there's a good chance you'll see price appreciation, in many cases you shouldn't consider it an investment. Generate rental income to offset costs? Again, much depends on the property. There are homes in the Hamptons that rent for $500,000 (and more) for the season; there are other locations where you'll be lucky to do much more than cover a portion of your real estate tax bill. Get good advice before buying. That's doubly important if you'll need any of the rental income to make the mortgage payments.
August 10, 2015
As a result of a severe storm on June 23, 2015 (FEMA-4231-DR) the following counties in New Jersey have been declared eligible for disaster relief by the president--Atlantic, Burlington, Camden, and Gloucester.
Just because you're convicted or plead guilty and are sentenced for criminal tax activities doesn't mean the IRS can't later assert civil penalties. That's what the Court held in Gary Kaplan (U.S Court of Appeals, Eighth Circuit). Here, the Court also distinguished between a civil forfeiture and a civil penalty. The Court noted the earlier agreement did not "preclude the initiation of any civil tax proceeding . . . against him." The Court also dismissed the taxpayer's argument that the statute of limitations had expired. The Court noted that the statute had not begun to run because the taxpayer never filed a return for the years at issue. Additionally, even if he had, the statute would be extended because the income at issue came from an illegal source.
Tip of the Day
Vacation home market . . . Some vacation home markets are starting to heat up again. Some of them are the same ones that were hot before the housing bust--some aren't. Is it time to jump in? You're on safer ground if there's something special about the location. Lake front or beach front property seems to almost always be in demand and it's limited in availability. But long-term pricing isn't guaranteed in all cases. Some lakes have shrunk and beach front in some areas has become less attractive because of hurricanes. Property near a theme park, one within a reasonable distance of a major city, those with a great view, will do better than run-of-the-mill properties. While there's a good chance you'll see price appreciation, in most cases you shouldn't consider it an investment. Generate rental income to offset costs? Again, much depends on the property. There are homes in the Hamptons that rent for $500,000 (and more) for the season; there are other locations where you'll be lucky to do much more than cover a portion of your real estate tax bill. Get good advice before buying. That's doubly important if you need the rental income to make the mortgage payments.
August 7, 2015
An Individual Taxpayer Identification Number (ITIN) is issued to individuals who are required to have a Taxpayer Identification Number for tax purposes but do not have and are not eligible to obtain a Social Security Number. ITINs are issued regardless of an individual’s immigration status, as both resident and nonresident aliens may have a U.S. filing or reporting requirement. In Calendar Year 2014, the IRS issued 638,000 ITINs. The Treasury Inspector General for Tax Administration (TIGTA) performed an audit because TIGTA received an IRS employee complaint referred from a member of Congress alleging that the IRS’s ITIN application processes and procedures do not ensure that documents certified by a foreign issuing agency are authentic. TIGTA's review substantiated the employee’s complaint. The IRS does not have effective processes or procedures to ensure the authenticity of copies of documents certified by foreign issuing agencies. Tax examiners responsible for reviewing these documents do not have the tools nor the expertise needed to authenticate copies certified by foreign issuing agencies. Apart from not having the most important tool to verify these documents, the processes and procedures the IRS has developed do not provide reasonable assurance that ITINs are not being issued based on false documentation. TIGTA recommended that the Commissioner, Wage and Investment Division, provide tax examiners with reference materials that can be used to verify the authenticity of copies of documents certified by a foreign issuing agency. In addition, the Commissioner, Wage and Investment Division, should develop detailed procedures and deliver adequate training on verifying the authenticity of copies of documents certified by a foreign issuing agency. For the complete report go to www.treas.gov/tigta/auditreports/2015reports/201540038fr.html.
The IRS has announced that it plans to begin accepting applications for PEO (Professional Employer Organizations) certification beginning July 1, 2016. As part of the certification program, the IRS will complete a background, credit and tax compliance check of PEOs; verify the PEO has an active surety bond; verify the PEO satisfies the service agreement and financial review requirements; collect a user fee; and provide public disclosure of certified PEOs and any whose certification has been suspended or revoked.
In order to secure a deduction for business expenses you've got to show the business purpose of the expense. If you're a carpenter and buy a nail gun, the IRS is unlikely to question the business purpose. The business purpose of a nail gun purchased by an auto body shop is likely to require separate substantiation. In Edwina Wan-Wen Lau (T.C. Memo. 2015-137) the used bank records to substantiate her expenses but produced no other evidence to show the business relationship. The Tax Court sided with the IRS in denying the expenses. It also denied a deduction for a home office because she did not provide any documentary evidence she used a portion of her home exclusively for business.
Tip of the Day
Buying a business . . . Unless you're just buying assets, you need professional accounting and/or financial help to review the target company's books. And you can't just look at the condensed version. Sales may be up, but is the business collecting on their accounts receivable? More than one seller has padded sales by pushing unwanted goods on distributors and customers or selling to accounts with dubious credit just to boost sales. Or is the company cutting back on necessary expenses just to improve the bottom line? Your CPA should be able to provide some insight.
August 6, 2015
The IRS has updated the list of counties in Kentucky where victims of the severe storms, tornadoes, flooding, landslides, and mudslides that took place beginning on April 2, 2015 that may qualify for tax relief from the IRS. The list of counties now includes Adair, Andeson, Butler, Edmonson, Franklin, Lewis, Lincoln, Magoffin, McCracken, Rockcastle, Union and Woodford.
The IRS has announced that the Modernized e-File (MeF) Production and Assurance Testing Systems will not be available on August 8 and September 19, 2015 from 7:00 a.m. till 8:00 p.m. ET.
In Agro-Jal Farming Enterprises, Inc., et al. (145 T.C. No. 5) the taxpayer was a farming corporation that deducted the cost of various field-packing materials for the year in which it bought them. The IRS contended that under Sec. 464 and Reg. Sec. 1.162-3 the taxpayer may deduct the cost of those materials only for the year in which the taxpayer uses them. The Tax Court held the class of items described under Sec. 464 as "feed, seed, fertilizer, or other similar farm supplies, " does not include packing materials as "similar farm supplies." The Court held further that the "provided that" clause of Sec. 1.162-3 for the years at issue means that the cost of materials and supplies must be deducted as the items are used or consumed, on the condition that they haven't been deducted for any prior year. The taxpayer may therefore deduct the cost of field-packing materials for the year of purchase.
Tip of the Day
Taking care of your parents? . . . It's not that unusual that one sibling, often because he or she lives nearby, ends up performing the bulk of the work in taking care of elderly parents. Whether or not that individual wants to be compensated is a separate issue. But if the caregiver is seeking to be compensated or is promised compensation on the death of the parent (or other relative) provision should be made in the will. You shouldn't expect the siblings to gratuitously relinquish a portion of their inheritance. In fact, the contrary can happen. Fred helps his mother for five years and gets 60% of the estate while sisters Sue and Carol get 20% each. It's not unusual for the parties receiving the smaller share to complain. The will should specifically state that Fred is getting the larger share because of his efforts. While the courts can sometimes correct an inequity, don't count on it. There can be a number of ways to handle the issue but the solution may require taking a number of financial and personal factors into account. There can also be tax consequences. Talk to your attorney.
August 5, 2015
The IRS has recently updated a number of its web pages dealing with the Affordable Care Act. The best starting point is www.irs.gov/Affordable-Care-Act.
In Estate of Arthur E. Schaefer, Deceased, Kathleen J. Wells, Executor (145 T.C. No. 4) the decedent (D) established two irrevocable charitable remainder trusts. Each trust was designed so that one of D's sons would receive distributions during his life or a term of years with the remainder going to a charity (NIMCRUTs). The trust instruments direct the trustees to distribute the lesser of each trust's annual income or a fixed percentage to one of the sons. If trust income exceeded the fixed percentage, the trustee was directed to make additional distributions to make up for previous years when the trust income did not yield enough to salsify a distribution of the fixed percentage. The estate claimed it was entitled to a charitable contribution deduction for the values of the charitable remainder interests of the two irrevocable trusts D created. For the estate to be eligible for the deduction, the value of each remainder interest must be at least 10% of the net fair market value of the property contributed to the trust at the time of contribution. The estate and the IRS disagreed regarding the appropriate distribution amount to use in calculating the values of the charitable remainder interests. The Tax Court held that where the trust payout is the lesser of the trust income or a fixed percentage, the parties must use an annual distribution amount equal to the fixed percentage state in the trust instrument to determine whether the estate is eligible for the charitable contribution deduction.
Tip of the Day
Commonality of expenses . . . More than a few small business owners operate multiple business, often through multiple entities. If that's the case, you need to keep good track of expenses that may be common to more than one business. For example, you own 100% of two S corporations where each one operates a restaurant. You're a 75% owner in a third restaurant that's operated as a partnership. If you buy for more than one restaurant at a time (to get quantity discounts) you've got to keep good records of where the items went. One reason in the example above is obvious--you've got a partner in one, but not in the other businesses. There's a second reason here. Generally, all the earnings from a partnership are subject to the self-employment tax (or, at higher levels, just the Medicare portion). That's not true for an S corporation. A third reason is that your basis in the entities will be misstated if you don't allocate any common expenses properly. There are a number of other reasons. Check with your accountant or tax advisor.
August 4, 2015
The IRS has issued final regulations (T.D. 9728) regarding the determination of a partner's distributive share of partnership items of income, gain, loss, deduction, and credit when a partner's interest varies during a partnership taxable year. The final regulations also modify the existing regulations regarding the required taxable year of a partnership.
The IRS has released the final (Fourth Quarter) update to the 2013-2015 Priority Guidance Plan as well as the Initial Version of the 2015-2016 Priority Guidance Plan. You can find both these plans at www.irs.gov/uac/Priority-Guidance-Plan.
You can go to court to compel the IRS to cut a check for your refund, but you've got to satisfy several criteria first. In Carol S. Ellis Warren (U.S. District Court, E.D. Michigan, North. Div.) the taxpayer could not show that she met two of the most important. First, she did not show she filed an administrative claim for the refund prior to filing the suit. Second, she did not show she waited the required six months after filing an administrative claim to bring her suit to court.
Tip of the Day
Lax on filing 1099s? . . . You wouldn't be alone with many small businesses, but it can be expensive, and a recent law change makes it more so. The penalty is now $250 for each 1099 unfiled. It's not worth taking a chance on getting caught. And it's very likely if your business return is selected for audit, the agent will check to see if all required 1099s were filed. Finally, income tax returns have two questions regarding 1099s-- "were you required to file 1099s?" and "if so, were they or will they be filed". Don't forget you're signing under penalties of perjury.
August 3, 2015
In Altera Corporation and Subsidiaries (145 T.C. No. 3) the taxpayer was an affiliated group of corporations that filed consolidated returns for the years in issue. The parent company was a Delaware corporation; the subsidiary a Caymans Islands corporation. The parent and subsidiary entered into cost-sharing agreements (QCSA). During its 2004-2007 taxpayer years the parent granted stock-based compensation (SBC) to its employees. The parent did not share the SBC costs with the subsidiary and the IRS determined deficiencies based on Sec. 482 allocations the IRS made pursuant to the final regulations. The taxpayer contended that the final rule is arbitrary and capricious. The Tax Court held the final rule is a legislative rule--i.e., it is not an interpretive rule--because it has the full force of law. The Court also held it was being asked to decide whether the IRS reasonably concluded that the final rule was consistent with the arm's-length standard. The IRS failed to support its belief that unrelated parties would share SBC costs with any evidence in the administrative record, failed to articulate why all QCSAs should be treated identically, and failed to respond to significant comments. The Court held the final rule fails to satisfy State Farm's reasoned decision making standard and is therefore invalid.
Tip of the Day
Rebates taxable? . . . It all depends. If you purchase a car solely for personal use and receive a rebate from the dealer or manufacturer, the amount isn't taxable. The same would be true for a rebate on your electric bill. On the other hand, if you got a tax benefit for the original payment, the rebate is probably taxable. For example, you deducted your real estate taxes on your 2014 individual tax return and got a full benefit for the deduction. In mid-2015 you received a rebate of $276. That amount is taxable income on your 2015 return (report it on line 21 of Form 1040). If you receive the rebate in the same year you pay the tax, you simply offset the two amounts. If you took the standard deduction in 2014, the rebate would not be income in 2015 (you got no tax benefit). There are some situations that can be trickier. The same rules apply to medical expenses and similar items. IRS Publication 525 has more information.
Copyright 2015 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536