Small Business Taxes & ManagementTM--Copyright 2017, A/N Group, Inc.
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June 27, 2017
NewsThe IRS recently began sending letters to a relatively small group of taxpayers whose overdue federal tax accounts are being assigned to one of four private-sector collection agencies. Taxpayers should be on the lookout for scammers posing as private collection firms. The IRS-authorized firms will only be calling about a tax debt the person has had – and has been aware of--for years. The IRS would have previously contacted taxpayers about their tax debt.
Generally, taxpayers who file a joint return are jointly liable for the taxes and any penalties that might arise from an inaccruate return. But either spouse may file for "innocent spouse relief" if they meet certain criteria. In Maren K. Conrad a.k.a. Maren K. Conrad-Mininger, Petitioner, and Jason E. Mininger, Intervenor (T.C. Memo. 2017-116) the Court denied such relief to the former wife. The deficiency resulted from fictious deductions taken on a partnership return that produced a substantial net loss that was passed through to the petitioner. The Court noted the erroneous item was attributable to the petitioner and she knew the items on the return were fictious. The petitioneralso knew of the undestatement and the Court noted it would not be inequitable to hold the petitioner liable for the deficiency. The petitioner did not show she would suffer economic hardship if she was not relieved of joint liability and she was not current with her tax returns.
Tip of the DayOne last look . . . You and your two partners have just spent the last four weeks putting together the new website. You've tested it and you're ready to go live. If you haven't done so yet, get a couple of people who haven't worked on the site a chance to use it. You never can tell what a third party will find. Could be as innocent as a couple of spelling errors, or as embarrassing as major faux pas that you looked over a dozen times (or added in the last revision). Bad links, a picture that should be, but isn't there, etc. can make you look nonprofessional. You probably don't need a professional to review it; a sharp secretary, a spouse, or even a son or daughter. Make sure someone from your audience reviews it. The site could be fine for natural-born American, but have an offensive reference to someone from Latin America, Europe, etc. Much the same approach applies to memos, products, reports, etc.
June 26, 2017
NewsIndividuals or businesses that oppose the Federal tax laws sometimes use frivolous tax arguments to enrich themselves or evade paying tax. One such argument is a frivolous redemption claim. A frivolous redemption claim involves the filing of a return reporting false income and claiming excessive false income tax withholding. Tax returns with a frivolous redemption claim report income and the taxpayer does not calculate any tax due or claims a refund of the excessive withholding. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to evaluate the IRS’s decision to discontinue the use of the Electronic Fraud Detection System predictive modeling filters to identify individual tax returns claiming potentially frivolous Original Issue Discount (redemption claim) arguments. The audit found the IRS’s identification processes and procedures are contributing to the reduction in confirmed frivolous redemption claims it identifies. TIGTA’s analysis of 337,273 tax returns in which the taxpayer reported excessive withholding identified 58,248 returns that were not evaluated for referral to the Frivolous Return Program because the refund fell below the IRS’s processing dollar tolerance. For the full report go to www.treasury.gov/tigta/auditreports/2017reports/201740040fr.pdf.
In Corbin A. McNeill et ux. (148 T.C. No. 23) the taxpayers filed jointly their 2003 Form 1040, claiming deductions for losses—reflected on a Schedule K-1—flowing from a tax shelter. The IRS issued to the partnership an FPAA disallowing the loss deductions and asserting an accuracy-related penalty under Sec. 6662. The taxpayer-husband, as the TMP of a partner other than the partnership's TMP, paid to the IRS the tax liability and interest and instituted a partnership-level proceeding in District Court. The proceeding was dismissed without a ruling on the taxpayers' partner-level defenses to the accuracy-related penalty under Sec. 6662. The IRS assessed the penalty and initiated collection procedures. After receiving a final notice of intent to levy and a notice of Federal tax lien filing, the taxpayers requested a hearing under Sec. 6330. During their hearing, the taxpayers challenged the assessment of the penalty. The Appeals officer issued a notice of determination sustaining the lien filing and the proposed levy and determining that the taxpayers could not raise the issue of their underlying tax liability. The Tax Court held that under Sec. 6330(d)(1), as amended by the Pension Protection Act of 2006, the Court had jurisdiction to review the IRS's notice of determination when the underlying tax liability consists solely of a penalty that relates to an adjustment to a partnership item excluded from deficiency procedures by Sec. 6230(a)(2)(A)(i).
Tip of the DaySecond time's the charm . . . Or not! Customers, constituents, the general public, etc. often forgive a company's, etc. first mistake--but are much less tolerant of the second. One manufacturer had a major design fault in it's product. It wasn't a safety issue, it was just a cosmetic fault where the paint discolored on units more than about two years old. Not attractive on a unit that should easily last five or more years. Customers complained, but the units still worked. The company reworked the paint mixing machinery and all was well for about two years when there was another error with discolored and flaking paint. Customers weren't nearly so understanding the second time. And this time the company had no excuse.
June 23, 2017
NewsThe Senate has released its version of the bill to replace the Affordable Care Act. While there are a number of differences between it and the House version, but it generally repeals many of the same tax provisions. Here are the highlights:
The IRS has issued an updated FAQ with respect to PTIN (preparer tax identification numbers} following the U.S. District Court upholding the IRS's authority to require PTINs but enjoining the Service from charging a user fee for the issuance or renewal of PTINs. Registration and renewal of PTINs, which was suspended, is resuming but without charge.
Employment-related identity theft occurs when an identity thief uses another person’s identity to gain employment. Taxpayers may first realize they are a victim when they receive an IRS notice of a discrepancy in the income they reported on their tax return. Each year, the IRS receives about 2.4 million tax returns filed using an Individual Taxpayer Identification Number (ITIN) with reported wages, an indicator of potential identity theft. In an audit the Treasury Inspector General for Tax Administration (TIGTA) identified that IRS processes are not sufficient to identify all employment identity theft victims. For example, 497,248 victims, who did not have a tax account in Processing Year 2015, were not identified even though identity thieves electronically filed tax returns with evidence that they used the victims’ Social Security Numbers (SSN) to gain employment. For another 60,823 victims, who have a tax account, the IRS did not update their account with an employment identity theft marker. In addition, IRS processes do not identify employment identity theft when processing paper tax returns. TIGTA reviewed a statistically valid sample of 292 paper tax returns filed in Processing Year 2015 by individuals with an ITIN. These tax return filers reported wages on 150 (51.4 percent) of the returns and attached a Form W-2, Wage and Income Statement, indicating they used someone’s SSN to gain employment. As a result, TIGTA projects that the IRS did not identify 272,416 victims of employment identity theft for the 685,737 paper tax returns filed by ITIN holders reporting wages in Processing Year 2015. TIGTA also identified that the IRS does not have processes to identify employment identity theft in the IRS’s Form W-2 perfection processes or to notify the Social Security Administration of the crime when both the victim’s name and SSN are used by an ITIN holder. To read the full report go to https://www.treasury.gov/tigta/auditreports/2017reports/201740031fr.pdf
Tip of the DayDeals that become too complicated . . . Sometimes each party spends so much time trying to protect itself by putting additional language in the contract that the transaction becomes too complex. Once you've reached that point it may be too late to go back. If you see the deal heading in that direction, consider a time out. Maybe the best idea is to stop and reconsider your approach. You might skip the guarantees and agree to a lower price. How you handle the situation depends on the deal. Buying a company that will double the size of your business? The transaction is likely to be complicated and you want the guarantees. Buying a division of another company just to get the building and equipment? That could be structured as a simple asset deal. Simplifying the transaction won't always work, but its worth a try.
June 22, 2017
NewsThe IRS announced (IR-2017-109) it is now accepting renewal applications for the Individual Taxpayer Identification Numbers (ITINs) set to expire at the end of 2017. The agency urges taxpayers affected by changes to the ITIN program to submit their renewal applications as soon as possible to avoid the rush.
You can deduct losses incurred in a business activity carried on for profit. But expenses for a not-for-profit activity are limited to the income generated. In Allen T. Stettner et ux. (T.C. Memo. 2017-113) the taxpayer was engaged in auto racing. Income from the activity was generated from prize money ($300 to $3,000 for winning; a small amount for participating and a variable amount depending on finish). The taxpayer also received money from a single sponsor of $1,200 annually. He received discounts on parts purchased from other sponsors. The taxpayer made a timely election to defer the determination of presumption an activity is engaged in for profit until the close of the fourth taxable year. But the taxpayer had net losses for the test years and were not entitled to the presumption the activity was engaged in for profit. The Court then looked to the nine factors generally examined to ascertain if an activity is engaged in with a profit motive and found five out of the nine factors favored the IRS and one factor was neutral. The Court found the taxpayers did not engage in the activity with a profit motive.
Tip of the DayPartnerships that sour . . . Going into business with your best friend doesn't always work out well. You may have been best friends for years, but under the pressure of a business that's in trouble or, conversely, one that's doing exceedingly well, disputes can easily arise. Ideally, you should have rules in place to handle such disputes when you starting the business. That rarely happens. There are options. One is to have a board of directors to make recommendations or a final decision. Another is to have each partner responsible for separate activities. That could be two separate businesses or different areas. For example, one is in charge of operations; the other finance and marketing. Avoiding constant close contact may help reduce friction. A third option is to seek a mediator or counseling. Sometimes the differences are insurmountable. In that case splitting up may be the only viable option. But keep in mind that if the business was successful splitting up the team could prove disastrous.
June 21, 2017
NewsSettlements or awards for physical injury or physical sickness are excludable from income, but amounts received for other reasons such as age discrimination are not. In Michael L. Devine, Jr. et ux. (T.C. Memo. 2017-111) the wife was a noncommissioned National Guard officer who submitted complaints of sexual discrimination and sexual harassment. The taxpayer did not allege that she had suffered any physical injury. Subsequently, she made a submission listing 15 specific types of damage she had allegedly suffered, but the list included no assertion of any physical injury. The taxpayer made a monetary offer to settle which was accepted by the National Guard. Neither the taxpayer's offer no the settlement agreement made any reference to any form of physical injury. The taxpayer received a Form 1099-MISC for the amount of the settlement. The Court found the settlement amount taxable and sustained the IRS imposition of the accuracy-related penalty.
Tip of the DayRenegotiating a lease . . . If you rent retail space for your business you may have the upper hand in many regions of the country. More than a few retailers have announced closing a large number of stores and several have gone out of business entirely. In addition, a number of casual dining chains have closed locations. While some malls in attractive locations have limited vacancy, smaller malls, strip centers, less visible centers, etc. may have higher vacancies. If you lease is coming up for renewal or you're looking for space you may be able to take a hard line on negotiations. That might include more allowances for alterations, lower rent, a free rent period, etc. Because the situation could continue to deteriorate, you should have an option to get out of any long-term leases early. What about current leases? You may be able to renegotiate and gain some concessions. That's particularly true if you have a strong position, such as being a major draw for the center. Get good advice and have a real estate attorney review your lease.
June 20, 2017
NewsIn order to secure an interest deduction you've generally got to show the use of the loan proceeds. In Larry Geneser (T.C. Memo. 2017-110) the taxpayer borrowed to pay certain business expenses but he also paid personal expenses. The taxpayer introduced no evidence that would allow the Court to make any reasonable allocation between personal expenses and business expenses for the loan proceeds received. As a result the court found the taxpayer was not entitled to an interest expense deduction. The Court also found that termination payments he received from his work as an independent contractor acting as an insurance agent were subject to the self-employment tax.
You may be able to avoid filing or claim deadlines if you can show you were "financially disabled". Under Sec. 6511 an individual is financially disabled if he or she is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment . . . which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” That's what the taxpayer claimed in Shung H. Chan (U.S. Court of Appeals, Tenth Circuit). But you've got to prove impairment by submitting a physician's statement containing the information required by the IRS. Among the requirements are a physician's medical opinion dthat the physical or mental impairment prevented the taxpayer from managing his financial affairs and that the impairment was or can be expected to result in death or that it lasted, or can be expected to last, for a continuous period of not less than 12 months. Here the taxpayer could not show he met the requirements.
Tip of the DayShort-term rentals . . . Renting out your house or vacation home for a short time period such as weekly. That type of rental may not fall under the same rules as renting a home for longer periods such as a month or more. In many states such short-term rentals are subject to sales tax or "meals and rooms" tax which can be higher than the usual sales tax. You don't have to be a registered business to be required to collect and pay the tax. Check the rules for your state.
June 19, 2017
NewsSec. 267(a)(2) defers deductions for expenses paid by a taxpayer to a related person until the payments are includible in the related person's gross income. Sec. 267(b) defines the “relationships” that bring this statute into play. Sec. 267(e) provides that, for purposes of applying subsection (a)(2), an S corporation and “any person who owns (directly or indirectly) any of the stock of such corporation” shall be “treated as persons specified in a paragraph of subsection (b).” Sec. 267(e) thus deems S corporations and their shareholders to be “related persons” regardless of how much or how little stock each shareholder individually owns. Sec. 267(c), which provides rules for constructive ownership of stock, provides that stock owned by a “trust” is deemed constructively owned by the beneficiaries of the trust. In Steven M. Petersen et ux.; John E. Johnstun et ux. (148 T.C. No. 22) the taxpayers were shareholders of a closely held S corporation. The corporation formed an ESOP for the benefit of its employees and transferred S stock and cash to the related ESOP trust. During 2009 and 2010 the corporation accrued payroll expenses for employees who participated in the ESOP, but a portion of these expenses remained unpaid at the end of each year. The corporation claimed deductions, and the taxpayers as shareholders of S claimed flowthrough deductions, for these accrued but unpaid payroll expenses. The IRSD disallowed these deductions on the ground that the ESOP participants were beneficiaries of a “trust”; that these employees were deemed by Sec. 267(c) to be constructive owners of the S stock held by the trust; and hence that the ESOP participants and S were related persons for purposes of Sec. 267(b) and (a)(2). The Tax Court held the entity holding the S stock for the benefit of the ESOP participants is a “trust” within the meaning of Sec. 267(c). Sec. 267(c)(1) thus deems the stock held by the trust to be owned by the trust's beneficiaries, viz., the S employees who participated in the ESOP. The Court also held the corporation and the ESOP-participating employees are deemed by Sec. 267(e) to be related persons for purposes of Sec. 267(b). Sec. 267(a)(2) accordingly operates to defer S' deductions for the accrued but unpaid payroll expenses to the year in which such pay was received by the ESOP employees and includible in their gross income.
Tip of the DayDeducting warranty expense . . . If you purchase an extended warranty for an auto used for business purposes, you can't deduct the full amount in the year of purchase. You've got to amortize the cost of the life of the warranty. Take the full cost and divide by the number of months in the warranty period. Multiply the number of months the warranty was in effect for the year by the monthly amount. For example, if you purchased the warranty September 1, 2006, deduct 4 months of the cost in 2006, 12 months in 2007, etc. If the auto isn't used 100% for business, you can only deduct the portion that applies to the business.
June 16, 2017
NewsThe IRS cancelled its planned June 15-19 e-Services system upgrade. State users will be able to submit new or update existing state e-file coordinator applications and TDS applications until the upgrade begins later this summer. The IRS will communicate the schedule for the e-Services platform upgrade and provide updates on user impact well in advance of any changes.
You may be entitled to an award if you provide the IRS with information on a taxpayer who owes additional taxes and/or penalties. But there are several hurdles to surmount. In James Awad (T.C. Memo. 2017-108) the petitioner reported on a taxpayer and family members who had unreported foreign bank accounts. The IRS recovered over $2 million as a result of an investigation, but denied the petitioner's claim for a whistleblower award. Following the death of her husband, the wife made a voluntary disclosure of the foreign account. Although the whistleblower office forwarded the petitioner's informaton to the division that examined the taxpayer, the revenue agent who conducted the examination denied using it. The Court noted there was nothing in the record that showed or even suggested otherwise. The Court held that the IRS did not have to make an award to the petitioner.
Tip of the DayDon't wait to take action . . . You should be continually monitoring your business. While there are many metrics available to measure business performance, often just a few will be all that's needed to get a good handle on your business. For example, year-to-year sales comparisons and profit margin trend are likely to be early tipoffs that something is amiss. Other metrics such as inventory turnover, may be confirming indicators and can pinpoint problem areas. But once you have early signs of a problem you should investigate further and, if action is warranted, do so quickly. More than one business has run into major problems or failed because management didn't act quickly enough. Turning around a business that's been on the decline for a while requires more drastic solutions. Now, instead of a hiring freeze you may have to lay off employees. The longer you wait, the less options you may have. Don't act rashly, but don't procrastinate.
June 15, 2017
NewsThe IRS has issued proposed regulations (REG-136118-15) regarding implementation of section 1101 of the Bipartisan Budget Act of 2015 (BBA), which was enacted into law on November 2, 2015. Section 1101 of the BBA repeals the current rules governing partnership audits and replaces them with a new centralized partnership audit regime that, in general, assesses and collects tax at the partnership level. These proposed regulations provide rules for partnerships subject to the new regime, including procedures for electing out of the centralized partnership audit regime, filing administrative adjustment requests, and the determination of amounts owed by the partnership or its partners attributable to adjustments that arise out of an examination of a partnership. The proposed regulations also address the scope of the centralized partnership audit regime and provide definitions and special rules that govern its application, including the designation of a partnership representative. The proposed regulations affect partnerships for taxable years beginning after December 31, 2017 and any partnerships that elect application of the centralized partnership audit regime pursuant to Reg. Sec. 301.9100-22T for taxable years beginning after November 2, 2015 and before January 1, 2018. This document also provides notice of a public hearing on these proposed regulations. This document also withdraws the notice of proposed rulemaking published in the Federal Register on February 13, 2009, regarding the conversion of partnership items related to listed transactions.
Tip of the DayKey man insurance . . . It might be your financial guru, your lead engineer, the shop manager or any one (or several) employees who are critical to your business. Replacing them would be costly, from a number of standpoints. Having key man life insurance policies where the company pays the premium and is the beneficiary on one or more of them could ease the pain of finding a replacement if they pass away. Costs vary based on age and health, but a 10-year, $250,000 term policy might only run $700 a year for a 50-year old employee. The big question is how much coverage to secure. If you're strapped for cash, anything is better than nothing, but ideally you'd like to replace a significant part of any profits that would be lost. Get good advice from your insurance agent.
June 14, 2017
NewsThe IRS is reminding (IR-2017-105) taxpayers living and working abroad that they must file their 2016 federal income tax return by Thursday, June 15. The special June 15 deadline is available to both U.S. citizens and resident aliens abroad, including those with dual citizenship. For those who can't meet the June 15 deadline, tax-filing extensions are available and they can even be requested electronically. In addition, a new filing deadline now applies to anyone with a foreign bank or financial account required to file an annual report for these accounts, often referred to as an FBAR. An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income exclusion or the Foreign Tax credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return. Members of the military and eligible support personnel serving in a combat zone have at least 180 days after they leave the combat zone to file their tax returns and pay any taxes due. This includes those serving in Iraq, Afghanistan and other combat zone localities. A complete list of designated combat zone localities can be found in Publication 3 , Armed Forces' Tax Guide.
Tip of the DayNot worth the effort . . . When told that taxes would take 45% (federal and state) of her short-term capital gain of $200,000 the taxpayer said "why even bother?" We've also heard the other side--sure the new pickup cost me $60,000, but it's tax deductible. Unless you don't care about money, neither statement makes sense. The woman who had the $200,000 gain was left with $110,000. Admittedly, taxes took almost half the gain, but she was still left with significant profits. The guy who got to deduct the $60,000 truck saved $27,000 in taxes, but still had to pay $33,000 for the vehicle out of his own pocket. The only time it's not worth working or the government picks up the entire cost is when tax rates reach 100%. In fact, if tax rates are cut to 15%, you'll be picking up more of the cost of that new vehicle.
June 13, 2017
NewsIn Ian D. Smith (148 T.C. No. 21) the petitioner, a whistleblower, provided information to the IRS. Using the petitioner's information, the IRS commenced examinations of a taxpayer that led to the assessment and collection of almost $20 million. The IRS determined that slightly less than $2 million of the collected proceeds was collected using the information the petitioner provided. The IRS further determined that because less than $2 million was based on the petitioner's information, the $2 million threshold for application of the nondiscretionary award regime of Sec. 7623(b) had not been met. Accordingly, the IRS made a discretionary whistleblower award under Sec. 7623(a). The petitioner argued that the “amounts in dispute” referenced in Sec. 7623(b)(5)(B) is almost $20 million and that the threshold for use of the nondiscretionary award of Sec. 7623(b) was met. The Tax Court held the “amounts in dispute” referenced in the Sec. 7623(b)(5)(B) threshold are the total amount of the liability that the IRS proposed with respect to a taxpayer's examination that was commenced using the information provided by a whistleblower and are not limited to the part of the “collected proceeds” attributable to the whistleblower's information or specific allegations. The Court also held the $2 million threshold of Sec. 7623(b)(5)(B) was met, and the petitioner's whistleblower award should be determined under Sec. 7623(b).
In David T. Myers (148 T.C. No. 20) the petitioner filed with the IRS's Whistleblower Office (W) a claim for a whistleblower award under Sec. 7623(b). W denied the petitioner's claim, stating in a letter dated March 13, 2013, that he was not eligible for an award and inviting him to contact W with any further questions. The petitioner continued to correspond with W during 2013 and 2014, sometimes submitting additional material regarding his claim. In response, W sent the petitioner four separate letters. By letters dated November 20, 2013, January 8, 2014, and March 6, 2014, W stated that it had “considered the additional information you provided and determined your claim still does not meet our criteria for an award.” By letter dated February 24, 2014, W informed the petitioner that his claim had been closed on March 13, 2013, and attached a copy of the March 13, 2013, letter. On January 20, 2015, the petitioner mailed his petition to the Tax Court, which the Court received and filed on January 26, 2015. The IRS moved to dismiss this case for lack of jurisdiction on the ground that the petitioner had failed to file his petition within the 30-day period specified by Sec. 7623(b)(4). The Court held each of W's letters to the petitioner constitutes an appealable determination for purposes of Sec. 7623(b)(4) and, as with a notice of deficiency, where there is direct evidence a claimant received actual notice of an award determination without prejudicial delay and with sufficient time to file a petition, that notice is effective to commence the running of the 30-day period under Sec. 7623(b)(4). The Court also held that the petitioner received actual notice of W's determinations without prejudicial delay and had ample opportunity to timely file a petition, yet he filed his petition significantly more than 30 days after receiving actual notice. Hence, the petitioner's petition is untimely and the Court dismissed this case for lack of jurisdiction.
Tip of the DayBuying a business? . . . Or examining the credit worthiness of a business? The first step is a review and analysis of the financials. But there can be other obligations that are not on the books. One of the most important and common ones is lease payments for real estate or equipment. That can be a real issue for real estate, particularly if you're only a couple of years into a 10-year lease and the business contracts or needs to move. Unless there's an escape clause in the lease, the landlord expects those payments to continue until the end. There can be other obligations such as employment contracts that guaranteee severance pay. Even owned real estate that has a mortgage can be an issue. Here the mortgage loan is on the books in plain sight, but the loan may or may not contain an onerous prepayment penalty. Unless you're experienced in accounting and finance, get a professional to review the financials.
June 12, 2017
NewsRevenue Ruling 2017-13 (IRB 2017-26) provides the rates for interest on tax overpayments and underpayments for the third calendar quarter of 2017, beginning July 1, 2017. The interest rates will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, 1 and one-half percent for the portion of a corporate overpayment exceeding 10,000, and 6 percent for large corporate underpayments. This quarterly determination is required by section 6621 of the Internal Revenue Code.
Revenue Procedure 2017-34 (IRB 2017-26) provides a simplified method to obtain an extension of time under Reg. Sec. 301.9100-3 to file a return to elect portability of the deceased spousal unused exclusion (DSUE) amount pursuant to Sec. 2010(c)(5)(A). This revenue procedure applies to estates that are not normally required to file an estate tax return because the value of the gross estate and adjusted taxable gifts is under the filing threshold in Sec. 6018(a).
Tip of the DayMind the store . . . You've seen the headlines from time to time--rouge bond trader creates $8 billion loss for bank--or some similar catastrophe. While the magnitude may be less, the impact may be just as significant for a small firm. The bookkeeper who embezzled $280,000 from a 10-person consulting firm over 18 months, the salesman who inflated his numbers to increase his commissions, etc. Don't assume the numbers from your bookkeeper are automatically correct. There are number of fairly simple tests that can be done to insure that the numbers represent the actual results. One of the easiest steps is to make sure your bank statement is reconciled each month--by someone other than the bookkeeper. Use a special bank account for electronic deposits and/or a special address for incoming checks. There are a number of relatively inexpensive steps that can be taken. Talk to your CPA. And use common sense. If sales are up and your margins are the same you should be making more money. If not, why not?
June 9, 2017
NewsThe IRS has announced that the MeF maintenance build window is being extended on Sunday, June 11, 2017. The systems will be unavailable from 1:00 a.m. until 10:00 a.m. Eastern. The build will deploy critical system updates. This extended window affects both the MeF Production and ATS Environments.
You may escape the accuracy-related penalty by showing reliance on a professional tax preparer. In Carolyn F. Whitsett (T.C. Memo. 2017-100) the taxpayer, a doctor, used and relied on a long-time professional tax preparer to file her return. The preparer reported a large capital on her 2011 return, but never efiled the return although he gave the taxpayer a copy of the completed return. The IRS sent the taxpayer a CP2000 notice for 2012 for not reporting the capital gain on that return. The IRS asserted a 20% negligence penalty for failing to report the capital gain (the 2011 return was never filed; the 2012 return did not report the gain). The Court found that while the taxpayer was a highly educated person, she had no knowledge of Federal income taxation. In addition, she tendered the stock for redemption in December 2011, but documents she received indicated the redemption was processed on January 4, 2012. The documents also stated the "payment date" was August 19, 2011. As a lay person unfamiliar with tax law, stock redemptions, and corporate reorganizations, petitioner understandably found this documentation confusing and reasonably referred this question to her longtime tax return preparer. The Court found the taxpayer exercised ordinary business care and prudence. The Court noted the professional's errors cannot be used retroactively to demonstrate the adviser's lack of competence. The Court held the taxpayer acted with reasonable cause and in good faith in failing to report the proceeds of the stock sale on the 2012 return and held her not responsible for the negligence penalty.
If you're planning to deduct vehicle expenses, you've got to keep especially good records. In Katrina E. Taylor et vir (T.C. Memo. 2017-99) the Tax Court found the taxpayer's log was not created contemporaneously, contained material errors, appeared obviously inflated, showed different mileages to the same destination, and multiple trips to nearby destinations rather than combining a trip. The Court noted the taxpayers offered no credible evidence to explain the inconsistencies and improbabilities. The Court denied the taxpayers a deduction for any car and truck expenses.
Tip of the DayPOD or TOD . . . That's payable on death or transfer on death. Using either device to transfer a bank or brokerage account on your death will keep the assets out of probate and reduce the fees to an executor or attorney. They'll also be no question on the transfer. The bank or broker should be able to do it on notification of death which means the funds can be available quickly for other purposes. The assets are included in the gross estate for estate tax purposes, so there's no break there. And it may cause an unequal distribution of the estate. For example, you put your son Fred on your Madison Securities brokerage account when it's valued at $500,000. You put your daughter Sue on your Chatham Brokers account when it's valued at $500,000. The rest of your estate is split 50-50. But your Madison account soars while the Chatham account languishes. Fred will get an unequal portion. This can be remedied in your will, but you have to recognize the potential problem. Talk to your estate attorney.
June 8, 2017
NewsThe IRS has issued a memorandum (SBSE-04-0517-0030) to provide guidance to remind examiners that frequently asked questions (FAQs) and other items posted on IRS.gov that have not been published in the Internal Revenue Bulletin are not legal authority. The FAQs and other items should not be used to sustain a position unless the items (e.g., FAQs) explicitly indicate otherwise or the IRS indicates otherwise by press release or by notice or announcement published in the Bulletin.
In a series of related cases Crescent Manor, Inc. (T.C. Memo. 2017-94; see also 2017-95, 2017-96, 2017-97 and 2017-98) the taxpayer had unpaid employment tax obligations. In a collection due process hearing the settlement officer (SO) rejected the taxpayer's proposed installment agreement because the corporation was not current on its filing and estimated tax payment requirements. The SO noted the taxpayer had defaulted on a previous installment agreement and that in the proposed installment agreement the monthly payments exceeded the taxpayer's monthly income by a significant amount. In addition, the corporation's assets, including accounts receivable of balances, werer sufficient to pay the outstanding obligation. The taxpayer claimed it would suffer economic hardship if the proposed collection action were sustained. The SO noted that the economic hardship exception was unavailable to corporations. The Court found the SO had reviewed the issues including the taxpayer's financial positionand and determined that thre was no alternative to sustaining the notice of intent to levy and she explained the reason bhind her decision in the notice of determination. The Court held the SO did not abuse her discretion in conducting the Sec. 6330(c)(3)(C) balancing test. The Court also rejected the taxpayer's argument that the SO was not impartial.
Tip of the DaySpecial needs trust . . . If you have a disabled child or relative for whom you want to provide care over the long term you should consider a special needs trust. The new ABLE account may provide the same benefits with less reporting and tax requirements. As opposed to simply putting money in a bank account for the disabled individual, a special needs trust won't disqualify the individual from certain government benefits that are based on need since the assets in the trust aren't counted. This can be a complicated area, talk to an attorney or tax professional well versed in this subject.
June 7, 2017
NewsPassive activity losses can only be used to offset passive activity income. A special provision allows taxpayers to deduct up to $25,000 of passive activity losses from real estate against ordinary income, but that $25,000 amount is phased out as a taxpayer's AGI exceeds $100,000. Another provisions allows real estate professionals to fully deduct those losses against ordinary income, but they have to prove material participation in the activity. That requires spending more than half of personal services in real property trades or businesses in which he or she materially participates and more than 750 of personal services in real property trades or businesses in which he or she materially particpates. The requirements can be significant hurdle for someone who has a full-time job in another field. Even the 750 hour test isn't easy to surpass. In the case of Paul Morris McNally et ux. (T.C. Memo. 2017-93) the taxpayers claimed to have met the test and claimed substantial real estate losses form eight properties for one of the years and six for the other, but they did not file a statement electing to treat all interests in rental real estate as a single rental real estate activity. Thus, they had to meet the test for each property. The Court found the taxpayers' journal recording his activities with respect to his real estate activities not credible substantiation of either his time spent in real estate activities. The Court noted the journal did not list the time or the type of work completed in the real estate activities. The Court found neither of the taxpayers qualified as a real estate professional.
In IRS cases the burden of proof is generally on the taxpayer. That's not the case if the IRS asserts fraud. In Henry Langer et ux. (T.C. Memo. 2017-92) the IRS was able to show fraud noting disallowed business expense deductions of $113,194, $67,186, and $84,087 for the three years at issue. The expenses were personal in nature and not different than in earlier cases with the same taxpayer. The Court noted that Mr. Langer's nearly 30 years of experience as a revenue agent and the taxpayers' history before the Court for identical issues were relevant considerations in determining whether they had fraudulent intent. The Court also noted that the taxpayers' repeated concealment of income by overstating deductions exemplified a pattern of fraudulent behavior, and their explanations were implausible and unpersuasive. The Court found the taxpayers liable for the fraud penalties for all the years at issue.
Tip of the DayReal estate professionals . . . As discussed in the case above, a real estate professional can deduct rental losses against ordinary income without limitation. It's not unusual for many taxpayers who rent one- or two-family houses to incur losses for a number of years. While they can be carried forward, they're usually only available some years down the road or when a taxpayer's income is low and then the losses offer less of a benefit. While the real estate professional provision has been on the books for some time, it's only been in the last couple of years that cases have shown up in court (cases usually come to court several years after an audit). But they are now appearing with great regularity. This definitely appears to be a red flag on a return. There are two reasons--first, most taxpayers who claim to be professionals can't meet the threshold and second, most taxpayers don't keep anywhere near adequate records. It's much like taking a deduction for a vehicle. The odds of winning are heavily in the IRS's favor. If you think you qualify--and there are many rental property owners who might--talk to your tax advisor. Your chances of getting audited are probably much higher and you want to be sure your log and the rest of your return are in order.
June 6, 2017
NewsThe U.S. Department of Education has announced the IRS Data Retrieval Tool is now available for borrowers applying for an income-driven repayment plan. New encryption protections have been added to the Data Retrieval Tool to further protect taxpayer information. The IRS Data Retrieval Tool will return Oct. 1, 2017, on the online 2018–19 Free Application for Federal Student Aid (FAFSA) form. For more information go to Data Retrieval Tool Available for Income-Driven Repayment Plan Application on the Department of Education web site.
In Adam Steele, et al. (U.S. District Court, D.C.) the Court held that while the IRS can require the use of PTINs (preparer tax identification numbers), in may not charge fees for issuing PTINs. It's likely the IRS will appeal the holding with respect to its ability to charge user fees for PTINs.
A bipartisian bill has been introduced that would increase the maximum for the Dependent Care Assistance Program, based on a flexible spending account, to $10,500 from $5,000. The bill would also provide credits for employer startup costs and employer matching contributions.
Tip of the DayDisregarded entities . . . For most taxpayers that means a single member LLC. If you're the only owner in an LLC the IRS considers it a disregarded entity and, instead of reporting the income from a sole proprietorship on a separate return, you report it on Schedule C of your personal return. If the LLC's only activity is the holding of rental real estate, you report the income on your Schedule E of your 1040. Most, but not all states, follow the same rule. Check the rules for the states in which you do business. And check to make sure you don't have to file another form. New York state requires all LLCs to file a one-page report and most will be liable for a fee. Check the rules in your state.
June 5, 2017
NewsThe IRS has announced (IR-2017-102) that beginning June 15, taxpayers requesting letter rulings, closing agreements and certain other rulings from the IRS will need to make user fee payments electronically using the federal government's Pay.gov system. In the past, ruling requesters could only make required user fee payments by check or money order. During a two-month transition period, June 15 to Aug. 15, requesters can choose to make user fee payments either through Pay.gov or by check or money order. After Aug. 15, 2017, Pay.gov will become the only permissible payment method.
The IRS has issued notices of certification to 84 organizations that applied for voluntary certification as a Certified Professional Employer Organization (CPEO). The IRS continues to process CPEO applications and those applicants not yet receiving a notice of certification will receive a decision from the IRS in coming weeks and months.
The spring 2017 issue of the Statistics of Income Bulletin is available on IRS.gov featuring preliminary data about individual income tax returns filed for Tax Year 2015. The Statistics of Income (SOI) Division produces the online Bulletin quarterly, providing the most recent data available from various tax and information returns filed by U.S. taxpayers.
Tip of the DayOutsourcing? What will your customers think? . . . Sometimes outsourcing is transparent. Do you care that the Fourth National Bank of Madison's mail is opened by someone in a foreign country? Probably not. Do you care that your radiologist might be sending your x-rays to be read by a doctor there? We're guessing the answer to that one is yes. If you're outsourcing your order, customer service, or help desk, you want to make sure the support person is competent, pleasant, and will be accepted by your customers. One large bank uses a tier system. Customers with large deposits talk to someone in the U.S.; small customers will be talking to someone in a foreign country. That may work, but there can still be pitfalls. Consider your customers. The dollar savings may not be worth it. The same applies to outsourcing any job. Most customers who contract for a new kitchen or addition assume the general contractor will subcontract electrical, plumbing, sheetrock work, etc., but that's not true for other services or products. Make sure the subcontractor performs up to you standards.
June 2, 2017
NewsThe amount of unpaid tax, penalties, and interest associated with Automated Non-Master File accounts is significant. The Automated Non-Master File provides information regarding individual and business taxpayer accounts that, because of system limitations, cannot be managed through the Master File. As of September 29, 2015, the Automated Non-Master File contained 9,145 open accounts with unpaid tax, penalties, and interest totaling more than $4.5 billion. The need to manually transfer information between the Master File and the Automated Non-Master File increases the risk of errors. The Treasury Inspector General for Tax Administration (TIGTA) did a review to evaluate the accuracy of processing tax accounts on the Non-Master File. TIGTA found that calculation errors on Automated Non-Master File accounts resulted in the incorrect assessment of penalties. Specifically, the IRS did not assess Failure to File penalties totaling more than $1.7 million on 85 open accounts. The IRS also overassessed Failure to Pay penalties totaling $88,576 on 153 accounts and underassessed Failure to Pay penalties totaling $354,153 on 227 accounts. In addition, processes are needed to ensure that credits and payments are correctly applied to accounts with a balance due. TIGTA identified four open Automated Non-Master File accounts with $122,041 in credits that were erroneously refunded back to the taxpayer despite the taxpayer having unpaid tax liabilities on another Automated Non-Master File account. TIGTA also identified 420 open Automated Non-Master File accounts and 399 closed Automated Non-Master File accounts for which the IRS did not correctly apply $1.4 million in payments. The IRS instead posted the payments to the taxpayers’ other Master File accounts with a balance due. Finally, processes need to be established to ensure the accuracy of Automated Non-Master File accounts. TIGTA identified 360 accounts in which the Collection Statute Expiration Dates did not match information on the Master File; 560 accounts in which the address did not match; and 116 accounts in which the taxpayers’ designated representative information did not match. These discrepancies can result in taxpayers and their representatives not receiving notices as required or the IRS accepting a payment for a balance due that is no longer legally owed. To see the full report go to www.treasury.gov/tigta/auditreports/2017reports/201740037fr.pdf.
You can't avoid a tax lien on your property by transferring it for inadequate consideration to a relative, friend or related entity. In Joseph Chiarelli (T.C. Memo. 2017-91) the IRS sent the taxpayer a Letter 1058, Final Notice of Intent to Levy. The taxpayer request a collection due process hearing and requested an installment agreement and offer-in-compromise. On an incomplete Form 433-A Collection Information Statement for Wage Earners and Self-Employed Individuals the taxpayer showed no ownership interest in real estate. He wrote on this form that the only assets that he had transferred in the prior 10 years were “charitable contributions”. During a supplemental collection due process hearing the taxpayer provided history on a properties that he transferred to his daughter for $1. Because of the size of the mortgage on one of the properties the IRS determined the taxpayer had no equity in the property. However, he did have equity in the other property. The Tax Court held the IRS did not abuse its discretion in upholding the proposed collection action.
In order to protect the IRS's ability to collect any tax due it may file a notice of federal tax lien (NFTL), In Chester George Durda (T.C. Memo. 2017-89) the taxayer wanted to have the NFTL withdrawn and when the IRS declined to do so he petitioned the Tax Court. The Tax Court noted that the IRS can withdraw an NFTL filing if he determines that: (1) the filing was erroneous; (2) the taxpayer has entered into an installment agreement that renders the NFTL unnecessary; (3) withdrawal of the NFTL “will facilitate the collection of the tax liability”; or (4) withdrawal of the NFTL “would be in the best interests of the taxpayer (as determined by the National Taxpayer Advocate) and the United States.” Here only the third justification was applicable. The Court found the settlement officer (SO) reasonably decided that withdrawal would not facilitate collection and that maintenance of the NFTL was necessary to protect the Government's interest.
Tip of the DayCustomer surveys--keep it short . . . It's important to know what your customers think of your service, product, etc. But a long survey isn't the answer. The longer the survey, the better the chance the respondent will ignore it or, worse, not answer the questions carefully. And that could result in misleading information. Some professionals have suggested that you only need to ask one question "would you recommend us to a friend or associate?" While on a "return per inquiry basis", that's the best question, you may want more info. For example, if not, why not? And, if so, why? You may also want to get more specific information on products or services. But unless you're paying the respondent, keep the survey short. Ten questions should be about the maximum.
June 1, 2017
NewsWhile work is continuing on tax reform, it increasingly looks like enough consensus among participants to generate legislation that will pass both houses is unlikely to happen this year, if at all. What we might see is significant changes in tax rates and curbing of deductions along with some simplification, but not the sweeping reform talked about for some time. The border adjustment tax, a major revenue raiser, does not have the support necessary. Many proposed benefits have their champions and any cuts would require hard fights if a consensus could be reached. The tax code is complex and in that complexity is a myriad of sacred cows.
You can recover your attorney fees and related costs in a dispute with the IRS if you can show you were the prevailing party and you didn't unreasonably protract the proceedings. In Christina M. Fitzpatrick (T.C. Memo. 2017-88) the petitioner was the subject of a trust fund recovery penalty (TFRP) investigation from unpaid employment taxes. The IRS found the taxpayer liable and issued a Letter 1153 proposing assessment of the TFRP but the petitioner never received the letter. The Court found the petitioner was not liable for the TFRP. The taxpayer sought her litigation costs since she was the prevailing party. Normally, a petitioner cannot recover even if they are the prevailing party if the IRS position is substantially justified, which, in this case, it was. However, even if the IRS can establish that its position was substantially justified, a taxpayer can still be considered a prevailing party if she makes a qualified offer and “the liability of the taxpayer pursuant to the judgment in the proceeding . . . is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted . . . [the] qualified offer”. The Court found the petitiioner was entitled to her costs. However, it did not agree that she should recover costs in excess of the statutory cap because of special factors and that tax expertise did not equate to special factors.
Tip of the DayShopping for insurance? . . . Do some research first. One company is no longer selling homeowner's insurance in a hurricane prone area. It's not that they want to eliminate risks, just reduce their exposure in a particular area. You may want to consider that before jumping on that low quote from another company. You may not be able to switch back later. Examine the stability and policies of the company before switching. Switching for a small savings may not be worth it.
Copyright 2017 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536