For the full text of new Revenue Rulings, Revenue Procedures, Regulations, etc. go to:
Internal Revenue Bulletins
For a Tax Court Case:
Tax Court Cases
For IRS News Releases:
News Releases and Fact Sheets
For Letter Rulings and Technical Advice Memoranda:
IRS Written Determinations
For IRS Forms and Publications:
Forms and Publications
For Health Care Tax Tips:
Health Care Tax Tips
February 24, 2017
The Financial Crimes Enforcement Network (FinCEN) has announced the renewal of existing Geographic Targeting Orders (GTOs) that temporarily require U.S. title insurance companies to identify the natural persons behind shell companies used to pay “all cash” for high-end residential real estate in six major metropolitan areas. The GTOs (1) all boroughs of New York City; (2) Miami-Dade County and the two counties immediately north (Broward and Palm Beach); (3) Los Angeles County; (4) three counties comprising part of the San Francisco area (San Francisco, San Mateo, and Santa Clara counties); (5) San Diego County; and (6) the county that includes San Antonio, Texas (Bexar County). The monetary thresholds for each geographic area can be found in this table. The lowest trigger is $500,000 in San Antonio; the highest is $3 million in Manhattan. The transaction is reportable if the purchase is made, at least in part currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, or a money order in any form.
If you fit the IRS definition of a real estate professional you can deduct your passive real estate losses without the usual $25,000 restriction. To do so you must show you spent more than 750 hours and more than half your working hours in real estate during the tax year. In Mohammad M. Zarrinnegar et ux. (T.C. Memo. 2017-34) the taxpayer had logs that showed he spent more than 1,000 hours during the year on real estate activities, which was more than the time he spent working as a dentist. The taxpayer's testimony about the logs was credible and he provided the testimony of other witnesses. However, the Court denied some of his expenses related to the business because of insufficient documentation. The Court did not apply the Cohan rule, noting the taxpayers provided no evidence that certain expenses were in fact incurred.
Tip of the Day
IRS not only user of 1099 data . . . The IRS isn't the only taxing entity to use the data from 1099s to find unreported income. At least one state is using data from 1099-Ks to determine if income is underreported on a tax return. States could use the date for both income taxes and sales taxes. Since it's more than likely the business would have receipts from additional sources, e.g., either cash or check, in addition to credit card revenue, the data can only be used imprecisely. Some businesses receive more cash than others. Based on prior audits the amount of cash can be estimated, but with limited precision. But there's no question if you report only the amount reported on 1099-Ks, you'll probably get a letter from the state.
February 23, 2017
The IRS has announced (IR-2017-41) that publicly available information from approved applications for tax exemption using Form 1023-EZ, Streamlined Application for Recognition of Exemption, is now available electronically. The data on IRS.gov is available in spreadsheet format and includes information for approved applications beginning in mid-2014, when the 1023-EZ form was introduced, through 2016. The information will be updated quarterly, starting with the first quarter of calendar year 2017. The IRS’s Tax Exempt and Government Entities division approved more than 105,000 applications for exemption submitted on the Form 1023-EZ from 2014 through 2016. Information in the Form 1023-EZ includes basic identifying information such as the name of the organization, Employer Identification Number and the names of officers, directors and trustees. The Form also contains information regarding items such as the organizing documents, state of incorporation, purpose and activities of the organization.
Amounts received as worker's compensation and some related payments are not taxable. In Elias Olson and Rosalinda Olson (T.C. Memo. 2017-33) the taxpayer-wife had received disability payments for a service-related disability for several years. Those amounts were excludable from her income. However, when she reached normal retirement age the disability payments stopped and she began to receive her pension. The taxpayer excluded the pension from the income reported on their return. The Court held the pension payments were not excludable since the amounts were determined with reference to the taxpayer's age and years of service. In addition, the Court sustained the notice of Federal tax lien (NFTL) finding the taxpayers' history of failing to pay tax liabilities.
Tip of the Day
Apportioning income for state taxes . . . Business owners who do business in more than one state must generally apportion their income to determine their tax liability in each state. In the past a simple three-factor formula was used--the percentage of sales in the state to the total sales, then the property, and finally the payroll. The three percentages were added and divided by three to arrive at a single percentage. While some states still use basically the same approach, many states double weight sales, drop one of the other factors, etc. Some states use different "sales" formulas for different industries. Read the instructions for the forms carefully if you've got to apportion your income. A mistake can prove costly.
February 22, 2017
In Steven C. Clift (U.S. District Court, W.D. Washington, at Tacoma) the taxpayer filed a complaint against the IRS alleging it improperly assessed civil penalties for frivolous tax submissions and issued false levies. The Court noted a taxpayer cannot seek damages under Sec. Sec. 7433 for improper assessment of taxes. Because the assessment of civil penalties under Sec. 6702 for frivolous tax returns is not a "collection activity" the Court found it lacked jurisdiction. The petitioner also claimed the IRS engaged in an unlawful collection activity when it levied over 15 percent of his Social Security retirement benefits. The Court noted that Sec. 6331(h) does not create a 15 percent limit on the levy of Social Security retirement benefits.
Tip of the Day
Letter 4883C . . . The IRS takes many steps to protect taxpayers from identity theft. If taxpayers receive an IRS Letter 4883C, it’s because the IRS stopped a questionable return. Before calling the IRS, be prepared to validate identity. See Understanding Your 4883C Letter for details.
February 21, 2017
The IRS, state tax agencies and the tax industry are warning tax professionals to be alert to a new phishing email scam impersonating software providers. The scam email comes with the subject line, “Access Locked.” It tells recipients that access to their tax prep software accounts has been “suspended due to errors in your security details.” The scam email asks the tax professional to address the issue by using an “unlock” link provided in the email. However, the link will take the tax professional to a fake web page, where they are asked to enter their user name and password. Instead of unlocking accounts, the tax professionals actually are inadvertently providing their information to cybercriminals who use the stolen credentials to access the preparers’ accounts and to steal client information.
The IRS is advising taxpayers that Tuesday, Feb. 21, the day following Presidents Day, is typically the busiest day of the year for IRS telephone assistors, as they field thousands of calls per hour. The IRS reminds taxpayers that most questions can be answered online by using the numerous tools available at IRS.gov. Taxpayers calling the IRS about account issues should be prepared to validate their identities by having prior-year and most recently filed tax returns available.
Tip of the Day
Retirement and estimated taxes . . . Your financial status can change significantly upon retirement. For many taxpayers, earnings will decrease--but not for all. And even if your income drops because you're no longer working, it also means you may not be having regular withholding for income taxes. For example, a married couple collecting social security and just $40,000 in interest, pensions, etc. would have a tax liability and may or may not have to make estimated payments. If you or your spouse have a small side income that could also trigger payments. If you have substantial income from Social Security the easiest approach is to ask for federal taxes to be withheld. If you're still working full-time and collecting Social Security, your liability could be significant. If you're using tax software, look for a worksheet for computing estimated taxes.
February 17, 2017
The IRS has announced that it will not reject returns that do not indicate the status of the taxpayer's health coverage. Beginning this year the IRS had intended to reject those returns, but following the issuance of Executive Order 13765 by President Trump it has reversed it's stance. While the Service will process such returns and issue refunds if appropriate, the IRS also said taxpayers may receive correspondence some time in the future with questions about health care coverage. The IRS also indicated that the decision to process the returns doesn't change the fact that penalties for failure to have coverage have not been eliminated.
The IRS has reported that as of Sunday February 5, certain e-Services users who have not verified their identities with the IRS have had their accounts suspended. In December, IRS mailed Letters 5903 to users who had been active on their accounts in the past year and had access to the Transcript Delivery System. Users were given 30 days to verify their identities as part of our effort to better secure the e-Services program and protect taxpayer data. The IRS has updated the e-Services landing page and the Important Update about Your e-Services Account to provide users with guidance about how to reinstate their accounts if they did not do so within the 30-day timeframe.
Tip of the Day
Real estate professional . . . If you qualify as a real estate professional you can deduct all your losses on rental real estate with the usual restriction. However, simply checking the box on Schedule E may be a mistake. Claiming to be a real estate professional is apparently a hot topic with the IRS and you'll probably increase your audit chances significantly. Why? Part of the answer lies in the requirements. lies in the requirements. You'll have to show you spent more than half your working time and more than 750 hours in the real estate field during the year. Be prepared to show the IRS a diary with the time you spent working both in real estate and in other trades or businesses during the year. The courts have scrutinized any documentation presented and found a substantial number of journals inadequate. Discuss the issue carefully with your tax advisor.
February 16, 2017
If your spouse is not competent to sign a return you should document that if it could be questioned. In Peter William Moss (T.C. Memo. 2017-30) the taxpayer-husband filed a joint return attaching a letter saying his wife was mentally ill, but not attaching a power of attorney. The wife filed a return reporting just her income. The wife had been hospitalized for mental illness several years earlier and she was released on the condition she live with her husband, but he was not a formal guardian or conservator. Several years after the return in question was filed the wife was placed in a conservatorship with her daughters. The Court found the taxpayer was unable to show that his wife was unable to file a return, and even if unable, that he qualified as her agent when he filed the return. The Court noted that the fact that she filed a return (as married, filing separately) weighed heavily against the husband. The Court found the taxpayer was not entitled to either married filing jointly status or the additional personal exemption that follows.
If you have a qualifying child you can be entitled to a number of tax benefits including an exemption for the child, the child tax credit of $1,000, the earned income credit and filing as head of household. In Grisel A. Smyth (T.C. Memo. 2017-29) the taxpayer was a grandmother who provided over half the support for the grandchildren, they lived in her home more than half the year and met the other qualifications. However, the children were also qualifying children of the taxpayer's son and his wife and they claimed the children on their return. The Court noted that under the "tie-breaker" rules the parents and not their grandmother get to claim them if both parties claim them. The taxpayer argued that she was under the impression that her son and his wife relinquished the claim on an amended return, but the Court found no evidence of that. The Court was sympathetic to the taxpayer's plight, but indicated it had to follow the law and disallowed the taxpayer the credit.
Tip of the Day
IRS checking preparer compliance . . . The IRS is sending Letter 4858 to tax preparers who completed 2016 returns claiming the earned income tax credit but who may not have met the required due diligence requirements. Disregarding due diligence requirements could result in penalties and other consequences for preparers and their clients. Letter 4858 comes in both English and Spanish. The IRS is also sending Letter 5364 to tax preparers who completed two or more 2016 paper returns claiming Earned Income Tax Credit (EITC), American Opportunity Tax Credit (AOTC), or Child Tax Credit/Additional Child Tax Credit (CTC/ACTC) without including Form 8867, Paid Preparer’s Due Diligence Checklist.
February 15, 2017
Victims of the severe storms, tornadoes, and straight-line winds that took place beginning on February 7, 2017 in parts of Louisiana, may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of Louisiana. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers (those who reside in or have a business) in the parishes of Livingston and Orleans Louisiana will receive 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 February 7, 2017, and before June 30, 2017, are granted additional time to file through June 30, 2017. This includes 2016 income tax returns normally due on April 18. It also includes the April 18 deadlines for making quarterly estimated tax payments. Affected taxpayers that have an estimated income tax payment originally due on or after February 7, 2017, and before June 30, 2017, will not be subject to penalties for failure to pay estimated tax installments as long as such payments are paid on or before June 30, 2017.
The IRS has announced that Where’s My Refund? will be updated on Feb. 18 for the vast majority of early filers who claimed the Earned Income Tax Credit or the Additional Child Tax Credit. Before Feb. 18, some taxpayers may see a projected deposit date or an intermittent message that the IRS is processing their return. By law, the IRS is required to hold EITC and ACTC refunds until Feb. 15. However, taxpayers may not see those refunds until the week of Feb. 27. Due to differing time frames with financial institutions, weekends and the Presidents Day holiday, these refunds likely will not start arriving in bank accounts or on debit cards until the week of Feb. 27--if there are no processing issues with the tax return and the taxpayer chose direct deposit.
Tip of the Day
Need tax help? . . . If you're determined to do your own taxes or just want more information on a tax topic, the IRS has plenty of material. Unfortunately, doing a keyword search in irs.gov doesn't work real well. If you're working on your return, the first move should be to check the instructions for the form. The second is to check for an IRS publication. You'll find the answers to most questions in the pubs. For a list of the most popular publications go to smbiz.com/sbrl046.html. Finally, the IRS Services Guide has three pages of phone numbers and links that will answer a number of questions.
February 14, 2017
If you don't pay the tax owed, the IRS can put force a sale of real estate or other property to collect any amount due. While the IRS has the power, the Service tries to collect first by other means (e.g., an installment agreement). Any proceeds from the sale in excess of the amount owed the IRS is returned to the owners. In Joe Watson, et al. (U.S. District Court, W. D. Virginia, Abingdon Div.) the taxpayer-husband's liability resulted from unpaid employment taxes. Both taxpayers were over 70 at the time of trial. The taxpayers owned three properties--a house and two commercial structures that generated rental income. The Court noted that in an IRS form submitted under penalty of perjury, the taxpayers did not identify any income from the rental properties. At trial the taxpayer-wife declared the properties do produce income, but did not specify the amount. The properties were held in a form called tenants by the entirety. The Court noted that in Rodgers the Supreme Court held that a district court has the power to order the sale of a family home to satisfy the tax debt of its owner, even when the debtor's spouse also owns an undivided interest in the home which is protected against forced sale under state law. While tax law allows for some discretion and does not require the court to authorize a forced sale under all circumstances, the Court enumerated a non-exclusive list of factors the court could use in exercised its limited discretion. The IRS argued the Rodgers considerations apply only to homestead properties and not to commercial properties owned as tenants by the entirety. The District Court noted the Supreme Court's reasoning did not support such a limitation. The Court considered the Rodgers factors, noting the taxpayers did not reside in the commercial properties and they appeared to generate little rental income beyond expenses. The Court also noted the wife would receive one-half of the sale proceeds after costs. The Court concluded the facts did not show the sale of the property would unduly harm the wife.
Tip of the Day
Married? . . . You are considered married for the whole year for tax purposes if, on the last day of the tax year, you and your spouse meet any of the following:
February 13, 2017
The IRS has reported that more than 48,000 tax return preparers have participated in the 2017 IRS Annual Filing Season Program and obtained an official Record of Completion. But another 37,000 return preparers who have completed the required amount of continuing education and been invited to participate have not consented to the Circular 230 requirements to receive a Record of Completion. The deadline for preparers to consent to the Circular 230 requirements and become full participants is April 18. A video tutorial of the process is available at www.youtube.com/watch?v=l6n_dAnQCn8.
The IRS has announced that the counties of Thomas and Worth have been added to the Georgia counties where victims of severe storms, tornadoes, and straight-line winds that took place beginning on January 21, 2017 may qualify for relief from the IRS.
If you start an action in Tax Court you may not be able to simply withdraw your petition. When the Court in a deficiency context dismisses a case on a ground other than lack of jurisdiction, Sec. 7459(b) requires the Court enter a decision deciding that "the deficiency is the amount determined by the Secretary". In Elizabeth M. Jacobson (148 T.C. No. 4) an individual petitioned under Sec. 7623(b)(4) for a review of the IRS's denial of her claim for a whistleblower award. The petitioner subsequently moved for voluntary dismissal of her case, to which the IRS did not object. The Court held because the IRS would not suffer prejudice from dismissal it granted the petitioner's motion.
Tip of the Day
Partnership returns due March 15 . . . Historically, partnership (and LLCs taxed as partnerships) returns have been due April 15 for calendar-year entities. That's changed. For returns due in 2017 the due date for Federal Form 1065 is March 15. What about state returns? Many states are following the Federal deadline. Check with any states in which you do business.
February 10, 2017
In a recently released report the Treasury Inspector General for Tax Administration (TIGTA) found that IRS efforts continue to result in the improved identification of fraudulent tax returns involving identity theft; however, additional steps should be taken to improve the accuracy of some of the IRS’s identity theft estimates. For the complete report go to www.treasury.gov/tigta/auditreports/2017reports/201740017fr.pdf.
While most taxpayers are either on the cash or accrual method, there are several other different methods of accounting allowed by tax law. In Basic Engineering, Inc. (T.C. Memo. 2017-26) the taxpayer accounted for two contracts using the completed contract method of accounting. A taxpayer using the completed contract method of accounting recognizes all income and expenses associated with a contract only in the contract's completion year. The IRS determined that the taxpayer was ineligible to use the completed contract method of accounting for the contracts at issue. In order to qualify for the completed contract method of accounting the contract must reasonably be expected to be completed in two years. The Court found that wasn't the case here. The Court held the taxpayer could not use the completed contract method of accounting.
Tip of the Day
State pre-refund reviews . . . Return fraud of various types can result in both the state and Federal governments losing millions in revenue. Since credits are worth more to tax cheats than deductions at least one state is reviewing suspicious returns and, in some cases, requesting additional documentation before issuing a refund. Other states have taken different measures.
February 9, 2017
The IRS has indicated that the instructions to Form 7004, Automatic Extension of Time to File, for corporations is correct and that C corporations will get an automatic 6-month extension, not the 5-month extension provided in Sec. 6081(b).
Rev. Rul. 2017-5 (IRB 2017-09) provides tables of covered compensation under Reg. Sec. 401(l(5)(E) for the 2017 plan year.
You can only take losses in an S corporation or partnership up to your basis in entity. In William Namen (T.C. Memo 2017-24) the IRS challenged the taxpayers basis in the LLC (which was taxed as a partnership). At trial the taxpayer attempted to establish his basis in his interest in the LLC by testifying regarding his alleged contributions to the LLC. The taxpayer also claimed he was personally liable on loans made to the LLC. However, the taxpayer provided no corroborating documents and failed to provide any credible testimony or other evidence regarding the amount of his distributive share of the losses and the extent of any prior adjustments to basis. The Court held the taxpayer had not established his basis in the LLC.
Tip of the Day
Mailing a return? . . . Or a payment? Check the address on the IRS web site. Addresses do change from time to time. This is a good time to check the addresses you use most frequently. Go to www.irs.gov/uac/Where-to-File-Paper-Tax-Returns---With-or-Without-a-Payment for a complete list. The same may be true for state forms. Caution. A different address is often required if you're mailing an item by a private delivery service.
February 8, 2017
Victims of the severe storms, tornadoes, and straight-line winds that took place beginning on January 2, 2017 in parts of Georgia, may qualify for tax relief from the IRS. Affected taxpayers may deduct the losses on their 2016 or 2017 tax return. In addition, the declaration also permits the IRS to postpone certain deadlines for taxpayer who reside or have a business in the disaster area. The affected counties include Baker, Calhoun, Dougherty, Early, Mitchell, Turner, and Worth. For additional information go to Tax Relief for Victims of Severe Storms, Tornadoes and Straight-line Winds in Georgia.
There's no hardship exclusion for distributions from IRAs. In Kevin Cheves et ux. (T.C. Memo. 2017-22) the Tax Court sympathized with the taxpayers, the Court found there was no exception for an economic hardship withdrawal of IRA funds, either from the standpoint of inclusion in income or the early distribution penalty. The Court noted it could not waive the penalty. However, the Court noted the taxpayers reasonably attempted to comply with the Code and acted in good faith. The husband asked his insurance agent to withhold any additional tax due because of the early withdrawals from his retirement accounts. The taxpayers reported the amounts shown on two Forms 1099-R received, one for each of them. Each unreported amount is not insignificant, but the Court believed that the taxpayers' changed economic circumstances contributed to their error and confusion. Their withdrawals were made from multiple accounts, at irregular times, and in varying amounts. Most importantly, the husband mistakenly believed payments to his insurance agent constituted reimbursements mitigating the effect of early withdrawals. The Court concluded they acted reasonably and were not liable for the accuracy-related penalty.
Tip of the Day
Beneficiary designation critical . . . Pensions, IRAs, etc. avoid probate if you've listed a beneficiary. But relationships change and you should review beneficiary designations regularly. For example, when you set up that new IRA you listed your husband at the time as the beneficiary. But now you're divorced and want to leave everything to your two daughters. If you die without changing the beneficiary, your ex-husband gets the IRA. That may be the case even if in the divorce agreement your husband waived any claim on your retirement benefits. Checking the beneficiary designations makes sense even if there's been no relationship change. For example, three years ago you decided to leave your house to your daughter and your IRA to your son. Each was worth about $400,000 at the time. Now the house is worth $415,000 and your IRA $675,000. If you still want an even split, you might want to do make some changes.
February 7, 2017
Douglas M. Thompson et ux. (148 T.C. No. 3) arose out of the taxpayers' participation in a distressed asset debt tax shelter. They conceded substantive issues related to this case but contested the issue of liability for penalties under Secs. 6662(h) and 6662A. The taxpayers filed a motion to disqualify the Judge based on their belief that they cannot get a fair trial because the President of the United States has the power under Sec. 7443(f) to remove the Judges of the Tax Court for cause. The taxpayers also filed a motion to declare the penalty under Sec. 6662A unconstitutional as violating the Excessive Fines Clause of the Eighth Amendment. The Tax Court held that Code Sec. 7443(f) does not violate the Constitution and the Court did not need to recuse itself on that basis. The Court also held that the accuracy-related penalties under Sec. 6662A do not violate the Eighth Amendment.
Section 6038(a)(1) imposes information reporting requirements on any U.S. person, who controls a foreign corporation. A person controls a foreign corporation if he owns or constructively owns stock that is more than 50% of the total combined voting power of all classes of voting stock or owns more than 50% of the total value of shares of all classes of stock. A U.S. person must furnish, with respect to any foreign corporation which that person controls, information that the Secretary may prescribe. Form 5471 and the accompanying schedules are used to satisfy the section 6038 reporting requirements. The Form 5471 must be filed with the U.S. person's timely filed Federal income tax return. In Edward S Flume (T.C. Memo. 2017-21) the Tax Court found that the taxpayer was required to file Form 5471 and that he were liable for the Sec. 6038(b) penalty. The Court found the taxpayer was not aware of the qualifications of their tax advisor and did not provide her with all necessary information. The Court held he could not avoid the penalty by claiming reliance on his tax advisor.
Tip of the Day
Direct deposit of refund . . . It's the fastest, easiest, and safest way to get your refund. But you've got to be especially careful when entering your routing and account numbers. Your request for a direct deposit may be rejected if:
Generally the best approach is to take the routing and account number from the bottom of your check. The routing number is always nine digits while account numbers vary in length.
February 6, 2017
IIn Stanley Battart et ux. (148 T.C. No. 2) the taxpayers filed a motion to disqualify all Tax Court Judges and to declare unconstitutional Sec. 7443(f), which authorizes the President to remove Tax Court Judges “after notice and opportunity for public hearing, for inefficiency, neglect of duty, or malfeasance in office, but for no other cause.” In the Tax Reform Act of 1969 Congress deleted from Code Sec. 7441 the designation of the Tax Court as an independent agency within the executive branch. In 1971 the Tax Court said that under the 1969 Act the Tax Court is no longer within the executive branch. The taxpayers also adopted the view that the Tax Court is not within the executive branch and contend that, as a result, the President's limited removal authority violates separation of powers principles. In Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), the Court of Appeals held that the Tax Court is within the executive branch. The following year Congress amended Sec. 7441 because of concerns about statements made by the Court of Appeals in Kuretski. The Court held that under the Rule of Necessity, it is proper for a Tax Court Judge to rule on the taxpayers' contention that Sec. 7443(f) is unconstitutional. The Court also held Presidential authority to remove Tax Court Judges for cause does not violate separation of powers principles because, while Tax Court Judges exercise a portion of the judicial power of the United States, its Judges exercise no portion of the judicial power reserved to Article III judges. Thus, Presidential removal authority cannot interfere with the Article III judicial power regardless of the Tax Court's placement in the branches of Government. The Court denied the taxpayers motion.
In Timothy M. Dees (148 T.C. No. 1) the taxpayer claimed a refundable credit under Sec. 36B on his 2014 income tax return. The IRS determined that he was not entitled to the refundable credit and issued a notice of deficiency. That notice showed a deficiency of zero on the first page. The attached computation pages stated that there was a decrease to refundable credits but erroneously computed a tax deficiency of “.00”. The taxpayer timely filed a petition to challenge the IRS's disallowance of his refundable credit. The Court ordered the IRS to show cause why this case should not be dismissed for lack of jurisdiction, questioning the validity of the notice of deficiency. The Court held that when determining whether a notice of deficiency is valid, the Court reviews the notice objectively to determine whether it is adequate to inform a reasonable taxpayer that the Commissioner has determined a deficiency. If that test is satisfied the notice of deficiency is valid, and the Court will not look beyond the notice. The Court also held that if a notice of deficiency is ambiguous as to whether the IRS has determined a deficiency, then the party seeking to establish the Tax Court's jurisdiction bears the burden of proving that the Commissioner has determined a deficiency and that the taxpayer was not misled by the ambiguous notice of deficiency. The Tax Court held the IRS has shown that it determined a deficiency and that the taxpayer was not misled by the notice of deficiency.
Tip of the Day
Paying the IRS . . . If you owe the IRS, beginning this year you may be able to pay in cash. The option is provided through retail partners with a maximum of $1,000 per day per transaction. To make a cash payment you must first be registered online at www.officialpayments.com/fed the IRS's Official Payment provider.
February 3, 2017
There have been a number of cases recently where the IRS has claimed the taxpayer should have taken a salary from his or her S corporation. The IRS usually prevails. However, in Scott Kimrey Goldsmith et al. (T.C. Memo. 2017-20) the Court found the distributions from the S corporation were nontaxable returns of capital to the extent of his basis. The shareholder had advanced funds to the corporation and the corporation had net losses over the period in question. The Court found the IRS did not take into account the losses or the advances when asserting the distributions should be classified as wages.
Many fuels are subject to the Federal highway excise tax (e.g., diesel, gasoline). If they're used for a nontaxable purpose (nonhighway) such as in a bulldozer or backup generator you may be entitled to a refund of the tax. Propane may be exempt from tax if sold to a nonprofit educational organization or a nonprofit educational organization uses the propane as a fuel. In Christian Chukwuemeka Ibeagwa (T.C. Memo. 2017-19) the taxpayer purchased propane for an educational organization and claimed a fuel tax credit on Form 4136. The Court determined he purchased goods or services from the fuel supplier by a review of the taxpayer's bank statements, but there was no evidence the taxpayer made purchases of propane. In addition, the Court noted that even if the taxpayer was able to prove propane was purchased, the taxpayer had not shown the propane was used by the church as a fuel.
Tip of the Day
Free file mobile . . . The IRS has announced that taxpayers now may use their smart phones or tablets to electronically prepare and file their federal and state tax returns through IRS Free File. The IRS and its private-sector partners who offer their brand-name software products for free now support a new design that allows for the use of desktops, laptops, mobile phones and tablets. Access the products using mobile devices in two ways: (1) Use the IRS app, IRS2Go, which has a link to the Free File Software Lookup Tool or (2) Use the device’s browser to go to www.IRS.gov/freefile and select the “Free File Software Lookup Tool” or “Start Free File Now” to find a software product. The IRS2Go app is available for Android and iOS devices.
February 2, 2017
In IRS news release IR-2017-16 the IRS addressed a number of questions related to refunds. It emphasized that most of the returns that will be delayed are those claiming the Earned Income Tax Credit or the Additional Child Tax Credit. The Service also reported that the best way to find out about a refund is at Where's My Refund or the IRS2gomobileapp. Your tax preparer or "secret way" to get better information. The IRS will begin issuing refunds for those taxpayers claiming the Earned Income Tax Credit or the additional child tax credit on or about February 15.
Letting the state dissolve your corporation (or LLC) by not filing taxes, annual reports, etc. or doing it yourself prematurely can be costly. In Phillip S. Brown et ux. (T.C. Memo. 2017-18) the taxpayers owned INC and LLC, each an S corporation. During tax years 2000 through 2002, INC accumulated unpaid payroll tax liabilities, for which trust fund recovery penalties subsequently were assessed against the taxpayers. INC did not file any tax returns from 2003 through 2011 and was administratively dissolved by the State of Arizona in 2007. In 2012 LLC sent $215,000 from its bank account to the trust account of the taxpayers' attorney, who then sent a certified check in that amount to the IRS. INC filed a tax return for 2012, indicating that it is a cash basis taxpayer and showing no assets, income, or other tax items, with the exception of a deduction of $180,911 for salaries and wages. This deduction was passed through to the taxpayers as an ordinary business loss. INC did not pay any salaries or wages in 2012, nor did it have any bank accounts at any point in 2012. The Court noted the absence of any business activity and the administrative dissolution of the corporation and found INC was not engaged in a trade or business in 2012. The Court also held that even if its liabilities arose from the conduct of a prior trade or business, INC is not entitled to a deduction for 2012 of $180,911 for salaries and wages because by 2012 it was no longer in existence and that even if INC did exist in 2012, it is not entitled to the deduction because it did not actually pay the amount in question. Finally, the Court held that even if INC existed in 2012 and paid the amount in question, it was not entitled to the deduction because the payment was of nondeductible trust fund recovery penalties assessed against the taxpayers.
Tip of the Day
Refinancing a rental or business property? . . . If you refinance your personal residence with a loan larger than the outstanding principal on the existing mortgage, interest on the excess is generally not deductible. There are some exceptions--if the money is used to improve the residence or it qualifies as a home equity loan ($100,000 or less). With rental or business property the same rules generally apply, but the home equity exception isn't available. Refinance for more than the existing loan and the interest on the excess is not deductible unless the excess funds are used to improve the property or for another property. For a business, the interest is deductible if the excess funds are used by the business. However, in both cases, if the funds are diverted to personal use, the interest isn't deductible.
February 1, 2017
The IRS announced the release of an updated Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, that will help tax-exempt organizations avoid common mistakes when filing their annual return. The updated Form 990-EZ includes 29 “help” icons describing key information needed to complete many of the fields within the form. The icons also provide links to additional helpful information available on IRS.gov. These “pop-up” boxes share information to help small and mid-size exempt organizations avoid common mistakes when filling out the form and filing their return. On the new form, the help icons are marked in boxes with a blue question mark. The icons and underlying links work on any device with Adobe Acrobat Reader and Internet access. Once completed, filers can print Form 990-EZ and mail it to the IRS. The IRS also advises taxpayers that filing electronically significantly reduces errors.
The IRS has updated the notice and added counties to the disaster notice resulting from the severe storms, tornadoes, and straight-line winds that took place beginning on January 21, 2017 in parts of Georgia. The counties of Berrien, Cook, Crisp, Turner, and Wilcox have been added to Dougherty as the counties that qualify for relief. For more information, go to Tax Relief for Victims of Severe Storms, Tornadoes and Straight-line Winds in Georgia at irs.gov.
Tip of the Day
Medical insurance premiums . . . You can deduct insurance premiums you pay for a variety of medical insurance policies. The policies can cover doctors, hospitalization and ancillary services such as X-rays, physical therapy, etc., prescription drugs, dental care, replacement of lost or damaged contact lenses and long-term care. Premiums for long-term care are subject to a cap based on your age at the time the premiums are paid.
January 31, 2017
Victims of the severe storms, tornadoes, and straight-line winds that took place beginning on January 20, 2017, in parts of Mississippi, may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of Mississippi. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Mississippi will receive tax relief. Individuals who reside or have a business in Forrest, Lamar, Lauderdale, and Perry 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 more information and which deadlines are postponed and for how long go to Tax Relief for Victims of Severe Storms, Tornadoes, Straight-line Winds, and Flooding in Mississippi at irs.gov.
The IRS is reaching out to paid tax preparers who, based on returns processed, may not have performed the required due diligence when preparing returns with the earned income tax credit diligence when preparing returns with the earned income tax credit (EITC). Return preparers who complete highly questionable EITC claims may receive one or more of 11 letters. If you receive a letter from the IRS, don’t ignore it. Review your procedures to make sure you meet all four due diligence requirements. If you receive a letter, the IRS will continue to monitor the EITC returns you prepare. If the quality of the returns doesn’t improve, you may be subject to special follow-up procedures that include the possibility of an on-site audit or a Due Diligence Compliance Audit. For more information, go to EITC & Other Refundable Credits at irs.gov.
Tip of the Day
Traditional IRAs and your age . . . There are three IRA rules that are age-related. The first is for catch-up contributions. You can contribute an extra $1,000 if you are age 50 or older. The second is you cannot make a contribution for the year you turn age 70-1/2 or any subsequent year. (For example, if you were born on or before June 30, 1946 you cannot make a contribution for 2016 or any later year.) Third, you must begin taking distributions in the year you turn 70-1/2 (there's a grace period to April 15 for the first year).
January 30, 2017
Victims of the severe storms, tornadoes, and straight-line winds that took place beginning on January 2, 2017 in parts of Georgia, may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of Georgia. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Georgia will receive tax relief. Individuals who reside or have a business in Dougherty County 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 more information go to Tax Relief for Victims of Severe Storms, Tornadoes and Straight-line Winds in Georgia at irs.gov.
Tip of the Day
IRA contributions . . . You can make an IRA contribution, either traditional or Roth, for 2016 up until the unextended due date of your tax return. Generally, that's April 15th, but this year individual returns are due on April 18th but don't wait until the last minute. Since a contribution made in this year could be for either 2016 or 2017, be sure to tell the sponsor the intended year of the contribution. If you don't specify the sponsor will assume it's a contribution for 2017.
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