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May 27, 2016
The IRS has announced that the spring 2016 issue of the Statistics of Income Bulletin is available on IRS.gov featuring preliminary data about individual income tax returns filed for Tax Year 2014. 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. For prior data go to the historical data tables.
In Emmanuel A. Santos (T.C. Memo. 2016-100) the taxpayer had an accounting degree, prepared tax returns and earned a master's degree in taxation. At some point he enrolled in law school and on a Schedule C for a year deducted some $20,275 for law school tuition and fees. (He deducted other expenses but the case did not provide the amount of income reported.) The issue was whether the taxpayer could deduct his law school tuition. The Court noted that courts have held that a law degree qualifies a law student for a new trade or business (the business of being an attorney) and that thus the cost of a law degree is a nondeductible educational expense as set forth in the regulation. The taxpayer challenged the regulation, but the Tax Court rejected the arguments. It held the tuition was not deductible.
Tip of the Day
Got a good location? . . . Make sure you can keep it. Make sure you have a renewal option in your lease. It shouldn't cost you much, if anything, unless you want more favorable terms than normal. In most cases landlords don't mind renewals because keeping an existing tenant means avoiding the loss of rent during a vacancy, and not having to pay broker's commissions or alterations. It also saves by not having to spend time and money negotiating a new lease. Even then, most renewals are for one term. If you've got a 5-year lease, the option period is usually 5 years. Talk to an agent and attorney that understand real estate leases. More than one business has failed when forced to move to a new location, even a nearby one.
May 26, 2016
The IRS has released tables presenting statistics from the Form 1120 series. Published annually, these tables present comprehensive data on corporation income tax returns. This data release includes returns with accounting periods ending between July 2013 through June 2014 and include data from Forms 1120, 1120F, 1120L, 1120PC, 1120RIC, 1120REIT, and 1120S. Classifications are by industry, size of total assets, and size of business receipts. Separate tabulations from the Form 1120S, U.S. Income Tax Return for an S Corporation, are also included. To view these and prior years go to www.irs.gov/uac/soi-tax-stats-corporation-complete-report.
You may be able to settle your tax debt for less than the full amount with an offer-in-compromise, but you've got to meet certain criteria. In Synergy Environmental, Inc. (T.C. Memo. 2016-99) the taxpayer corporation, by the time of the case defunct, owed some $1.6 million but offered to settle for $600. A taxpayer's liability may be compromised where doubt as to collectibility exists, i.e., where the taxpayer's assets and income are less than the full amount of the liability. While the IRS settlement officer noted that the taxpayer could not pay and, on that basis, met the criteria for an offer-in-compromise, the settlement officer also noted that taken as a totality, the taxpayer showed a pattern of moving or eliminating its assets, all the while hotly contesting tax issues during the prolonged (10 year) audit and Tax Court processes. The IRS found the taxpayer met the offer-in-compromise rejection criteria contained in the Internal Revenue Manual. The Court found the IRS had not abused its discretion in rejecting the offer in compromise and filing of the notice of Federal tax lien.
Tip of the Day
To defer or not to defer . . . A like-kind exchange of business or investment property can defer gain, but that may not always be wise. You'll be losing depreciation deductions because your basis in the property will be the adjusted (reduced for depreciation) basis in the property disposed of plus any cash you added. Multiple like- kind exchanges could leave you with a big gain if you sell and don't defer. On the other hand, depreciation deductions spread over a number of years can't offset paying tax on a substantial gain. More importantly, if you die holding the property you'll escape income tax and your heirs will receive a step-up in basis. Generally, it makes sense to defer the gain. But you might want to consider not doing so if you've got a big capital loss that would otherwise go unused (even in the future) or you're having a bad year and you expect little or not income or even a loss. Talk to your tax advisor and work through the numbers.
May 25, 2016
On May 6, 2016 the President determined that certain areas in Arkansas are eligible for assistance as a result of severe storms, tornadoes, straight-line winds and flooding during the period of March 8 to 13, 2016. Taxpayers in the counties of Arkansas, Ashley, Bradley, Calhoun, Chicot, Cleveland, Columbia, Desha, Lincoln, Ouachita, Phillips and Prairie who sustained losses attributable to the disaster may deduct the losses on their 2016 or 2015 federal income tax returns.
The Rehabilitation Credit is jointly administered by both the IRS and the National Park Service (NPS). It uses tax incentives to encourage the private sector to restore and maintain historic structures. Qualified applicants may claim as much as 20 percent of their expenditures as a credit to reduce their overall tax liability. Similar to other general business credits, the IRS does not determine the primary qualifications of the project for which the Rehabilitation Credit is based. Rather, the IRS relies on the certification provided by the NPS, i.e., the NPS assigns a project number to each rehabilitation project when the certification application is submitted. The Treasury Inspector General for Tax Administration (TIGTA) performed a review to assess the effectiveness of the IRSís controls to ensure that business taxpayer claims for the Rehabilitation Credit were valid. TIGTA found third-party data received from the NPS are not being proactively used to identify potentially erroneous Rehabilitation Credit claims. The cornerstone of the IRSís ability to ensure compliance with many tax provisions is the ability to obtain reliable third-party data. Although the IRS receives a complete electronic copy of the NPS database twice a year, it has not established effective processes to use the data to identify potentially erroneous claims, both during tax return processing and in post-processing compliance efforts. Also, processes are needed to ensure that required information to claim the Rehabilitation Credit is provided and is accurate on all tax forms. A review of 2,720 tax year 2013 Forms 3468, Investment Credit, identified 39 taxpayers claiming almost $47 million in Rehabilitation Credits that did not provide either the required NPS project number or Employer Identification Number (EIN) of a pass-through entity. TIGTA recommended that the IRS develop processes and procedures to use NPS data to identify potentially erroneous claims and revise programming to identify and reject electronically filed business tax returns claiming the Rehabilitation Credit in which the required information is not provided on Form 3468 and when the information provided is invalid. To see the complete report, go to www.treasury.gov/tigta/auditrepo rts/2016reports/201640024fr.pdf.
Tip of the Day
Real and personal property . . . When you purchase a home you're usually buying only the house itself. There may be appliances that are assumed to go with the home--range, fridge, washer and dryer, etc. They're considered a part of the house, and while not real property per se, most of the time their sale with the home isn't a problem. But what if you purchase furnishings along with the house? The purchase of the furnishings should be separate from the real property and you should have a separate bill of sale. That's even more important if the real estate is business or rental property. There's no concern if the dollar amount is insignificant, or as it is in many cases, the property has no value.
May 24, 2016
The IRS has announced it will conduct its annual Memorial Day systems maintenance outage beginning Saturday, May 28, 2016 at 11:59 a.m. EDT and ending on Tuesday, May 31, 2016 at 6:00 a.m. EDT. E-Servicesí Transcript Delivery System, TIN Matching and e-file Application will not be available during this period. The IRS has asked taxpayers and practitioners to refrain from accessing the MeF Systems to transmit business, individual or state tax returns, retrieve acknowledgements or submit any other service requests.
In an audit report TIGTA (Treasury Inspector General for Tax Administration) noted that billions of dollars in potentially improper payments will continue to go unaddressed unless the IRS is allowed expanded error correction authority. The Improper Payments Elimination and Recovery Act (IPERA) of 2010 and subsequent legislation strengthened agency reporting requirements and redefined "significant improper payments' in Federal programs. The Office of Management and Budget (OMB) has declared the Earned Income Tax Credit (EITC) Program a high-risk tax program that is subject to reporting in the Department of the Treasury (Treasury) Agency Financial Report. OMB considers the EITC the only IRS revenue program fund to be a high risk for improper payments. The IRS estimates that 23.8 percent ($15.6 billion) of EITC payments were issued improperly in Fiscal Year 2015. The Consolidated Appropriations Act of 2016 provides the IRS with additional tools to reduce EITC improper payments. However, it did not expand the IRSís authority to systemically correct the erroneous claims it identifies. Without this authority, the IRS continues to be unable to address the majority of potentially erroneous EITC claims it identifies. The number of potentially erroneous EITC claims the IRS can audit is limited by resources. As a result, billions of dollars in potentially erroneous EITC claims go unaddressed each year. "The IRSís Fiscal Year 2017 budget submission contained a legislative proposal for correctable error authority," said J. Russell George, of TIGTA. "This authority would help it systemically address many of the erroneous claims it identifies," he added. In addition, although the IRS completed risk assessments of the 22 program fund groups identified by the Treasury, the risk assessment process still does not provide a valid assessment of refundable credit improper payments. For example, the IRS continued to incorrectly rate the risk of improper payments associated with the Additional Child Tax Credit and the American Opportunity Tax Credit in Fiscal Year 2015 as low, despite the IRSís own enforcement data. From those enforcement data, TIGTA estimates that the potential Additional Child Tax Credit improper payment rate for Fiscal Year 2015 is 24.2 percent, with potential improper payments totaling $5.7 billion, and estimates that the potential American Opportunity Tax Credit improper payment rate for Fiscal Year 2015 is 30.7 percent, with potential improper payments totaling $1.8 billion. TIGTA recommended that the IRS ensure that the revised Additional Child Tax Credit improper payment risk assessment process includes a quantitative assessment. TIGTA also recommended that the IRS ensure that the results of the American Opportunity Tax Credit Improper Payment risk assessment accurately reflect the high risk associated with American Opportunity Tax Credit payments. The IRS agreed with the recommendations and plans to take corrective action. To read the full report, go to https://www.treasury.gov/tigta/a uditreports/2016reports/201640036fr.pdf.
Tip of the Day
Larceny begins at home . . . Business owners might worry about employees embezzling or otherwise stealing from the company. And while that often happens, don't assume relatives won't do the same. In one case two brothers owned a small home contracting business. The wife of one brother took care of the payroll and the employment taxes. The husband found unanswered notices from the IRS and confronted her. A few days later she ran off with her brother-in-law and some $100,000 that was supposed to be paid to the IRS. That's not the only case. No one should be above suspicion.
May 23, 2016
In an extremely lengthy case Samuel Evans Wyly, et al., Debtors (U.S. Bankruptcy Court, N.D. Texas) the taxpayers had put hundreds of millions of dollars in foreign trusts for which they received unsecured private annuities. The Court found the taxpayers failed to file the required reports related to the trusts and were liable for fraud penalties associated with the offshore trusts. Fraud was indicated by the complicated transactions and the use of multiple entities and offshore trusts in addition to other badges of fraud. The Court did find the widow of a debtor qualified for innocent spouse relief. Only one of the factors considered weighed against her. The Court noted that even after her husband's death she continued to rely on his professionals and had no reason to suspect the reporting on the returns was incorrect.
Tip of the Day
Student loans don't go away . . . Your credit card company may eventually give up on a debt; so may your bank if it feels it can't collect or can't do so at reasonable cost. But your student loan may follow you forever. Years ago it was easier to drop out and maybe avoid paying. That's no longer true. The government is chasing debtors with more fervor than ever. And the IRS can withhold any tax refund you're due. Add to that the fact that the federal and state governments share data much more freely than in the past. Private lenders are just as aggressive. Don't think about not paying. If you can't pay, you should be able to cut a deal to make monthly payments to at least bring down the balance.
May 20, 2016
The IRS is reminding taxpayers who have health care cover through the Health Insurance Marketplace and have chosen to have advance payments of the premium tax credit paid to their insurance company to lover monthly premiums to advise the Marketplace about changes in significant life events such as:
In John O. Drew et ux. (T.C. Memo. 2016-97) the Tax Court held that the taxpayers did not show that withdrawal of the Notice of Federal Tax Lien would aid in the collection of their outstanding tax liabilities. The Court also held there was no abuse of discretion in the rejection of their offer in compromise. The Court noted the taxpayers failed to provide additional financial information requested by the IRS.
In Johnny Lara (T.C. Memo. 2016-96) taxpayer was enrolled as a full-time student at a university in 2011. He qualified for tax-free educational benefits under the Post-9/11 GI Bill, including the Yellow Ribbon GI Education Enhancement Program, and during 2011, the Department of Veterans Affairs paid $11,748 directly to the school on his behalf. Because this amount covered all of his tuition and related educational expenses, the taxpayer did not incur any student loan debt or receive any scholarships for 2011. The school issued the taxpayer a Form 1098-T, Tuition Statement, for 2011, which reflected his student status as at least half-time and the total payment of $11,748 received for qualified tuition and related expenses. The taxpayer provided this form to his tax preparer. The taxpayer claimed the American Opportunity Tax Credit for $1,000 (the maximum amount based on his income). The Court noted that in determining the amount of the credit, qualified tuition and related expenses for any academic period must be reduced by certain tax-free educational assistance allocable to such period. Since his entire tuition was paid for, the Court disallowed the entire credit.
Tip of the Day
Stay short . . . Short term that is. The Fed is likely to raise interest rates again in June. Whether a rate hike will occur then or later this year, rates are virtually certain to increase soon. And that could be expensive for fixed income investors. Bonds of all types would decrease in value. A 10-year bond could drop in price from $10,000 to $9,138 (a 9% decrease) if interest rates increase by 1 percentage point. If rates increase by 2 percentage points the bond would decline to $8,358, a 16% drop. The longer the time to maturity, the bigger the price drop. Conversely, the shorter the time to maturity, the smaller the drop. With a 1 percentage point increase in rates a bond maturing in 2 years would only fall to $9,807, just under a 2% decrease. Some bonds with unusual features could decline more or less. Talk to your investment advisor about the best strategy for you.
May 19, 2016
The IRS has issued final regulations (T.D. 9769) eliminating the requirement that each disbursement from a designated Roth account that is directly rolled over to an eligible retirement plan be treated as a separate distribution from any amount paid directly to the employee and therefore separately subject to the rule in Section 72(e)(2) allocating pretax and after-tax amounts to each distribution. As a result of this change, if disbursements are made from a taxpayer's designated Roth account to the taxpayer and also to the taxpayer's Roth IRA or designated Roth account in a direct rollover, then pretax amounts will be allocated first to the direct rollover, rather than being allocated pro rata to each destination. Also, a taxpayer will be able to direct the allocation of pretax and after-tax amounts that are included in disbursements from a designated Roth account that are directly rolled over to multiple destinations, applying the same allocation rules to distributions from designated Roth accounts that apply to distributions from other types of accounts.
The IRS often challenges excessive salaries paid by C corporations. That's because the excess salaries are not deductible by the corporation, but income to the shareholder/employees as dividends. In H.W. Johnson, Inc. (T.C. Memo. 2016-95) the taxpayer was able to show the Court the salaries were not excessive. The two brothers managed the company and received salaries of some $2.0 million each in 2003 and $3.6 million in 2004. The Court noted the brothers increased sales from 2002 to 2004 from $23 million to $38 million and managed to keep the cement contractor operating efficiently during a time when concrete was in short supply in their area of operation. The Court noted there was a formula for determining bonuses and dividends and the company adhered to that model. The taxpayer also convinced the Court that amounts paid to an entity the brothers created to insure a supply of concrete were ordinary and necessary business expenses.
Tip of the Day
Don't lie when recruiting employees . . . You need a new chief accountant for a division, but you know that management is planning to sell or abandon the operation within the year. You don't even hint about the problem to the person being interviewed. Or you tell a prospective employee that the he's sure to be promoted to managing the subsidiary within a year. Or that he'll be making 15% more at the end of the year. Sound familiar? More and more employees have decided to go to court if the rosy picture you painted doesn't develop. Some awards have been in excess of several times the employee's annual salary. And even if you win, the legal fees and negative publicity will be costly. You can put a positive spin on the job, but be careful about lying. Check with your attorney on the best approach.
May 18, 2016
In Lisa A. Nkonoki (T.C. Memo. 2016-93) the IRS disallowed deductions the taxpayer claimed on Schedule C of her 2009 Federal income tax return for gifts and travel, moving and storage, passenger automobile, cellular telephone, and other expenses. To sanction the taxpayer for her violation of the Court's order to provide the IRS by a specified date with documents to substantiate expenses relating to her deductions, the Court did not allow her to introduce those documents at trial. The Tax Court held that the taxpayer's testimony alone did not meet the substantiation requirements of Sec. 274(d) applicable to her gifts and travel, automobile, and cellular telephone expenses but with respect to the remaining deductions in issue, her testimony was adequate to substantiate only her moving and storage expenses. The Court also held that the taxpayer was liable for the Sec. 6662(a) accuracy-related penalty only if her underpayment is attributable to a substantial understatement of income tax, within the meaning of Sec. 6662(d)(1)(A); because the taxpayer's failure to introduce documents to substantiate her disputed expenses was due to the Court's sanction, it did not establish negligence.
Tip of the Day
Unclaimed property . . . States require businesses to report unclaimed property if it has remained dormant for a period of time. In most cases that's 3 years--but it can be longer or shorter. And in some cases it can vary by the time of property. Unclaimed property can include payroll checks, accounts payable checks, refunds, accounts receivable, credit balances, customer overpayments, etc. Some states are very aggressive and failure to file the required reports can result in penalties. Check the rules in all the states in which you do business.
May 17, 2016
The IRS has announced that with the enrolled agent (EA) renewal cycle now completed, it begin its annual clean-up of enrolled agents with Social Security numbers ending in 0, 1, 2, or 3 who did not renew. More than 5,000 EAs who did not renew during the 2016 cycle will be moved to inactive status, while more than 2,000 EAs who did not renew during the 2013 and 2016 cycles will be moved to terminated status. Letters will be sent to all affected enrolled agents advising them of the action. Any EA in inactive status can submit a late renewal for approval. Anyone in terminated status must re-take the Special Enrollment Exam to apply for re-enrollment. If an EA disagrees with an action taken and has a record of previously renewing , he or she should call 1-855- 472-5540.
Effective immediately, the IRS will return newly filed Offer in Compromise (OIC) applications in cases where the taxpayer has not filed all required tax returns. Any fees included with the OIC will also be returned. This new policy does not apply to current year tax returns if there is a valid extension on file. To confirm you or your client is eligible and get an estimated offer amount, use the OIC Pre-Qualifier Tool.
Tip of the Day
Converting an IRA to a Roth? . . . There are a number of issues to consider, but the biggest factor is the tax to be paid if the original IRA was all or even partly deductible. Assuming you have no nondeductible IRAs, the entire amount of the converted amount will be taxable in the year of conversion. That's not a problem if the IRA was sitting in a savings account. But if it was in stocks you could end up converting to a Roth, paying tax on the amount and later seeing the value decline. For example, you've got $100,000 in an IRA that's invested in Madison Inc. You convert to a Roth and pay $33,000 in taxes. Subsequently, the value of that Madison investment falls to $40,000. You'll have essentially paid taxes on income that no longer exists. You can "recharacterize" or undo the conversion if you take action by the extended due date of the return for the year of the conversion. But that may be small comfort if Madison declines precipitously in value after that cutoff date. Best advice? Try to do a conversion using assets that aren't very volatile. Another approach is to spread a conversion out over several years. You may also be able to save tax dollars by converting in a year when your income is down. Many business owners have years when they're in a lower bracket because of equipment purchases, a poor business environment, etc. The dollars here can be substantial. Work through the numbers with your tax advisor.
May 16, 2016
The IRS is authorized to issue a FDR (formal document request) to any taxpayer to request foreign-based documentation. "Foreign-based documentation" means "any documentation which is outside the United States and which may be relevant or material to the tax treatment of the examined item." Congress enacted Section 982 as a pretrial discovery tool to discourage taxpayers from delaying or refusing disclosure of certain foreign-based information to the IRS. In Cheri LaRue and Jack LaRue, Petitioners (U.S. District Court, D. Oregon), the petitioners asked the Court to quash the FDR for two reasons: (1) Petitioners were not in possession, custody, or control of the requested foreign-based documents; and (2) Petitioners invoked their Fifth Amendment privilege against self-incrimination under the act of production doctrine. The Court noted that the party resisting enforcement bears the burden of producing credible evidence that he does not possess or control the documents sought. The petitioners failed to present any evidence, let alone "credible evidence," that they do not possess or control the documents at issue. Petitioners did not deny that they owned or controlled these trusts, entities, or accounts; instead, they deny that they have had any interest in them in at least five years. Petitioners also failed to assert that they have made any efforts to retrieve the summoned documents from any party. Petitioners' general declaration that they did not have custody or control of the requested documents fell far short of establishing a defense. Accordingly, the Court concluded that Petitioners have failed to meet their burden to counter the IRS's evidence that they possessed the documents and records the IRS sought.
The employee or independent contractor question has been an issue for years. In Nelly LLC (U.S. District Court. E.D. Pennsylvania), the LLC provided nonmedical homecare services to the elderly. Even if the IRS finds that a worker is an employee and not an independent contractor, a taxpayer may still avoid employement taxes if it qualifies for relief under Sec. 530 of the Revenue Act of 1978. Here, the taxpayer's reliance on prior audits was misplaced because they were not employment tax audits. The taxpayer's survey of business practices of comparable firms also fell short of meeting the required standard for relief. However, the Court noted that while the purpose of the earlier IRS audit was to analyze the LLC's owner's personal income tax delinquencies, the IRS requested and reviewed numerous documents regarding the LLC, including copies of contracts with independent contractors. Given that it undertook an in-depth analysis of the LLC's business practices, it was reasonable for the owner to interpret the IRS's silence on the independent contractor classification as acquiescence. The Court found that the taxpayer had a reasonable basis to classify the workers as independent contractors and was entitled to relief.
Tip of the Day
Don't fight your image . . . Most businesses spend a significant amount of time and money building an image. You might want to be considered an expert in a field, a purveyor of the highest quality foods, the low-cost supplier, etc. Some businesses are content to stick to their image (Rolls-Royce is unlikely to offer an economy car). But some want to get a bigger share of the market or increase profits by broadening their offerings. For example, you may be known in the market for the highest-quality printing, but you've got extra machine time that you may want to sell at a big discount without having to worry about the quality. Or you may want to offer a high-end product but you've been known as a commodity producer. The best approach may be to set up a separate company and keep the two markets separate. It's not unusual. Many companies have done it for years. You don't need a completely different staff, just separate contact addresses, telephone numbers, and employees who will deal with customers.
May 13, 2016
In Alterman Trust (T.C. Memo. 2015-231), the Tax Court held that the IRS failed to meet his burden of proof to establish that the trust was liable under Sec. 6901 as a transferee for Alterman Corp.'s 2003 income tax liability. The taxpayer, a trust whose case was consolidated with other cases for purposes of that opinion moved for an award of administrative and litigation costs under Sec. 7430. Generally, individual taxpayers seeking costs must have a net worth of $2 million or less at the time the civil action was filed. For a trust, that limit applies as of the last day of the taxable year involved in the proceeding. Sec. 7430(c)(4)(D)(i) (II). For this transferee liability case, the taxpayer argued that its net worth should be determined in either 2009 or 2010, as of the date IRS issued the notice of liability or the date it filed its petition, respectively. The notice of liability states that the taxable year involved in the proceeding ended Dec. 31, 2003. The trust concedes that its net worth exceeded $2 million as of the close of 2003. The Tax Court held when applying the net worth requirement the general rule is modified and requires that a trust's net worth "shall be determined as of the last day of the taxable year involved in the proceeding." The Court also held that the last day of the taxable year involved in the proceeding was Dec. 31, 2003, as stated in the notice of liability. Finally, the Court held that because the trust's net worth exceeded $2 million as of Dec. 31, 2003, it has not met the requirements under Sec. 7430, and its motion for an award of administrative and litigation costs was denied. Bryan S. Alterman Trust U/A/D May 9, 2000, Bryan S. Alterman, Trustee, Transferee (146 T.C. No. 14).
If you want to challenge an IRS determination you must file a Tax Court petition within 30 days of the date the IRS mails a determination notice. In Thomas W. Allibone (T.C. Memo. 2016-91) (a whistleblower case) the IRS claimed the notice was mailed 33 days after the determination notice. The Court noted it helsubmission of indirect evidence such as testimony of habit or standard business practice is insufficient to prove the date of mailing of a final determination letter in a whistleblower case. The Court also noted the IRS did not produce a certified mailing receipt or any other direct evidence showing that the final determination letter was mailed on May 6, 2015 (or any other date). A phone call by the IRS to the petitioner indicating a letter would be mailed was not evidence of mailing. The Court held it had jurisdiction because a timely petition was filed.
Tip of the Day
Taking care of a sick relative in another state? . . . You could find yourself considered a resident of that state. In a New York case an Administrative Law Judge in the Division of Tax Appeals held that days spent in the state taking care of a sick relative counted toward the number of days the taxpayer spent in the state. The taxpayers, who were not domiciled in the state were deemed to be residents. (On the other hand, an earlier ruling held that days spent by a taxpayer who came to New York for treatment of an illness should not be counted as days spent in the state.) Check the rules in your state.
May 12, 2016
The IRS is reminding (IR-2016-76) (May 15 falls on a Sunday this year.) The IRS is also cautioning groups not to include Social Security numbers (SSNs) or other unneeded personal information on their Forms 990, and consider taking advantage of the speed and convenience of electronic filing. By law, organizations that fail to file annual reports for three consecutive years will see their federal tax exemptions automatically revoked as of the due date of the third required filing. The Pension Protection Act of 2006 mandates that most tax-exempt organizations file annual Form 990-series information returns or notices with the IRS. The law, which went into effect at the beginning of 2007, also imposed a new annual filing requirement for small organizations. Churches and church-related organizations are not required to file annual reports.
In Angela A. Terrell (T.C. Memo. 2016-85) the IRS disallowed all of a taxpayer's American Opportunity Credit. The Court found that although the university charged a portion of petitioner's spring 2011 semester tuition to her account in November 2010, the loan proceeds that she used to pay those tuition charges were not disbursed and credited to her account until 2011. The Court held that she was therefore treated as having paid those expenses in 2011. Since she is a cash basis taxpayer, this was the proper year for which to claim a credit for the tuition that she paid in 2011.
In John N. Alphson (T.C. Memo. 2016-84) the taxpayer ran up a tax bill of more than $200,000 from 2008 to 2010. He didn't pay, and in 2012 the IRS decided to place a lien on his property to try to collect. The taxpayer claimed he couldn't pay the full amount because of financial problems dating back to the real-estate market collapse of 2008 and offered to settle for $2,400. The IRS rejected the offer in compromise because it thought the taxpayer had wasted more than $1 million received in settlement of a business dispute with related parties that he should have used to pay his taxes. The taxpayer was unable to show that the proceeds of the settlement were used to pay necessary living expenses. The IRS concluded the settlement proceeds were a dissipated asset properly includible in the taxpayer's reasonable collection potential (RCP). The taxpayer claimed to be unemployed and could not find employment, but had significant unexplained bank deposits. The Court also rejected the taxpayer's claim of economic hardship if the IRS tried to collect the compute RCP since the taxpayer provided no specific evidence of such hardship. The Court found no abuse of discretion by the IRS.
Tip of the Day
What's it mean? . . . Tax law contains words whose meaning may not be defined by statute or even regulation. Often, the meaning depends on a dictionary definition or case law. And in some cases the word is defined differently for different sections of the law. For example, what's the definition of a "small" business. There are at least 20 different definitions, some are based on sales, some on employees, and at least one on the amount of initial capital. What does "principally" mean? There's only one definition here and it means more than 50%, but you won't find that in the laws Congress wrote.
May 11, 2016
The IRS has again updated the disaster notice for the Houston area. Victims of the severe storms and flooding that took place beginning on April 17, 2016 in parts of Texas may qualify for tax relief from the IRS. The complete list now includes the counties of Austin, Colorado, Fayette, Fort Bend, Grimes, Harris, Liberty, Montgomery, Parker, San Jacinto, Walker and Wharton. For more information go to Tax Relief for Victims of Severe Storms and Flooding in Texas-Houston Area.
In Giant Eagle, Inc. (U.S. Court of Appeals, Third Circuit) the Appeals court reversed and remanded to the Tax Court it's earlier decision in T.C. Memo. 2014-146. The Appeals court held the Tax Court misapplied the "all events" test as it applies to recurring expenses. In this case the Tax Court disallowed deductions claimed by a supermarket chain based on rewards shoppers had earned but not yet redeemed. The Court held since the fact of the liability was met before the end of the year the "all events" test was met despite the fact that the total amount of the liability could not be definitely ascertained.
Tip of the Day
Offer a freebie . . . Free is probably one of the best four-letter words. Getting something for free satisfies a very important urge. Often the freebie can be something of such a small value it has little effect on your bottom line. The best freebie is one related to the product or service you're selling. Your regular customer comes in for a brake job. You do all the work on his car. You notice a bad windshield wiper. Replacing it for free (give him the old wiper) will go a long way. Upgrades work too, if they're visible and the customer is aware he's getting a higher valued item. How much you can afford to give away will depend on the product or service your selling.
May 10, 2016
Notice 2016-31 (IRB 2016-21) updates prior IRS guidance to reflect the PATH Act extension and modification of the date by which facilities must begin construction for Code Sec. 45 and 48. Notice 2016-31 also extends the date by which taxpayers must place a facility in service to satisfy the Continuity Safe Harbor.
FinCEN is issuing final rules under the Bank Secrecy Act to clarify and strengthen customer due diligence requirements for: banks; brokers or dealers in securities; mutual funds; and futures commission merchants and introducing brokers in commodities. The rules contain explicit customer due diligence requirements and include a new requirement to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.Tip of the Day
Abandoned property . . . Have you sold gift certificates that haven't been redeemed? Have unclaimed security deposits? Customer overpayments that you haven't been able to refund? Payroll checks that haven't been picked up? Checks to vendors that haven't been cashed? The money doesn't belong to you. Instead, you probably have unclaimed property that has to be turned over to the state. There are other examples of abandoned property. The period of presumed abandonment varies from state to state. Some consider property abandoned at the end of 3 years; some at the end of 5; some at 7. If you haven't heard of the requirements, you're not alone. But a number of states are beginning to aggressively audit this area. If the state gets the property and it's never claimed, its like tax revenue, without the bad connotation. If you haven't turned in the property in the past, start to do so now. If you're audited you'll be in a better position to have penalties and interest waived or reduced if you:
You'll get more sympathy from the state if they believe you're trying to comply with the rules (that's true in other areas too). But don't contact the state without first talking to your accountant and/or attorney.
May 9, 2016
Revenue Procedure 2016-29 (IRB 2016-21) provides the List of Automatic Changes to which the automatic change procedures in Rev. Proc. 2015-13, as clarified and modified by Rev. Proc. 2015-33, and as modified by Rev. Proc. 2016-1, (or successor) apply.
The IRS has announced that beginning Monday, May 9, it will begin accepting applications for a number of enforcement positions around the country. The IRS will be hiring revenue agents, revenue officers, tax compliance officers and tax examiners. In all, between 600 and 700 people will be hired, with many of these in entry-level GS 5/7/9 job levels. The first job announcements will be posted Monday, May 9th and will continue for several weeks. Tax professionals are encouraged to share this information. For more information, click on the "careers" section of jobs.irs.gov.
Tip of the Day
Timing can be critical . . . You don't want to be late with getting inventory on the shelves, or waiting for equipment after you're finished with alterations on a rental space, etc. You can't open the store without inventory and that means lost sales. Conversely, having equipment delivered before the space can accomodate it can be costly from several points. First, if you store it on site it can delay alterations that are necessary for the equipment. Store it off site and you'll incur fees. Second, you will either be tying up valuable cash in equipment that's not used or be paying interest needlessly. Third, you may be running out the warranty. For a clothing retailer inventory will lose value as fashions change. There will always be a snafu that throw a schedule off--a delay by a supplier, delays by a contractor, etc. Many may be unavoidable. But you should make an effort to time activities. That's especially true for a start-up business where a timing error can be very costly.
May 6, 2016
The IRS has issued regulations (T.D. 9767) with respect to the Multiemployer Pension Reform Act of 2014 ("MPRA"), relating to multiemployer defined benefit pension plans that are projected to have insufficient funds, within a specified time frame, to pay the full plan benefits to which individuals will be entitled (referred to as plans in "critical and declining status"). Under MPRA, the sponsor of such a plan is permitted to reduce the pension benefits payable to plan participants and beneficiaries if certain conditions and limitations are satisfied (referred to in MPRA as a "suspension of benefits"). One specific limitation governs the application of a suspension of benefits under any plan that includes benefits directly attributable to a participant's service with any employer that has withdrawn from the plan in a complete withdrawal, paid its full withdrawal liability, and, pursuant to a collective bargaining agreement, assumed liability for providing benefits to participants and beneficiaries equal to any benefits for such participants and beneficiaries reduced as a result of the financial status of the plan. These final regulations provide guidance relating to this specific limitation. These regulations affect active, retired, and deferred vested participants and beneficiaries under any such multiemployer plan in critical and declining status as well as employers contributing to, and sponsors and administrators of, those plans.
A contribution of a conservation easement can generate a tax deduction while costing you very little, but there are a number of requirements that must be met. One is that the easement must be protected in perpetuity. In RP Golf, LLC, SB Golf, LLC, Tax Matters Partner (T.C. Memo. 2016-80) the taxpayer conveyed an easement on property to a charitable organization, but only some months later were the bank loans subordinated. The Court ruled that the contribution's conservation purpose was not protected in perpetuity because the easement could have been extinguished by foreclosure at the time of conveyance.
Clothing may be deductible as an ordinary and necessary business expense if it (1) is required or essential in your employment, (2) not suitable for general wear and (3) is not worn as general wear. More than a few taxpayers have stretched the rules and the IRS and the courts have denied more than a few claims. The test is tougher to pass than generally imagined. In Terence K. Barnes et ux. (T.C. Memo. 2016-79) the Court denied the taxpayer a deduction for the cost of clothing the husband had to wear because he worked as a designer clothing salesman. The Court noted the clothing was suitable for general wear.
Tip of the Day
Keeping an estate alive . . . Sometimes the settlement of an estate can drag on for years. There can be all manner of issues that can arise (some which might not have been a problem if the decedent had planned better). But often the estate can be settled relatively quickly. Make sure you have a good list of assets as soon as possible and either sell or distribute the assets quickly. Income producing assets that aren't distributed or sold will create income that must be reported on a Form 1041 trust return.
May 5, 2016
The IRS has issued final and temporary regulations (T.D. 9766) that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity. These regulations affect partners in a partnership that owns a disregarded entity. The text of these temporary regulations serves as the text of proposed regulations (REG-114307-15).
Revenue Procedure 2016-30 (IRB 2016-21) revises Rev. Proc. 2009-14, which outlines the procedures to resolve issues through a pre-filing agreement (PFA). The Rev. Proc. (1) expands the scope of a PFA to include issues relating to changes in methods of accounting requested pursuant to the automatic consent procedures; (2) reflects LBI's new structure; (3) clarifies or updates procedures for fling PFA requests; and (4) increases the user fee for PFAs from $50,000 to $134,300 for requests submitted on or after the date that is 30 days after the Rev. Proc. is released, to $218,600 for requests submitted on or after January 1, 2017.
You can't claim you didn't get a notice from the IRS or the state by simply refusing to accept delivery. But in Samuel S. Yasgur et ux. (T.C. Memo. 2016-77) that wasn't the case. The taxpayer and his wife were separated but they used her address on their joint return. The IRS sent the notice of deficiency to that address, but the husband never received a copy. The taxpayer did not provide that address in bad faith and he neither received nor deliberately refused receipt of the levy notice. The Court discussed the circumstances surrounding the two notices (one to the wife, one to the husband) mailed to the same address and the other issues that would have led the wife to believe the second notice was of no significance. There was no reason for the husband to believe he would receive a notice because he was in active discussions with the IRS regarding his taxes. The Court found he never received the notice and, therefore, could challenge his underlying liability.
Tip of the Day
State vs. federal . . . Most discussion and tax planning for individuals centers around federal taxes for two reasons. First, federal rates are generally much higher. Second, if the plan passes muster for federal purposes, it'll do so for state purposes. That second assumption is generally, but not always true. While many states start out with federal adjusted gross income, most make modifications and use different rules for computing taxable income. For example, New York state allows a taxpayer to exclude $20,000 in pensions and IRA distributions. And Social Security income is never taxable. But the state doesn't allow some of the faster depreciation federal law does. Most states don't allow a deduction for their own income taxes. In addition, even though you may escape an IRS audit, you can still be audited by the state. And, in some cases the state may disallow a deduction even though it's allowed for federal purposes. In one case the IRS auditor allowed losses from a horse breeding activity, but the taxpayer's state (Massachusetts) disallowed the activity as a hobby loss. If the dollars involved are big enough, don't forget to check state rules.
May 4, 2016
The IRS has updated the area of Texas where victims of the severe storms and flooding that took place beginning on April 17, 2016 may qualify for tax relief to include the counties of Austin, Colorado, Walker and Wharton.
Are you an election worker? That is, do you work for your county or state at the polls on election day (regular or primaries)? If so, the IRS has published a page with information on withholding of income tax and FICA. For the complete article, go to Election Workers: Reporting and Withholding.
The Affordable Care Act created the refundable Premium Tax Credit (PTC) to help offset the cost of health care insurance for those with low or moderate income. Individuals can receive the PTC in advance or can claim the PTC on their tax return. Individuals who received the PTC in advance are required to reconcile the amount paid on their behalf to the allowable amount of the PTC on their tax return. The Treasury Inspector General for Tax Administration (TIGTA) did a review to evaluate the effectiveness of the IRSís verification of PTC claims during the 2015 Filing Season. As of June 11, 2015, the IRS processed more than 2.9 million tax returns involving the PTC, and taxpayers received approximately $9.8 billion in PTCs that was either received in advance or claimed at filing. TIGTAís analysis of more than 2.6 million tax returns with a PTC claim that were filed between January 20, 2015, and May 28, 2015, found that the IRS accurately determined the allowable PTC on more than 2.4 million (93 percent) returns. Computer programming errors resulted in an incorrect computation of the allowable PTC for 27,827 tax returns. In addition, Exchanges did not provide the EPD (Exchange Periodic Data) to the IRS prior to the start of the 2015 Filing Season, and IRS system problems prevented the IRS from being able to use the EPD received between January 20, 2015, and March 29, 2015. Without the required EPD, the IRS was unable to perform computer matches to verify filed claims or that individuals who received the APTC filed a tax return as required. TIGTA verified that the IRS processes to identify potentially fraudulent PTC claims are operating as intended. In addition, the IRS corrected programming errors identified by TIGTA that resulted in tax returns not being identified for further review during processing. Finally, the IRS sent letters to individuals who received the APTC but did not file a tax return to remind them of the requirement to reconcile APTCs. However, the IRS processes to identify these taxpayers did not use the most current tax filing data. For the complete report go to Affordable Care Act: Internal Revenue Service Verification of Premium Tax Credit Claims During the 2015 Filing Season.
Tip of the Day
IRA beneficiary . . . What started out as a simple way to save for retirement has gotten very complicated. How complicated? There are now two publications dedicated to explaining them. Naming a person as the beneficiary may seem like a simple matter, but if you don't do it (leaving the estate or a trust as the beneficiary) there can be significant negative tax consequences. And, if your spouse is alive, even if he or she is the only heir, he or she should be the beneficiary rather than letting it default to the estate. The choice is so important that you should discuss it with your tax advisor or attorney.
May 3, 2016
The IRS has released its third quarter update to the 2015-2016 Priority Guidance Plan. The plan represents projects the IRS intends to work on actively during the plan year and does not place any deadline on completion of projects. In addition the Appendix lists the more routine guidance that is generally published each year. For the third quarter update go to Priority Guidance Plan.
. You can challenge and offer-in-compromise (OIC) that's rejected on the grounds the IRS abused its discretion in doing so. But you'll have to show that the rejection of the offer was arbitrary, capricious, or without sound basis in fact or law. That was the taxpayer's position in Lanny D. Walker (T.C. Memo. 2016-75). The taxpayer argued that the IRS abused its discretion by limiting certain of his claimed monthly expenses pursuant to local and national standards. Second, the taxpayer argued that the IRS abused its discretion by failing to properly consider petitioner's exceptional circumstances in denying his OIC. The Court found the IRS's decision was based on a financial analysis of the taxpayer's monthly income and expenses and net equity in real and personal property, and ability to pay. The IRS adjusted its analysis for subsequent information, reducing the net asset equity in property down and increasing the taxpayer's allowed expenses by $1,000 per month to reflect the care for his mother. The Court disregarded his claimed medical condition because he did not raise the issued when he filed his petition. Moreover, even if the Court were to consider the issue, the taxpayer provided no documentation to support his claim. The Court found the determination to proceed with collection was not an abuse by the IRS.
Tip of the Day
Review those bank statements . . . You may sign all the checks, but do you really know what's going out? An easy way to embezzle is for an employee to write the payee in erasable ink. After the check is signed, he or she simply writes in "cash", the name of another company they've set up, etc. You should be able to foil the scheme if you review the canceled checks returned by the bank. Don't have your checks returned? The bank should still be providing a copy in electronic format. Checks written by computer or checkwriting machine are susceptible if you don't check the payee carefully before signing. Don't be rushed into signing anything. When presented for signature, each check should be accompanied by an invoice, bill, etc. Some checks can be quickly bypassed--the $35 one to FedEx, etc. Embezzlers rarely go after small amounts (under $100) unless they're into volume. And just letting the staff know you're checking can be a deterrent.
May 2, 2016
The House Ways and Means Committee has approved three bills that affect the IRS. The first, Stolen Identity Refund Fraud Prevention Bill of 2015 requires the IRS to make it easier for an identity theft victim to deal with the Service. The second, Recovering Missing Children Bill would allow the IRS to disclose return information to state and local law enforcement with respect to the disappearance or exploitation of a child. Finally, the Preventing IRS Abuse and Protecting Free Speech Bill would stop the IRS from requiring disclosure of the identities of contributors to tax-exempt entities.
In 2005 the taxpayers contributed a conservation easement on a parcel of land to two qualified organizations. The conservation easement provides that, in the event that the conservation purpose is extinguished because of an unexpected change in circumstances surrounding the donated property, the donee organizations are entitled to a proportionate share of extinguishment proceeds at least equal to (1) the amount allowable as a deduction for Federal income tax purposes over (2) the fair market value of the property at the time of the contribution. The taxpayers claimed a charitable contribution deduction on their 2005 Federal income tax return and carried forward the remaining deduction to their taxable years 2006, 2007, and 2008. Sec. 170(h) allows a deduction for a "qualified conservation contribution." A qualified conservation contribution requires that the contribution be exclusively for conservation purposes. For a contribution to be made exclusively for conservation purposes, the conservation purpose must be protected in perpetuity. The regulations provide that the conservation purpose of a contribution is not protected in perpetuity unless the contribution "gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time. . . . Accordingly, when a change in conditions give rise to the extinguishment of a perpetual conservation restriction under paragraph (g)(6)(i) of this section, the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction". The Court held that the taxpayer's easement provided that the value of the contribution for purposes of determining the donees' rights to extinguishment proceeds is the amount of the taxpayers' allowable deductions rather than the fair market value of the easement and therefore does not comply with the requirements of Reg. Sec. 1.170A-14(g)(6), The conservation purpose is not protected in perpetuity as required by Sec. 170(h)(5)(A). Douglas G. Carroll, III and Deirdre M. Smith (146 T.C. No. 13)
Tip of the Day
Can't do a budget? . . . Sue makes $130,000 a year, has business expenses of $6,000, mortgage and real estate taxes of $30,000 a year and aside from putting $7,000 a year in her 401(k) has no savings. Fred makes about half that amount, doesn't have any business expenses, but his mortgage and taxes are the same. He puts $12,000 in his 401(k) and puts another $3,000 in a savings account. Where does Sue's money go? While the best approach to control spending is a budget, most people have neither the inclination nor the time. You can dial it down a notch and still get worthwhile results by doing a simple analysis of your spending. Making a spreadsheet of all your expenses over the course of a year will likely point out some areas where you can save a bundle. That $4 morning coffee will cost you $1,000 over the course of a year. A premium cable package an extra $35 per month ($420 per year). That high-end bike you rode twice just after you got it three years ago cost you $1,900. You won't know were the money is going without an analysis. That's not to say you have to turn into a monk. Make your coffee at home and spring for the $4 cup as a special treat. Get a $800 bike if you're just starting out. If you do get serious you can upgrade. You may even be able to get a couple of hundred for the old bike. You've got to be diligent about recording those expenses for this to work. Can't stay the year? Consider doing it for just two months. Using the examples above, you'd catch the $4 coffee and the premium cable package, but maybe miss the bike. It will still add up to a substantial saving and maybe make you think twice before using your credit card for a new refrigerator just because yours has some scratches.
Copyright 2016 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536