Small Business Taxes & Management

News and Tip of the Day


Small Business Taxes & ManagementTM--Copyright 2014, A/N Group, Inc.

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October 23, 2014

News

The president has determined that certain areas of Kentucky, New Mexico, and Montana are eligible for government assistance. In Kentucky the disaster was a result of severe storms, flooding, landslides, and mudslides from August 18 to 23, 2014 and affected taxpayers in the counties of Floyd, Johnson, Knott and Pike. For Montana the disaster resulted from severe storms, straight-line winds and flooding from August 21 to 25, 2014 and affected taxpayers in the counties of Blaine, Carter, Musselshell, Petroleum and Valley and Fort Belknap Reservation in Blaine County. For New Mexico the disaster resulted from severe storms and flooding from July 27 to August 5, 2014 and affected taxpayers in the counties of Guadalupe, Rio Arriba and San Miguel and the Pueblo of Acoma. Taxpayers in the affected areas can deduct losses on their 2013 returns.

You can deduct gambling losses up to the amount of your winnings, but you'll have to substantiate the amount of your losses. In Jacqueline D. Burrell (T.C. Memo. 2014-217) the taxpayer did not track her winnings and losses. On her Schedule A the taxpayer reported losses equal to the amount of her winnings for the three years at issue. Documents from the casinos in which she gambled reported losses equal to a fraction of her winnings. The IRS allowed a substantial portion of the claimed losses for two of the years and all of the claimed losses for the third. The Tax Court allowed the taxpayer no additional loss deductions. The Court also held the taxpayer could not avoid the accuracy-related penalty by claiming reliance on her preparer. The Court noted the taxpayer failed to show the advisor was a competent professional who had sufficient expertise to justify reliance; she provided necessary and accurate information to the advisor; and she actually relied in good faith on the advisor's judgment.

Tip of the Day

Track customers with declining orders . . . We often advise knowing your best customers, what they're buying, etc. That's very important. But you should also be keeping track of customers who are ordering less and/or less frequently. Identify them and then try to find out why they're buying less. Have they found a cheaper supplier? Better quality? Is demand for a product declining because of a market shift? You want to know the reason. If it's price, quality, or customer service, you can do something to regain the account. If it's because of a market shift, there may be other actions you can take.

 

October 22, 2014

News

The U.S. Supreme Court recently declined to review the decisions in appeal court rulings involving bans on same-sex marriages. As a result the federal government will recognize same-sex marriages performed in the states of Colorado, Indiana, Nevada, Oklahoma, Utah, Virginia and Wisconsin.

In Kenna Trading, LLC, et al. (143 T.C. No. 18) Brazilian retailers, who purportedly contributed distressed consumer receivables to an LLC, treated as a partnership for tax purposes. The LLC claimed carryover bases in the receivables under Sec. 723. Later the LLC in turn contributed some of these Brazilian receivables to trading companies and contributed its interest in each trading company to a holding company. The LLC claimed a cost of goods sold for each holding company equal to the basis of the receivables contributed. The LLC then sold an interest in each holding company to an investor. The trading companies claimed bad debt deductions. In the following year the LLC allegedly contributed more of the Brazilian receivables to main trusts. Each main trust then assigned the receivables to a newly created subtrust. Investors allegedly contributed cash to the main trust in exchange for the beneficial interest in the subtrust. The subtrust claimed a bad debt deduction. Asserting that the subtrusts were, for Federal income tax purposes, grantor trusts, the investors claimed deductions on their tax returns. The Court held:

Tip of the Day

Use an expediter . . . No, not for shipping. For cutting through the red tape or any problems on a project. It's not unusual for a worker or team to encounter problems in completing a project. It may be a $500 limit on the purchase of a tool without getting permission of the finance department. Or ordering from an unapproved supplier. Or having a part shipped next day when company policy prohibits such an action. Or hiring an independent contractor for a two-day job. Or maybe it's just finding someone in another part of the company to help for a couple of hours. Often the company has rules against many of these requests for internal control purposes. While the controls normally make sense, they can be costly at times. The expediter has the authority to bypass the rules--up to a point. For example, the $500 tool limit is upped to $1,500 for the expediter. Because controls are bypassed, someone should be spot check the expediter's decisions. The best choice for an expediter is someone who knows the company well and can get things done quickly. An expediter shouldn't be used for every problem, but reserved for costly bottlenecks.

 

October 21, 2014

News

Prepare taxes for compensation? Time to renew your PTIN for 2015. The IRS has announced that it is now processing applications and renewals for 2015. Go to the Tax Pros tab at irs.gov. The IRS also describes the new program recognizing the efforts of non-credentialed return preparers who meet the 18 hours of continuing education. The IRS has also announced it will have a database of PTIN holders that the public can search. The IRS is planning to have the database online in January, 2015.

The president has determined that certain areas in California, Hawaii and Michigan are eligible for government disaster assistance. For California, the disaster was the earthquake during the period of August 24 to September 7, 2014 and includes the counties of Napa and Solano. For Hawaii, the disaster was Tropical Storm Iselle during the period August 7 to 9, 2014 and involved the counties of Hawaii and Maui. The Michigan notice applies to severe storms and flooding during the period to August 11 to 13, 2014 and affected the counties of Macomb, Oakland and Wayne. Affected taxpayers may deduct losses on their 2013 returns.

Tip of the Day

Buying a business? . . . You're probably buying a customer base as well. When analyzing the business, keep in mind that not all customers are equal. In some cases they will deal with you automatically because of pricing, quality, service, etc. Those are the types of customers you want. You won't have to spend time and energy finding new customers and that translates into more profit. If the business has a higher than normal proportion of customers who price shop, order only low-margin products or services, pay late, etc. you're off to a rough start. The same is true for product lines. If most of the sales are from low-margined or perishable items, you'll have to work harder. Same if only one or two customers generate the bulk of the company's business. Analyze the customer base as well as you can. Your accountant may have suggestions for ways to get at the information.

 

October 20, 2014

News

Individuals can claim the Excess Social Security Tax Credit as a refundable credit on Form 1040, U.S. Individual Income Tax Return. In Tax Year 2011, more than 1.3 million tax returns included Excess Social Security Tax Credit claims for more than $1.6 billion. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine the effectiveness of the IRS’s processes to ensure that taxpayers are accurately claiming excess Social Security tax withholding credits. TIGTA reviewed a statistically valid sample of 322 of 87,319 tax returns for which the total amount of Social Security tax withholding employers reported to the IRS on Forms W-2, Wage and Tax Statement, did not support the credit amount claimed by the taxpayers on their tax returns. The review found that 231 (72 percent) returns had potentially erroneous claims totaling $177,854. Neither the information reported on or included with these 231 tax returns nor TIGTA's research of wage and withholding information reported by employers supported the amount of Excess Social Security Tax Credit claimed by these individuals. Of the 231 tax returns with questionable Excess Social Security Tax Credit claims, 40 could have been identified as questionable at the time the tax returns were processed. The remaining 191 (83 percent) of the 231 tax returns involved discrepancies between the credit claimed by the taxpayer and the amount the employers reported on Forms W-2. The IRS has established processes to identify these discrepancies. However, the IRS only reviews a small portion of the questionable claims it identifies. The IRS generally has no other processes or procedures to address these questionable Excess Social Security Tax Credit claims. TIGTA estimates that the IRS allowed more than $12.9 million in erroneous credits in Tax Year 2011 ($64 million forecasted over five years). TIGTA recommended that the Commissioner, Wage and Investment Division, ensure that employees follow established procedures when verifying claims and develop a strategy that adequately addresses tax returns identified with a discrepancy between the Social Security tax withholding reported by taxpayers and reported by employers. You can find the full report at www.treasury.gov/tigta/auditreports/2014reports/201440058fr.html.

Tip of the Day

Just-in-time inventory doesn't always work . . . Auto companies with manufacturing plants in Japan were recently shut down when an earthquake hit a supplier of piston rings. Apparently there are no backup manufacturers and all the company's plants were in the same area and affected. Many manufacturers espouse just-in-time inventory where a company carries only a few days inventory to reduce costs. The problem isn't unique to manufacturers. Service businesses can have problems if a machine breaks and spares are unavailable. Here are some suggestions to avoid a disaster:

 

October 17, 2014

News

The IRS has released a new Health Care Tax Tip, Information for Employers about Their Responsibilities Under the Affordable Care Act. Remember, applicable large employers are subject to the employer shared responsibility provisions.

The IRS is protecting taxpayers’ rights when issuing systemic and manual levies in cases for which additional assessments were not included in the levy. TIGTA reviewed statistical samples of systemic and manual levies issued by the Automated Collection System and the Integrated Collection System and determined that controls ensured that taxpayers were given notice of their appeal rights at least 30 calendar days prior to the issuance of the levies. The Treasury Inspector General for Tax Administration (TIGTA) in a review of a statistical sample of 30 Automated Collection System taxpayers with additional assessments included in the systemic and manual levies determined that there were 27 (90 percent) taxpayers who did not receive a new notice of intent to levy after an additional assessment was made on a tax period listed on the levy. IRS management stated that they have since made computer programming changes to correct this problem. In addition, a review of a statistical sample of 30 Integrated Collection System taxpayers with additional assessments included in the systemic levies determined that there were 18 (60 percent) taxpayers who did not receive a new notice of intent to levy after an additional assessment was made on a tax period listed on the levy. You can find the full report at www.treasury.gov/tigta/auditreports/2014reports/201430078fr.html.

In Terry Gene Akey (T.C. Memo. 2014-211) the IRS denied the taxpayer deductions for cost of goods sold and other deductions related to a sports memorabilia activity. The Court first looked to see if the activity was engaged in with the intention of securing a profit. It looked at the factors the courts normally review to determine a profit motive and found none of the factors supported its existence. The Court went on to say that even it were to find the taxpayer engaged in the activity for profit it would still disallow the claimed cost of goods sold and deductions because he failed to substantiate both the fact of the expenditures themselves and, with respect to his claimed business deductions, that they were ordinary and necessary business expenses. The taxpayer claimed his expenses were adequately documented and offered eight five-inch-thick looseleaf binders containing thousands of pages of papers. The Court said the taxpayer ignored its specific instructions regarding substantiating his income and expenses. It went on to say it "need not (and will not) undertake the task of sorting through the voluminous evidence petitioner has provided in an attempt to see what is, and what is not, adequate substantiation of the times on petitioner's returns.

Tip of the Day

Analyze the numbers . . . The internet now allows us to have access to far more information, much of it arcane, than ever. We can call up a barrage of numbers, graphs, statistics, etc. But the meaning behind those numbers may be elusive. Two recent statistics are telling. Sales of existing homes are down significantly, but the median price just went up slightly. If you just look at the second statistic, it's good news if you're selling your home. Or is it? The median is the middle value in a list of numbers. For example, the median in the sequence 5, 6, 8, 9, 11,000 is 8; the average is 2206. The market value of your house could have actually decreased, while the median in your area increased. How? Possibilities include:

In fact, in some lightly traded markets, the sale of just a few expensive homes can result in an increase in the median selling price. Nonetheless, the median is still the best available indicator. Keep in mind that numbers can provide an insight into markets, but be sure they mean something.

 

October 16, 2014

News

The IRS has issued proposed regulations (REG-136676-13) that removes a rule that a deemed discharge of indebtedness for which a Form 1099-C, Cancellation of Debt, must be filed occurs at the expiration of a 36-month non-payment testing period. The IRS was concerned that the rule creates confusion for taxpayers and does not increase tax compliance by debtors or provide the IRS with valuable third-party information that may be used to ensure taxpayer compliance.

Business bad debts are taken as an ordinary deduction, that is, they can offset ordinary income. Nonbusiness bad debts are only deductible as a capital loss and subject to the same limitations, i.e., no more than $3,000 can be used in any one year to offset ordinary income. In addition, a nonbusiness bad debt is only deductible if wholly worthless. In Scott M. Langert (T.C. Memo. 2014-210) the taxpayer was a real estate agent did not hold himself out as a lender. Indeed, over the 30 years that he was involved in real property activities he made loans on about six different occasions. At no time did he advertise himself as a money lender or keep a separate office or separate books relating to any of the loans he made. The loan he made was not secured by collateral, he did not check the credit rating of the borrowers, or ask for financial information. In addition, after the borrower stopped making payments on the note, the taxpayer did not pursue any action other than orally requesting payment. When the borrower filed a petition for bankruptcy the taxpayer did not file a proof of claim with the bankruptcy court. The Court noted that in order for a bad debt to be deductible as a business bad debt it must be created or acquired in connection with a trade or business, or a loss from the worthlessness incurred no the taxpayer's trade or business. (For example, you hold a note as a result of the sale of certain assets the business sold.) The Court found the taxpayer was not in the business of lending money and was not in connection with his trade or business. The Court held that the taxpayer was not entitled to a business bad debt deduction for the year at issue.

Tip of the Day

Too many irons in the fire . . . You've got an engineer who's a genius. He comes up with new products almost weekly. That may not sound like a problem, but exploiting all those ideas could put a strain on the system. Prototypes, testing, getting the product into manufacturing, marketing, etc. could take months or years. Trying to commercialize all of them might actually lower your overall return and could even jeopardize the health of the business. The best approach may be to select the ones with the highest expected return (probability times return), least risk, and ones closest to the objectives of the business. What about the other ideas? You may be able to license or sell them to another party or outsource most or all of the business functions from testing to manufacturing to marketing.

 

October 15, 2014

News

This is it. Can't procrastinate any longer. The extended due date for individual tax returns is today.

The IRS has made a number of changes to its offshore compliance program for delinquent filers of Foreign Bank and Financial Accounts (FBAR). Many of these changes simplify and clarify procedures. The recently updated pages of IRS.gov include:

Streamlined Domestic Offshore Procedures for U.S. Taxpayers Residing in the U.S.

Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing in the United States Frequently Asked Questions and Answers

Delinquent International Information Return Submission Procedures Frequently Asked Questions and Answers

Streamlined Foreign Offshore Procedures for U.S. Taxpayers Residing outside the U.S.

Delinquent International Information Return Submission Procedures

If you do business as a corporation and an officer provides more than nominal services, the officers are statutory employees. That's what the Tax Court held in Central Motorplex, Inc. (T.C. Memo. 2014-207). Two individuals were officers and performed more than minor duties. A third worker was classified as an employee because his work was controlled by one of the officers, received compensation considered wages every month and the work he performed was integral to the corporation's business. The Court allowed the 5% per month penalty for failure to file a return and the 10% failure to file for the employment taxes.

The Fifth Amendment privilege has limitations. In Eli Chabot et ux. (U.S. District Court, D. New Jersey) the IRS was informed that a company in which the taxpayer is the beneficial owner had a foreign bank account. The taxpayers declined to produce documents requested by the IRS, asserting their Fifth Amendment rights. The Court found the Required Records Doctrine applied and the taxpayers could not claim the Fifth Amendment privilege to refuse responding to the IRS's summons.

Tip of the Day

Waiving NOL carryback period . . . Normally, a net operating loss (NOL) is first carried back two years (there are special situations with other carryback periods). Any unutilized amount is carried forward. But you can elect to forgo the carryback and just carry the loss forward. For example, for 2013 you had an NOL. In 2011 and 2012 you had income, but it was relatively small. In 2014 and 2015 you expect to be in the top bracket. You can attach an election to your 2013 return to forgo the carryback and just carry the loss forward to 2014. If you forget to make the election all is not lost. If you filed your original return on time you can make the election on an amended return filed within 6 months of the due date of the return (excluding extensions). Attach a statement to the amended return, and write "Filed pursuant to section 301.9100-2" at the top of the statement. Once you choose to wave the carryback period, it is generally irrevocable.

 

October 14, 2014

News

The IRS has released the instructions for the 2014 Form 1040 in draft form. The draft instructions note the individual health care responsibility and the expired tax benefits. The instructions note that certain lines on the form have been labeled "Reserved" in case Congress extends the benefits into 2014.

In Daniel Richard Buczek (143 T.C. No. 16) the taxpayer timely filed a Form 12153, Request for a Collection Due Process or Equivalent Hearing, with attachments, in response to a final notice of intent to levy to collect the taxpayer's unpaid liability for 2009. The taxpayer did not raise any issues specified in Sec. 6330(c)(2) or make any allegations that reasonably indicated he was raising such an issue. The Appeals Office sent him a letter stating that it was disregarding his hearing request because his disagreement was frivolous. The Court noted this "disregard letter" resembled the letters sent to the taxpayers in Thornberry. The IRS filed a motion to dismiss for lack of jurisdiction, asserting that contrary to the Court's holding in Thornberry, the Court did not have jurisdiction when a disregard letter is issued. The IRS asserted that the holding in Thornberry eviscerates Sec. 6330(g) and requested the Court overturn it. The Court declined to do so. The Court held it had jurisdiction to review the IRS's determination as to whether a taxpayer who has sought judicial review under Sec. 6330(d)(1) has raised an issue other than issues that have been identified by the IRS as frivolous or are a delaying tactic. Thornberry followed and clarified. The Court also held that because the taxpayer did not raise on form 12153 any issues specified in Sec. 6330(c)(2) that may be considered in an administrative hearing, no portion of his request for a hearing is excluded from the IRS's determination to disregard the entire request and Sec. 6330(g) prohibits further judicial review of that determination. Finally, because the IRS's determination that the Collection Division could proceed with collection was not made in response to a proper request for a hearing, i.e., the entire request was properly treated as if it had never been submitted, and the Court lacked jurisdiction to review that determination and the IRS's motion to dismiss for lack of jurisdiction was granted.

In Mica Ringo (143 T.C. No. 15) the whistleblower filed with the IRS's Whistleblower Office (W) an application for an award under Sec. 7623. On November 7, 2012 W mailed the whistleblower a letter stating that he was ineligible for such an award because he did not provide the IRS with information that resulted in the collection of any tax from the target. The whistleblower timely filed a petition with the Tax Court. The Court noted that the law provides that any determination regarding an award may, within 30 days of such determination be appealed to the Tax Court. On June 11, 2103 W notified the whistleblower that it was still considering his application and that W had mailed the November 7, 2012 letter in error. The IRS moved to dismiss the case for lack of jurisdiction. The Court held that the November, 2012 letter was a determination and the Court had jurisdiction. The fact that the IRS continued to consider the whistleblower's application after sending the letter does not terminate the Court's jurisdiction.

Tip of the Day

Buying a business? . . . Be sure to factor in the possibility of one or more employees leaving. They may have stayed only because of the former owner, or just think the transition is a good time to leave. Some you won't miss (in fact you're probably hoping some will leave), but some may be important to the operations--a foreman, accountant, salesman, etc. Either you or the seller should talk to key employees to see what they need to stay. Often money isn't the issue. They may just want more of a say in the business or more freedom in doing their job.

 

October 10, 2014

News

Notice 2014-58 (IRB 2014-44) amplifies Notice 2010-62, by providing additional guidance regarding the codification of the economic substance doctrine and the related penalty amendments. Specifically, this notice provides guidance regarding: (1) the definition of “transaction” for purposes of applying the codified economic substance doctrine under Section 7701(o), and (2) the meaning of “similar rule of law” as described in the accuracy-related penalty under Section 6662(b)(6). This notice is also relevant with respect to the availability of the reasonable cause exceptions under Sections 6664(c) and (d) and the reasonable basis exception under section 6676 because those exceptions are inapplicable to transactions described in Section 6662(b)(6).

In an audit the Treasury Inspector General for Tax Administration (TIGTA) found the field workload selection process is not designed to ensure that cases with the highest collection potential are identified, selected, and assigned to be worked. In Fiscal Year 2013, 40 percent of the taxpayer delinquent accounts closed by the field were written off as currently not collectible. The amount of delinquencies written off that year totaled $16.1 billion, which was over five times as much as the amount collected by the field ($3.1 billion). There are several contributing factors limiting the effectiveness of the IRS’s collection efforts:

Furthermore, many of the cases are older with less collection potential because they were first routed to the Automated Collection System but were not resolved before assignment to the field. To view the full report go to www.treasury.gov/tigta/auditreports/2014reports/201430068fr.html.

Many "hobby loss" cases are cut and dried. It's clear the taxpayer had little intention of making a profit in the activity. Often few, if any, of the nine factors the IRS and courts look at in determining whether a taxpayer intended to reap a profit from the activity favor the taxpayer. In Susan Crile (T.C. Memo. 2014-202) the taxpayer was a well-recognized artist and a tenured professor of studio art at Hunter College. She had a long, varied, and distinguished career as an artist for over 40 years and worked in a number of diverse mediums including oil, acrylic, charcoal, lithographs, and woodcuts. She exhibited and sold her art through leading galleries and has received professional accolades, residencies, and fellowships. She devoted much time to her craft. Yet despite her artistic success, financial success escaped her. She consistently incurred losses in her business. The IRS argued that her activity as an artist was part of her work as a professor at Hunter College and her art-related expenses should be claimed as a itemized deduction on Schedule A. The Court rejected that argument and went on to review the factors. The Court found the first four factors favored the taxpayer; the fifth, eight, and ninth slightly favored the taxpayer or were neutral and only the sixth and seventh factors favored the IRS, but even these less strongly than in many Section 183 cases. The Court did note that the economic losses she actually sustained in her art business were substantially smaller than the tax losses reported on her Schedules C, owing to the inclusion of many personal expenses when calculating her business income.

Tip of the Day

Employee leaving? . . . Make sure you get his company cell phone, tablet and/or laptop, credit cards, any special discount cards, cancel insurance coverage, etc. In addition, scrutinize bills for items for employees who left. For example, the employee may have used some special software. You don't want to continue paying maintenance if the software is no longer used, or no longer in house. Same goes for trade publications and dues. Most vendors will continue to send bills as long as you continue to pay them. The amounts can add up quickly. You should be especially careful if the employee worked out of his house or was on the road a lot. Publications, software updates, etc. could have been mailed directly to him. There may be other items depending on the nature of your business and the employee's position. The same scrutiny may be applicable to an employee changing jobs. For example, the salesman who's not on the road anymore doesn't need a company car.

 

October 9, 2014

News

The IRS has issued a warning that if an extenders legislation package is not dealt with soon the filing season and tax refunds for many taxpayers could be delayed. Some 50 tax laws expired at the end of last year that have been routinely renewed. The range from the relatively trivial to those of major importance such as the expensing limit under Section 179.

In an audit, the Treasury Inspector General for Tax Administration found that there are some barriers for the IRS in ensuring the tax compliance of real estate sales transactions subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). As such, the IRS cannot provide assurance that all foreign seller real estate transactions comply with the FIRPTA. TIGTA’s review of Form 1099-S, Proceeds From Real Estate Transactions, real estate transaction data reported to the IRS revealed that there may be noncompliance with the FIRPTA filing requirements. TIGTA also found that the IRS did not always ensure compliance with FIRPTA filing requirements when a request for reduced withholding was filed and the FIRPTA withholding tax was still owed. In addition, TIGTA also identified various internal control weaknesses in the processing of 1) FIRPTA withholding payments and 2) FIRPTA withholding credits claimed by foreign sellers on their income tax returns. These internal control weaknesses resulted in the issuance of erroneous refunds and balance due notices. You can find the full report at www.treasury.gov/tigta/auditreports/2014reports/201430051fr.html.

In another audit TIGTA found the same deficiencies in the IRS’s processing of Collection Due Process cases as previously reported. Specifically, the Office of Appeals did not always classify taxpayer requests properly and, as a result, some taxpayers received the wrong type of hearing. In its two statistically valid samples, TIGTA identified eight taxpayer cases that were misclassified. This is an increase from the six misclassified taxpayer cases that were identified in the prior year’s review. In addition, TIGTA continued to identify errors relating to the determination of the Collection Statute Expiration Date on taxpayer accounts. From a statistically valid sample, TIGTA identified 12 taxpayer cases that had an incorrect Collection Statute Expiration Date. TIGTA also found that Appeals personnel did not always document their impartiality statement in final hearing notification letters issued to taxpayers. TIGTA identified that in 23 of the 132 taxpayer cases reviewed, the IRS did not have the required impartiality statement documented in the waiver and withdrawal letters sent to taxpayers. You can find the full report at www.treasury.gov/tigta/auditreports/2014reports/201410049fr.html.

Tip of the Day

Buying a business? . . . Most buyers just want certain assets--business name, inventory, patents, machinery, etc. They don't want to be burdened by any liabilities associated with the business. But sometimes it's easier to buy the business. That way you get all the contracts, rights, etc. the business owns. And those contracts may be what made the business a success. Talk to your attorney. Some contracts may not survive a transfer of ownership and there may be other considerations. But don't reject a purchase of the business out of hand.

 

October 8, 2014

News

Revenue Procedure 2014-55 (IRB 2014-44) provides that eligible U.S. citizens and residents with certain Canadian retirement plans will be treated as making an election under Article XVIII(7) of the U.S.-Canada Income Tax Treaty to defer U.S. income tax on income accruing in their retirement plans until a distribution is made. Such individuals will be treated as having made the election in the first year in which they would have been entitled to make the election under the treaty. This revenue procedure also eliminates a reporting requirement associated with such Canadian retirement plans.

Many Tax Court cases involve deductions, most frequently auto expenses, travel and entertainment, and other expenses such as office supplies, etc. In this case, Binh Nguyen et ux. (T.C. Memo. 2014-199) the IRS challenged the taxpayer's deductions for cost of goods sold. The taxpayer installed flooring often using materials he supplied, sometimes with customer-supplied materials. The taxpayer had limited proficiency in English and cannot read English. Some of his receipts for the first of two years at issue were lost in a flood caused by a hot water heater. For the second year the receipts were just missing. For both years he had a professional tax preparer (different ones), but the preparer was not called to appear in court. The Tax Court allowed the taxpayer a deduction for only the amounts allowed by the IRS.

You can deduct as a medical expense capital expenditures required for medical care or to accommodate a disability. For example, an individual confined to a wheelchair may be able to deduct the cost of installing a special sink, ramp to an entrance door, etc. But the deductible amount is limited to the amount that exceeds the increase in value of the home, must be medically required, and be primarily for the treatment of medical ailments. Installing a swimming pool in your back yard may qualify, but not in the case of Charles Paul Le Beau (T.C. Memo. 2014-198). The Court noted the only evidence the taxpayer presented to support the medical purposes was his testimony that doctors told him to lose weight. The Court found the taxpayer did not show that the pool was primarily for the treatment of medical ailments.

Tip of the Day

Profit motive lacking in rental activity . . . While the IRS can disallow losses on a rental property if it finds a lack of a profit motive, the issue usually arises when the property is rented to family members or friends at less than a fair rental. But that's not always true. In one case the court found the taxpayer did not carry on the activity in a business-like manner, noting a lack of advertising and a professional manager, the failure to secure a lease, and the failure to maintain books and records on the property. You may be at risk for an IRS challenge if your gross rental income is very low in comparison to expenses, there are years when you have no income, or you have consistently large unexplained losses. Check with your tax advisor to see if you're at risk.

 

October 7, 2014

News

Notice 2014-61 provides guidance on the federal tax treatment of per capita payments that members of Indian tribes receive from proceeds of certain settlements of tribal trust cases between the United States and those tribes.

When does the statute of limitations start running? Generally it's when the applicable return is filed. Without a return the IRS (or a state) cannot calculate a tax liability. In Law Office of John H. Eggertsen P.C. 142 T.C. No. 4, (Eggertsen I), the Court held that the period of limitations for assessing the excise tax under Sec. 4979A(e)(2)(D) had expired. In the current case Law Office of John H. Eggertsen P.C. (143 T.C. No. 13) the Court reconsidered its position, holding that Sec. 6501 controls resolution of that issue because the taxpayer did not file Form 5330 or any other document that qualifies as a return for Sec. 4979A(a) excise tax purposes within the meaning of Sec. 6501(a). Sec. 4979A(e)(2)(D) serves only to extend under the circumstances set forth therein the period of limitations prescribed by Sec. 6501. The Court also held the excise tax that Sec. 4979A(a) imposes on the taxpayer for its taxable year 2005 may be assessed at any time under Sec. 6501(c)(3).

Deposit or advance tax payment? If you overpay your taxes you're entitled to a refund, often with interest. In Ford Motor Company (U.S. Court of Appeals, Sixth Circuit) the taxpayer remitted hundreds of millions of dollars to the government after the IRS found the taxpayer underpaid its taxes. The taxpayer originally designated the funds as "deposits in the nature of a cash bond" but later asked the government to convert its remittances into "advance tax payments". The IRS subsequently found the taxpayer overpaid its taxes and refund the advance tax payments with interest, but refused to pay interest for the period the government held the funds as deposits. The Court sided with the IRS in denying the taxpayer's claim to interest on the deposits.

Tip of the Day

As goes the IRS, so go the states . . . In many cases, states follow the lead of the federal government. The IRS has been searching for undisclosed offshore bank accounts; several states are now asking for the same information. If the IRS makes an adjustment on your income tax, you'll probably have to file an amended state return. (There are exceptions. For example, you may have a credit or deduction adjusted on your federal return that's not reportable on your state return.) Some states are asking for disclosures of reportable transactions. Check with your tax adviser to make sure you're complying with state rules. Don't think the state won't catch up to you. They exchange information with the IRS and you could be liable for substantial penalties if you don't report audit changes, etc.

 

October 6, 2014

News

The IRS recently updated the e-Services Registration process with challenge questions for use in unlocking one’s account and certain other changes to the registration screen. More details are available on the e-Services information page on irs.gov.

The IRS is reminding tax professionals that they can earn continuing professional education credits online through seminars filmed at the 2014 IRS Nationwide Tax Forums. The 14 self-study seminars are now available on the IRS Nationwide Tax Forums Online (NTFO). Self-study seminars provide information to students using interactive videos, PowerPoint slides and transcripts. The online forums are registered with the IRS Return Preparer Office and the National Association of State Boards of Accountancy (NASBA) as a qualified sponsor of continuing professional education (CPE). For a fee, Enrolled Agents and CPAs taking NTFO seminars can earn CPE credits. To earn CPE credits, users must create an account, answer review questions throughout the seminar, and pass short tests at the end of the seminars. For more information go to irs.gov/pub/irs-news/IR-14-095.pdf.

Tip of the Day

Basis for amortization/depreciation deductions . . . Before taking an amortization or depreciation deduction, you've got to be able to show you've got basis in the asset. For example, you may be able to amortize start-up expenses, developed intangibles, etc. or physical assets such as purchased or constructed equipment or buildings. If you purchased the asset you've got a receipt or bill of sale. But what if you self-constructed it? The IRS will not just accept that you expended $20,000 in constructing a special machine to use in your business. You've got to have receipts and canceled checks and show that you didn't deduct those expenditures. If you had your own employees working on the project you want to be able to reconcile total payroll with current and capitalized expenditures. The amounts involved can be substantial and may not be challenged immediately. For example, you used in-house labor to construct a building. Years later the IRS challenges your depreciation deduction. Do you still have the documentation to prove your basis? Talk to your tax adviser for what you need to do.

 

October 3, 2014

News

The IRS has released final regulations (T.D. 9696) relating to the deductibility of expenses for lodging when an individual is not traveling away from home (local lodging). Lodging expenses when not away from home are generally not deductible. The regulations provide that under certain circumstances local lodging expenses may be deductible as a necessary business expense. The regulations also provide a safe harbor for local lodging at business meetings and conferences.

If you have a net operating loss (NOL) for the year you must first carry the loss back to the second year before the loss. Any unutilized amount can be carried forward. You can elect to forgo the carryback period and just carry the loss forward. In Maryann Larkin et vir (T.C. Memo. 2014-195) the taxpayers had an NOL for 2005, failed to make the election but carried the loss forward, reporting zero liability on their 2006 return. In 2008 the taxpayers amended their 2003 return to correctly use the NOL carryback and generate a 2003 tax overpayment of $206,311. On the amended return they requested the overpayment be credited to the 2006 liability of $76,400 that resulted from the removal of the NOL carryforward. The IRS, rather than applying the overpayment refunded it and then assessed the taxpayers' 2006 self-reported and unpaid tax liability of $76,400 along with $8,014 in interest. The taxpayers sought an abatement of the interest. The Tax Court held that the IRS did not abuse its discretion in denying the taxpayers' abatement of interest request and requiring the taxpayers to pay interest on the entire unpaid 2006 liability. The Court also held the taxpayers were not entitled to relief under Sec. 6404.

Exchanges of life-insurance contracts . . . Were it not for Code Section 1035 exchanging a life insurance contract in one company for a contract in another company would be taxable. But Section 1035 allows several different types of tax-free exchanges. You can avoid gain or loss on the exchange of:

Unfortunately, the exchange of an annuity contract for a life insurance contract or a annuity contract for an endowment contract produces taxable gain.

 

October 2, 2014

News

In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found International tax noncompliance remains a significant area of concern for the IRS. However, the IRS’s collection efforts need to be enhanced to ensure that delinquent international taxpayers become compliant with their U.S. tax obligations. TIGTA’s review found that the IRS has not provided effective management oversight to International Collection, which contributed to several control weaknesses in the program. For example, International Collection does not have:

You can find the full report at www.treasury.gov/tigta/auditreports/2014reports/201430054fr.html.

THe IRS is reminding taxpayers (IR-2014-93) that the filing deadline for individual taxpayers with extensions is October 15. If a taxpayer is struggling financially and owes $50,000 or less, he or she may also be eligible to use the Online Payment Agreement to set up a monthly payment agreement for up to 72 months or request a short-term extension to pay.

In Gerd Topsnik (143 T.C. No. 12) the taxpayer, a German citizen, made an installment sale of his stock in a U.S. corporation and received payments pursuant to a promissory note. The sale was structured as a large payment in the year of sale, 2004, and additional payments troughout 2005-2009. The taxpayer filed returns in 2004 and 2005, but not for 2006-2009. The taxpayer alleged that during the years in issue, he was a German resident and a U.S. nonresident alien, having informally abandoned his status as a lawful permanent resident (LPR) (i.e., a resident alien taxable on his worldwide income) in 2003 and therefore not subject to tax on his U.S. income. The Court held that because he did not formally abandon his LPR status pursuant to Reg. Sec. 301.7701(b)-1(b)(1) and (3) until 2010, he remained an LPR during the years in issue and taxable by the U.S. on his worldwide income, including the gain on his installment sale of stock. The Court also held that LPR status for Federal income tax purposes turns on Federal income tax law and only indirectly determined by immigration law.

Tip of the Day

Skin in the game . . . If you're looking to get a bank loan (or similar financing), the most lenders want to see that you have your own money in the business. Many small business owners start with as little capital as possible and take out as much money as they can to live on. That's unlikely to impress a lender. Many want to see total liabilities of no more than four times your equity capital. The more capital you've got invested, the better your chances of securing a loan. In some cases with additional capital you may be able to secure a lower interest rate. Loaned the business money? Those loans will probably be subordinated to a bank's loan. Check with your tax advisor on the tax consequences.

 

October 1, 2014

News

In Dennis E. Bohner (143 T.C. No. 11) the taxpayer participated in the Civil Service Retirement Systems (CSRS) while he worked for the Federal Government. After he retired he received a letter explaining that he could elect to increase his CSRS retirement annuity by remitting a fixed sum. He did remit funds to CSRS, but because he did not have sufficient funds in his bank account, he borrowed a portion of the fixed sum. He paid off the loan and replenished his bank account by making withdrawals from his traditional IRA. The taxpayer did not report as taxable income any of the amounts withdrawn from the IRS, contending that he engaged in a tax-free rollover. The IRS argued that rollover contributions can't be made to CSRS. The Tax Court held that because CSRS did not accept his remittance as a rollover, the taxpayer must include his withdrawals in income for the year at issue.

Tip of the Day

Got season tickets? . . . If you buy season tickets or series tickets you've got to treat each ticket as a separate item. Divide the total cost (but not more than the face value) by the number of games in the series or season. You've got to account for each event you claim is business or number of games in the series or season. You've got to account for each event you claim is business or gift related.

 

September 30, 2014

News

The IRS has released final regulations (T.D. 9695) relating to the requirements for filing certain employee retirement benefit plan statements, returns, and reports on magnetic media. (Magnetic media includes electronic filing.) These regulations affect plan administrators and employers maintaining retirement plans that are subject to various employee benefit reporting requirements.

If an IRS employee is unable to contact or unable to locate (UTC/UTL) a delinquent taxpayer, the collection case may be closed as currently not collectible (CNC). If all of the required research steps are not taken prior to the case closure, there is a risk that the Government’s interest may not be protected and that taxpayers will not be treated equitably. In Fiscal Year 2012, the IRS closed 482,611 tax modules involving approximately $6.7 billion as CNC–UTC/UTL. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether these cases were adequately researched, documented, and approved to ensure that all actions were taken to collect outstanding taxpayer liabilities. Required case actions were not always completed before closing cases as CNC–UTC/UTL. Of a stratified sample of 250 cases reviewed, there was no evidence that employees completed all of the required research steps for 57 percent of the cases prior to their closing. Moreover, 7 percent of the cases did not have a Notice of Federal Tax Lien (NFTL) filed on all delinquent tax periods as required. Collection Field function (Field) employees did not complete all research in 165 of the 204 Field cases, while Automated Collection System function employees did not complete all research in eight of the 38 Automated Collection System cases. Automated Collection System function employees use an electronic checklist to guide them; however, Field employees do not have a checklist. Managers approved the case closures even though the required research steps were not completed. Field employees are required to complete more extensive research than Automated Collection System function employees before they close cases as CNC–UTC/UTL. However, the IRS does not track whether the additional research and time spent is productive. TIGTA recommended that the Directors, Enterprise Collection Strategy and Field Collection, ensure that controls are in place so that employees complete the required research and make NFTL determinations, as well as require managers to document that all case actions have been completed before approving any CNC–UTC/UTL case closures. TIGTA also recommended verifying that all cases closed as CNC–UTC/UTL with aggregate unpaid assessed balances of more than $10,000 beginning in Fiscal Year 2012 had an NFTL filed on all applicable tax periods. Additionally, TIGTA recommended that an analysis be conducted on the success of the additional research steps taken by Field employees prior to closing cases as CNC–UTC/UTL. In their response to the report, IRS officials agreed with all of our recommendations and plan to take corrective actions. However, management’s planned corrective actions for two of the recommendations did not fully address the recommendations. TIGTA believes management should completely address both recommendations to ensure that the Government’s interest is protected. For the complete report go to www.treas.gov/tigta/auditreports/2014reports/201430052fr.html.

In James C. Cooper et ux. (143 T.C. No. 10) the taxpayer-husband was an inventor who transferred several patents to a corporation, T. The taxpayers owned 24% of T. A related party and a friend owned the remainder. The taxpayer-husband controlled T through it officers, directors and shareholders. The taxpayers reported royalty income that the taxpayer-husband received fro T in exchange for the transfer of the patents as capital gain under Sec. 1235. The IRS determined that the royalty payments the husband received from T did not qualify for capital gain treatment. The Court held that the taxpayer-husband did not transfer all substantial rights in the subject patents to T within the meaning of Sec. 1235 because he controlled T during the years at issue. The taxpayers were not entitled to capital gain treatment under Sec. 1235 for the royalties received from T in exchange for the subject patents.

Tip of the Day

Measuring amount of a casualty loss . . . The amount of a casualty loss is generally measured by the difference in fair market value of the property before and after the casualty, less any insurance recovery. Neither the cost of repairing damaged property nor the cost of cleaning up is part of a casualty loss. However, you can use the cost of cleaning up or making repairs as a measure of the decrease in the fair market value if you meet all of the following:

 

September 29, 2014

News

Beginning in October the IRS will send due diligence warning letters to tax preparers who appear not to be complying with EITC due diligence requirements. Assistance understanding these requirements is available on the EITC Tax Professional’s page.

In a report the Treasury Inspector General for Tax Administration (TIGTA) found Return Preparer Coordinators effectively managed most of the paid preparer activities under their control and provided good audit leads for further enforcement actions. However, more actions could be taken to ensure that the Return Preparer Coordinators timely review referrals with allegations of inappropriate paid preparer behavior and that the referrals and complaints are shared among the various functions responsible for reviewing them. TIGTA reviewed 2,134 paid preparer referrals received by three Area Offices during Fiscal Years 2010 through 2012 and found that the Return Preparer Coordinators had not evaluated 722 referrals (34 percent) to determine if a preparer case was warranted. This resulted primarily from limited resources and ineffective controls. In addition, due to a lack of guidance, many of the complaints processed by the Return Preparer Office are not shared with the Return Preparer Coordinators. TIGTA recommended that the IRS develop inventory controls and timeliness standards for the referral process to help ensure that problematic paid preparers are identified and considered for further enforcement actions. In addition, TIGTA recommended that the Small Business/Self-Employed Division work with the Return Preparer Office to develop a methodology for sharing information on paid preparer referrals and complaints to improve the identification of the most egregious paid preparers for further enforcement actions. In their response to the report, the IRS agreed with both recommendations and plan to take appropriate corrective actions. For the complete report go to www.treas.gov/tigta/auditreports/2014reports/201430050fr.html.

Tip of the Day

Starting a business? . . . Some businesses start with few, if any, customers and it takes months or years to amass enough customers for a viable business. Those business owners know how hard it is to build a customer base and will always guard and nurture it. Some new owners already have a following from another business or from a previous employer or buy an existing business with an established customer base. That's when you can't get complacent. No matter how loyal your customers, you'll lose some of them over time for any number of reasons. If you're buying a business, be proactive to retain the customers you bought. That's especially important in a personal service business. Don't simply rely on a letter of introduction from the seller.

 

September 26, 2014

News

Senator Charles E. Grassley, R-Iowa, who sits on the Senate Finance Committee indicated that the action by the Treasury to stem inversions may reduce the impetus for tax reform.

In an audit of the IRS's Voluntary Classification Settlement Program (VCSP; regarding the classification of workers as employees or independent contractors) the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS does not obtain information it needs to verify the accuracy of applications and payments. The IRS does not require employers to provide information on the VCSP application that identifies the specific workers who are being reclassified, such as the workers' names and Social Security numbers. In addition, the IRS is unable to verify the accuracy of the compensation amount reported on the application. For the full report, go to www.treas.gov/tigta/auditreports/2014reports/201440065fr.html.

The relief of a liability generally creates income. For example, if the bank forgives $1,000 of your credit card debt, you have income for that amount (there are some exceptions). In Howard W. Mylander et ux. (T.C. Memo. 2013-191) the taxpayer had guaranteed a loan but received no consideration for doing so. The primary obligors defaulted, and the taxpayers made good on a portion of the defaulted amount. The IRS claimed the taxpayers had forgiveness income because the guaranty of the debt was not contingent. The Court found the liability was contingent and the taxpayers received no consideration for making the guaranty. In addition, they did not receive the benefit of the non-taxable proceeds from the loan obligation. It held the taxpayers did not have cancellation of debt income.

Tip of the Day

Power of attorney for your parents? . . . It may not be the best choice if you're using it to gain access to your parents' checking account. More than a few banks are reluctant to accept a power of attorney for a parent because of the amount of potential for financial abuse. You may be better off having your parent put your name on the account or setting up a revocable trust. Ask your financial adviser or attorney the best approach for you.

 

September 25, 2014

News

The IRS has revised Form 4506-T, Request for Transcript of Tax Return and Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. The IRS has also revised Publication 1544, Reporting Cash Payments of Over $10,000 and Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The IRS has issued draft instructions for Form 8965, Health Coverage Exemptions, and Form 8962, Premium Tax Credit.

In 1979 the taxpayers started Knight, a contract manufacturing company that made tools and machine parts. In 1982 the taxpayer's eldest son developed an automated liquid-dispensing machine they called CAM/ALOT. In 1987 the taxpayers' three sons incorporated Camelot Systems, Inc. to sell the machines may by Knight. The two companies operated out of the same building and shared payroll and accounting services, and collaborated in further development of CAM/ALOT with Knight funding the operations of both companies and paying the salaries and overhead for both. In 1994 the taxpayers sought estate planning advice. The professionals advised them the value of the CAM/ALOT technology resided in Camelot (the sons' company)and not Knight. The taxpayers and sons merged Knight and Camelot with Camelot the surviving entity. Valuing the two companies in accordance with the advice their professionals had given, the taxpayers accepted a disproportionately low number of shares in the new company and their sons received a disproportionately high number of shares. The IRS issued notices of deficiency to the taxpayers determining for each a gift tax liability and a Sec. 6651 failure-to-file addition to tax (as well as a fraud penalty that the IRS eventually conceded). The Court held that the Camelot shares that the taxpayers received in the merger in exchange for their shares of Knight were not full and adequate consideration. Therefore, in 1995 the taxpayers made a $29.6 million gift to the sons. The Court also held that because they followed professional advice, the taxpayers had reasonable cause for failing to time file gift tax returns and were not liable for the Sec. 6651 additions to tax nor the 6662 accuracy-related penalty. William Cavallaro, Donor; Patricia Cavallaro, Donor (T.C. Memo. 2014-189)

Tip of the Day

Rental property partnering . . . Even if you can afford to go it alone on a rental property, you may decide to join with one or more partners. You may be able to buy more than one property spreading risk and getting some help in managing the property. Some individuals buy properties as joint tenants. Setting up an LLC makes more sense. That will reduce your liability and allow you to set operating and liquidation rules. For example, Fred is a carpenter and doesn't mind working on the property, but doesn't want to be taken advantage of. Fred agrees to do the work but gets 60% of the profits; his partner Sue gets 40%, but both share 50-50 in the gain (or loss) when the property is eventually sold. In most cases a property is a substantial investment. Get professional advice on how to handle the transaction.

 


Copyright 2014 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. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. 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


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