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Health Care Tax Tips
October 31, 2014
The IRS has announced (Rev. Proc. 2014-61; IRB 2014-47)) the annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. The changes of greatest interest include:
In Elizabeth Varela, Petitioner, and Jose M. Lozano, Intervenor (T.C. Memo. 2014-222) the ex-wife received innocent spouse relief where the Court found she did not receive benefits resulting from the husband's funds, she was not involved in the management of the corporation or rental properties that generated the husband's income, she did not have access to the bank accounts, and had no reason to know of the understatements.
Tip of the Day
Doing business through multiple entities . . . It's not unusual for business owners to use several entities--partnerships, LLCs, S corporations and even regular corporations. It's also not 's also not unusual for the entities to have intercompany transactions. Madison Inc. performs management functions for Chatham LLC which rents property to Waterford Inc. You should be careful that the transactions are handled on an arms' length basis. And, if some of the entities have losses while others have profits, you should watch your basis carefully. You generally don't want to be in the position where one or more entities generates a loss that can't be used because you have insufficient basis while a related entity generates profits that are taxed. Discuss the issues with your tax adviser.
October 30, 2014
The IRS has released final regulations (T.D. 9698) that provide guidance on the mandatory electronic filing of Form 2290, Heavy Highway Vehicle Use Tax Return, for 25 or more vehicles; credits or refunds for sold, destroyed, or stolen vehicles; and the tax liability and computation of tax on the use of certain second-hand vehicles. The regulations affect owners and operators of highway motor vehicles with a taxable gross weight of 55,000 pounds or more. The final regulations also remove the temporary regulations that provide guidance on the filing of Form 2290 and payment of the associated highway use tax for the taxable period beginning July 1, 2011.
In C. Lynn Moses (T.C. Memo. 2014-220) the taxpayer failed to file returns for the period 1999 to 2002. The IRS used third party summonses to obtain bank records and reconstructed the taxpayer's income from a real estate business using the bank deposits method. The Court found the taxpayer failed to rebut the presumption that the IRS's determinations were correct and sustained the IRS's determinations.
Tip of the Day
Get ready for mutual fund distributions . . . The market has done well in the last couple of years and many professionals expect mutual funds to pay significant dividends before the end of the year. It's not too early to start thinking about your plan to handle the distributions. There are a number of considerations here, but you if you have any unrealized losses you may want to take at least some to offset the income.
October 29, 2014
The Department of Justice has announced that the federal government will recognize same-sex marriages in six more states: Alaska, Arizona, Idaho, North Carolina, West Virginia and Wyoming. As a result of these additions, same-sex marriages are recognized as legal in 32 states and the District of Columbia. The IRS recognizes a marriage based upon place-of-celebration. That is, if the marriage was legal were it was performed, the individuals are considered married in their state of domicile, even if that state does not recognize a same-sex marriage.
In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found that for Processing Year 2013, the IRS issued over 770,000 IP PIN (Protection Personal Identification Numbers) notices to taxpayers for use in filing their tax returns. This number increased to more than 1.2 million for Processing Year 2014. The IRS also started a limited pilot in January 2014 whereby taxpayers who obtained an electronic filing PIN through an IRS authentication website and live in the District of Columbia, Florida, or Georgia were provided with an opportunity to obtain an IP PIN. In addition, taxpayers who used their IP PIN to file their tax returns claiming a refund in Processing Year 2013 had their returns processed in a time frame similar to the general population of return filers claiming a refund. Although the program expanded, the IRS did not provide an IP PIN to 532,637 taxpayers who had an identity theft indicator on their tax account indicating that the IRS resolved their case. The IRS also did not provide an IP PIN to 24,628 taxpayers who were potential victims because their Personally Identifiable Information had been lost, breached, or stolen by/from the IRS. In addition, IRS programming errors resulted in 32,274 taxpayers not timely receiving an IP PIN and the issuance of 13,220 IP PIN notices to deceased taxpayers. TIGTA also found that the IP PIN notice issued to 759,446 taxpayers for Processing Year 2013 does not provide taxpayers adequate instructions on the use of the number and its importance on a tax return. You can find the full report at www.treasury.gov/tigta/auditreports/2014reports/201440086Ffr.html.
Tip of the Day
Hobby losses . . . You can't avoid the hobby loss rule by putting the activity in your S or C corporation, partnership, or other business entity. Even if the entity has a profitable business, the IRS can break out an activity and separately claim there was no intent to make a profit.
October 28, 2014
The IRS has issued final regulations (T.D. 9699) that will remove regulations relating to information reporting and backup withholding for the Qualified Payment Card Agent (QPCA) Program. T.D. 9699 also amends regulations to remove references to the QPCA Program Enactment of the payment card and third party network reporting requirements.
In most states, when property is held in joint tenancy with a right of survivorship, liens issued against a deceased joint tenant's interest in the property are extinguished when the deceased joint tenant dies and any other living joint tenants succeed to his share. In NPA Associates, LLC, Plaintiff v. Estate of Dennis A Cunning et al. (U.S. District Court, D. Virgin Islands) tax liens attached to Cunning's interest in the property. The Court noted that although no Virgin Islands' statute or case law addresses this issue, it concluded that the Supreme Court of the Virgin Islands would not depart from this general rule if the issue were before it. When Cunning died the joint tenant became the sole owner of the property through the Warranty Deed because she was a joint tenant with a right of survivorship. At that time any liens attached to Cunning's interest in the property were extinguished.
Tip of the Day
IRA not for everyone . . . Many advisors suggest putting money into an IRA as a no brainer--either a deductible IRA or a Roth. But that's not always true. You've got to consider your situation. A young couple just starting out may have little or no backup savings. They need something for an emergency in case the old car bites the dust, there's a medical bill that's not fully covered by insurance, etc. Or it could be they're saving for a house. Or have a house and need an emergency fund for home repairs. Tapping the IRA is likely to mean a 10% penalty as well as taxes on the distribution. In some cases that's inevitable; the funds needed exceed your rainy day reserve. But you should have a reserve to tap first.
October 27, 2014
IRS Commissioner Koskinen has advised Congress that if a delay in resolving the "extenders" provisions persists into December or later it could result in the postponement of the opening of the 2015 tax season. Any policy changes to the existing extenders or new provisions would result in the Service having to reprogram systems and make processing changes which could result in longer delays.
Notice 2014-66 (IRB 2014-46) provides a special rule that enables qualified defined contribution plans to provide lifetime income by offering, as investment options, a series of target date funds (TDFs) that include deferred annuities among their assets, even if some of the TDFs within the series are available only to older participants. This special rule provides that, if certain conditions are satisfied, a series of TDFs in a defined contribution plan is treated as a single right or feature for purposes of the nondiscrimination requirements of § 401(a)(4) of the Internal Revenue Code. This permits the TDFs to satisfy those nondiscrimination requirements as they apply to rights or features even if one or more of the TDFs considered on its own would not satisfy those requirements.
Notice 2014-67 (IRB 2014-46) provides guidance for determining whether a State or local government entity or a 501(c)(3) organization will be considered to have private business use of its tax-exempt bond-financed facilities due to its participation in an "accountable care organization" and guidance regarding certain management contracts that do not result in private business use.
Tip of the Day
Right to audit . . . You hire an independent contractor for consulting work and agree to reimburse him for expenses including meals, lodging, equipment rentals, subcontractors, etc. If the contract is substantial, make sure you include a right to audit his expenses. Contractors have been known to pad charges that should be legitimately passed through without a markup. Similarly, if you're a tenant in a building you should also have the right to review building cost data if a share of the expenses are being passed through on your lease.
October 24, 2014
The Social Security Administration has released the cost-of-living adjustments (COLA) for a number of inflation indexed amounts. For 2015 the maximum taxable earnings for Social Security will be $118,500, up from $117,000 in 2014. (There is no limit for Medicare.) The COLA for 2015 is only 1.7%, so benefits will increase only slightly. The estimated average monthly benefit for all retired workers will increase from $1,306 to $1,328. For more information go to 2015 Social Security Changes.
The IRS has announced the cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2015. Many of the pension plan limitations will change, but other limitations will remain unchanged because the increase in the index did not meet the statutory thresholds that trigger their adjustment. Of particular interest:
In R. Jean Fisher (T.C. Memo. 2014-219) the taxpayer worked for a medical services corporation and received payments as an independent contractor but received no Form 1099 from the firm. The taxpayer claimed the amounts she received weren't compensation for services but a loan from the corporation. The IRS and the Tax Court found otherwise. The Court looked at the factors the courts review to determine if a bona fide loan exists and found they did not support a loan. Moreover, the doctor who owned the practice testified the payments were for services.
Tip of the Day
Ongoing savings beat one-shot cuts . . . If you're doing a full-blow return-on-investment study you're sure to consider future benefits in your analysis. If you're just doing a quick-and-dirty calculation, you may not go that far. For example, by switching to a certain vendor you can save $50 per month; the competitor will cost you more per month but has a $300 upfront bonus for signing with them. If you anticipate an ongoing relationship, you're better off with the first choice. At the end of 6 months you'll have saved $300 on the monthly service--just equal to the signing bonus; at the end of a year you'll have saved another $300 on the monthly charge, putting you $300 ahead.
October 23, 2014
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
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
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
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
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
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
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
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
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
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
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.
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