Small Business Taxes & ManagementTM--Copyright 2017, A/N Group, Inc.
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September 22, 2017
NewsRevenue Procedure 2017-52 (IRB 2017-41) introduces an 18-month pilot program to accept letter ruling requests addressing the general federal income tax consequences of transactions intended to qualify as tax-free stock distributions.
the IRS released new versions of Form 14568, Model VCP Compliance Statement, and Forms 14568-B through 14568-I, Model VCP Schedules. Plan sponsors of tax favored retirement plans can use these forms to make an IRS Voluntary Correction Program (VCP) submission. The model schedules (Forms 14568- A to 14568-I) contain standardized methods to correct common errors that sponsors may discover in their plans and wish to resolve using VCP. Generally, the IRS revised the following forms to (1) make them easier to understand and (2) better work with the Rev. Proc. 2016-51 requirements effective as of January 1, 2017. For more details on the changes go to Revised VCP Forms--Model VCP Compliance Statement and Model VCP Schedules .
There are a number of exceptions to the early distribution penalty for IRAs. In Dean Russell Cates et ux. (T.C. Memo. 2017-178) the taxpayer argued that the use of the funds for qualified higher education expenses exception applied in their case. But the taxpayers were unable to convince the Court that they actually paid such tuition. A 1098-T showed some $11,000 was billed to the taxpayers but the form did not show any payments. In the absence of such evidence the Court found the taxpayers liable for the early distribution penalty.
Tip of the DayLooking for higher interest rates on savings accounts? . . . Even if interest rates on home mortgages, car loans, bonds, etc. rise, rates on savings accounts are unlikely to keep pace. There are several technical reasons for that, including the fact that many banks don't need the funds and want to increase margins. You may do better in a bond fund (somewhat higher risk) or at a credit union. And watch any small accounts. You could be hit with a monthly fee if you carry a small balance or have an inactive account.
September 21, 2017
NewsThe IRS has added the counties of Burleson, Grimes, Madison and Washington to those in Texas that qualify for full relief as a result of Hurricane Harvey. That includes postponement of filing deadlines.
If you fail to file a return, the statute of limitations never begins to run and the IRS (or state) can examine that year, no matter how long ago. In New Capital Fire, Inc., as Successor by Merger to The Capital Fire Insurance Company (T.C. Memo. 2017-177) Old Capital was merged into New Capital and Old Capital's operations reported on New Capitals tax return for the short year that Old Capital continued to exist. The IRS argued that no return was filed for Old Capital's short period, the statute of limitations remained open on the 2002 year. The Court had to determine if including the results of the merged company on the surviving corporation's return constituted a return. The Court noted that in order to constitute a return (1) the document must contain sufficient data to calculate tax liability; (2) the document must purport to be a return; (3) there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) the taxpayer must have executed the document under penalties of perjury. The Court found the filing of the return by the surviving corporation started the limitations period and the IRS assessment of the deficiency and additions to tax was barred by the statute of limitations.
If you don't show up for court, you can risk losing your case. That was what happened in Ernesto P. Patacsil et ux. (T.C. Memo. 2017-176). Despite warnings from the Tax Court six months and three months before the trial date the taxpayers failed to appear, and told the IRS attorney they would not appear and did not give a reason. The judge had warned them he would not agree to a continuance. Because there was no reason given for the taxpayers' absence from the trial, the judge granted the IRS's motion to dismiss the case.
Tip of the DayEvery shareholder must consent to S election . . . Most corporations elect S status on startup and usually there are only a few shareholders who have held stock from the inception of the corporation. But that's not always true and you could find the S election void if you don't follow the rules. Each shareholder who owns (or is deemed to own) stock at the time the election is made must consent. If the election is made during the corporation's tax year for which it first takes effect, any person who held stock at any time during the part of that year that occurs before the election, must consent even though the person may have sold or transferred his or her shares before the election is made. For example, Sue, Fred and Mike were shareholders in Madison Inc. (a calendar-year corporation) during January, 2017. In early February Mike sells his shares to Fred. In early March Sue and Fred decide to elect S status for 2017. Mike must sign the consent section of Form 2553 because he owned shares during the first month of the tax year. On the other hand, if a new shareholder buys stock in the corporation after the election is made, he or she is not required to consent.
September 20, 2017
NewsThe IRS has announced that it is now offering expanded relief to any area designated by FEMA, as qualifying for either individual assistance or public assistance in the State of Georgia for losses related to Irma. As a result, all 159 counties in Georgia qualify. Relief includes the postponement of certain deadlines for taxpayers who reside or have a business in the affected area. Certain deadlines falling on or after September 7, 2017 and before January 31, 2018 are granted additonal time to file through January 31, 2018. For additional information, go to Tax Relief for Victims of Hurricane Irma in Georgia.
The IRS has announced (IR-2017-157) it will not impose a penalty on certan uses of certain adulterated fuels that do not comply with applicable Environmental Protection Agency (EPA) regulations, in response to shortages of Ultra Low Sulfur Diesel (ULSD) fuel caused by Hurricane Irma. This relief is effective from Sept. 13, through Sept. 22, 2017, or until such dyed diesel reserves are exhausted, whichever is earlier. Because the reserves to which this relief applies are of dyed diesel fuel, the relief issued in IR-2017-149 is also available, provided the operator or the person selling the fuel pays the tax of 24.4 cents per gallon for any such fuel used on the highway.
The IRS has issued proposed amendments of regulations (REG-105004-16) that would permit employers to truncate employees' social security numbers on Forms W-2. The to permit employers to truncate employees' SSNs to appear in the form of a TTIN on copies of Forms W-2 that are furnished to employees under section 6051. Consistent with the rule in §301.6109-4(b)(2)(iii), prohibiting the use of TTINs on any return, statement, or other document that is required to be filed with or furnished to the IRS, these proposed regulations amend §31.6051-2 to clarify that employers may not truncate an employee's SSN to appear in the form of a TTIN on a copy of a Form W-2 that is filed with the Social Security Administration. the proposed regulations also amend §31.6051-3 to clarify that a payee's SSN may not be truncated to appear in the form of a TTIN on a statement furnished to the employer of the payee who received sick pay from a third party because section 6051(f)(1)(A)(i) specifically requires such a statement to contain the employee's SSN.
In an audit the Treasury Inspector General for Tax Admnistration (TIGTA) found that since fiscal year 2011 reductions in staffing and available funding for criminal investigation (CI) activities contributed to a decrease in the number and size of IRS CI field offices throughout the U.S. While managing its core mission tax work with declining resources, the IRS continued to work general fraud, internatonal, and Bank Secrecy Act (BSA) cases as well. In FY year2016 CI initiated 3,395 cases, an overall decrease of 34 percent compared to the 5,125 cases initiated in FY 2012. TIGTA identified a trend of special agent inventory taking longer to turnover because of the ncreaed time it taxes for special agents to determine a case did not contain prosecution potential. In FY 2016, it took an average of 540 days (1.5 years) to determine that there was no prosecution potential, while it took an average of 422 days in FY 2012. To read the complete report, go to www.treasury.gov/tigta/auditreports/2017reports/201730073fr.pdf.
Tip of the DayPaying final wages . . . Sue just quit with no notice and you just fired Fred. When do you have to give them their final pay? It depends on state law. In California you have to pay Sue within 72 hours, or if she gave 72 hours notice, you have to pay her immediately when she leaves. Fred has to be paid immediately. In Texas Sue has to be paid no later than her next payday; Fred has to be paid within six days. You could be fined for not following state requirements, so check the rules in your state.
September 19, 2017
NewsThe IRS has announced (IR-2017-155) Hurricane Irma victims in Florida have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments. This includes an additional filing extension for taxpayers with valid extensions that run out on Oct. 16, and businesses with extensions that run out on Sept. 15. The IRS is now offering this expanded relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for either individual assistance or public assistance in Florida. For more information, go to IRS Expands Tax Relief to Victims of Hurricane Irma in Florida.
The IRS has published proposed amendments (REG-125374-16) to Reg. Sec. 1.149(a)-1 and Reg. Secs. 1.163-5T, 1.165-12, 1.860D-1, 1.871-14, 1.881-3, 1.1287-1, 1.6045-1, 1.6049-5, 5f.103-1, 5f.163-1 and 1.163-5, including guidance on the issuance of pass-through certificates and participation interests in registered form.Professional Employer Organizations (PEO) are referred to as a third-party payer because they generally pay wages and file employment tax returns on employees’ wages that would otherwise be handled by their client companies. PEOs that are certified by the IRS are required to notify the IRS of those specific employers that use their services. However, employers that continue to use the services of a PEO that chooses not to participate in the certification program remain at risk. The Treasury Inspector General for Tax Administration (TIGTA) initiated because legislation was enacted by Congress in Calendar Year 2014 in an effort to reduce the risk of employment tax fraud by third-party payers, in particular PEOs. This audit assesses the IRS’s actions to establish processes for certifying PEOs authorized for the filing and paying of employment taxes. In addition, it evaluates the dual notice process for address changes associated with employers that have employment tax filing requirements. The IRS has taken steps to implement processes and procedures to issue a notice as confirmation of any business address change when required and to establish a voluntary program for PEOs to become Federally certified. However, the majority of PEOs do not participate in Federal certification, which results in the continued inability to link employers who use the services of these organizations. As of March 31, 2017, the IRS received applications for certification from 123 PEOs, whereas in September 2015, the National Association of PEOs estimated there were between 780 and 980 PEOs that represent 156,000 to 180,000 employers. In addition, TIGTA found that processing time frames and procedures to periodically inform applicants as to the status of their application need to be developed. Finally, regarding the dual notice process, some notices were being issued erroneously and some notices were not being issued at all. For example, TIGTA identified 698,660 sets of notices that were unnecessarily issued to businesses whose address did not actually change. Using IRS cost data, TIGTA estimated that the issuance of these erroneous notices resulted in the IRS needlessly expending almost $3 million. TIGTA also identified 256,826 sets of notices that should have been issued to businesses whose addresses were changed but did not receive a notice as required. For the complete report go to www.treasury.gov/tigta/auditreports/2017reports/201740085fr.pdf.
Tip of the DayEquifax breach . . . What should you do about the Equifax breach? The easiest and probably the best approach would be to freeze your credit report with all three reporting agencies--Equifax, Transunion, and Experian. If your credit report is frozen a lender cannot gain access, but that also means they won't issue credit to someone who has your identity information. The downside here is that if you apply for credit--home mortgage, car loan, credit card, etc.--you'll have to unfreeze the account and then refreeze it to protect yourself. And there could be a cost. It could cost as much as $30 to do so for all three credit agencies. (The cost varies by state; in some states it can be free.) Freezing your report with just Equifax won't help much. In addition to a credit freeze, you should monitor your credit very carefully. And take steps if you note any suspicious activity such as a letter from the IRS or your state regarding your tax returns, correspondence from a bank or other lender. Talk to your financial advisor or accountant about other steps you should take.
September 18, 2017
NewsThe IRS has updated the localities affected by Hurricane Irma that qualify for filing and payment relief from the IRS. They include:
The islands of St. John and St. ThomasThe IRS has also updated the localities in Texas affected by Hurricane Harvey that qualify for filing and payment relief. They include the counties of Aransas, Austin, Batrop; Bee, Brazoria, Calhoun, Chambers, Colorado, DeWitt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tyler, Victoria, Walker, Waller, and Wharton.
The municipalities of Culebra, Vieques, Canovanas and Loiza in Puerto Rico
All 67 counties in Florida
In Estate of Minnie Lynn Sower, Deceased, Frank W. Sower, Jr. and John R. Sower (149 T.C. No. 11) the husband died in 2012, and his estate reported a deceased spousal unused exclusion (DSUE) and elected portability of the DSUE. In 2013 the IRS sent his estate a letter reporting that the return had been accepted as filed. The wife died in 2013. Her estate claimed the DSUE reported by her husband's estate. As a part of an examination of the estate tax return filed by her estate, the IRS also examined the estate tax return filed by the husband's estate. The IRS reduced the amount of the DSUE by the amount of taxable gifts given by H but did not determine or assess a deficiency against H's estate. But the IRS determined an estate tax deficiency against the wife's estate. The wife's estate filed a petition in which it made several arguments regarding why the IRS should not be allowed to examine the estate tax return filed by the husband's estate to determine the proper DSUE amount allowable to the wife's estate. The Tax Court held:
Tip of the DayZero-based budgeting . . . Most businesses (and government entities) based their upcoming budget on the current one. For example, Fred thinks Madison's sales will increase by 10% next year so he increases all his budget costs by 10%, probably tweaking individual items to take into account things like quantity discounts, economies of scale, etc. It's a quick and cheap approach. And it often can be reasonably accurate. Zero-based budgeting starts every budget from scratch. While a more work, it forces you to take a close look at each item and develop a number. The trade offs are pretty obvious. Despite the possible significant cost savings from a fresh look, most businesses can't afford the time. You may be able to find some middle ground. Use the zero base approach on certain different areas each year. Alternatively, use the approach on areas with higher dollar values. For example, product A generates $2 million of revenue a year; product B, only $250,000. Your accountant can provide more guidance.
September 15, 2017
NewsThe IRS has announced special relief designed to support leave-based donation programs to aid victims of Hurricane and Tropical Storm Irma. This parallels relief granted to Hurricane and Tropical Storm Harvey victims. Under these programs, employees may forgo their vacation, sick or personal leave in exchange for cash payments the employer makes, before Jan. 1, 2019, to charitable organizations providing relief for the victims of this disaster. Under this special relief, the donated leave will not be included in the income or wages of the employees. Employers will be permitted to deduct the cash payments as business expenses. For additional details go to Notice 2017-52.
The IRS has announced that the e-Services transition to a new platform is taking longer than anticipated. As a result, the ability to submit new or change existing applications to access our tools will remain offline for several more days. We will update you early next week on its status. Meanwhile, Registration Services, Transcript Delivery System and TIN Matching are online and available. However, some TDS users are reporting issues related to bookmarking. The e-Services landing page has been redesigned so old bookmarked URLs may not work. Follow these steps: IRS.gov > Tax Pros > Access e-Services > select your user segment > e-Services Login screen.
Revenue Procedure 2017-53 (IRB 2017-40), for private foundations and sponsoring organizations of donor advised funds. It modifies and supersedes Rev. Proc. 92-94. The revenue procedure provides guidelines that qualified tax practitioners may use for preparing written advice on which a private foundation or sponsoring organization ordinarily may rely in making a good faith determination that a grantee is a qualifying public charity.
Tax-exempt organizations in parts of Texas, Florida, Puerto Rico and the Virgin Islands may qualify for tax relief from the IRS. Organizations may get some extra time to file returns if they are in the Hurricane Harvey and Hurricane Irma disaster areas, and have a filing due date after the hurricane hit and before Jan. 31, 2018. These organizations now have until Jan. 31, 2018 to file. The relief applies to original and extended due dates in this period. The start date of the relief varies by area.
Tip of the DayFinished a sales tax audit? . . . If you owe sales tax because of unreported sales, your problems may be just beginning. More than one state uses the result of sales tax audits as a basis for income tax audits of businesses. And, if the state finds unreported income, chances are it will exchange that information with the IRS. Sales tax audits should be taken seriously and you should use your best efforts to reduce any adjustments. Talk to your tax advisor before you schedule a visit from the auditor.
September 14, 2017
NewsIn Notice 2017-49 (IRB 2017-40) the IRS, the Department of Labor's Employee Benefits Security Administration (EBSA), and the Pension Benefit Guaranty Corporation (PBGC) are providing relief in connection with certain employee benefit plans because of damage caused by Hurricane Harvey and Hurricane Irma. The relief provided by this notice is in addition to any relief already provided by the IRS, EBSA, and PBGC to victims of Hurricanes Harvey and Irma.
The White House appears to be looking for bipartisan support for any tax bill. That may not be easy to come by. Tax bills bring out the worst in politicians. The plan is still to have a bill before the end of the year and, if that goal is met, to make it retroactive to the beginning of 2017. The uncertainty is likely to make any year-end planning more difficult than usual.
You generally can't challenge your liability at a collection due process (CDP) hearing. That's what the Tax Court held in Gregory David Bruce (T.C. Memo. 2017-172). The taxpayer failed to file a Federal income tax return for the year at issue. He claimed his military pension should not be subject to tax. The IRS sent a deficiency notice for the tax and failure to file and failure to pay penalties. The taxpayer failed to pay and the IRS issued a final notice of intent to levy. The Court held the taxpayer was precluded from contesting his underlying tax liability before IRS Appeals and the Tax Court because he received a notice of deficiency and failed to contest it timely.
Tip of the DayDisaster aftermath . . . Cleaning up after a natural or man-made disaster can be extremely difficult. Besides the cost, the logistics can be a nightmare. So can finding honest and qualified contractors to do the work. Unfortunately, while the IRS has sympathy, you'll need to have records to do your tax return, support a casualty loss, etc. The IRS has launched a page Reconstructing Records After a Natural Disaster or Casualty Loss; IRS Provides Tips to Help Taxpayers to assist taxpayers. The page has good advice for both tax and nontax needs and links to a number of other helpful sites.
September 13, 2017
NewsTHe IRS has announced (IR-2017-150) Hurricane Irma victims in parts of Florida and elsewhere have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments. This relief parallels that granted last month to victims of Hurricane Harvey. This includes an additional filing extension for taxpayers with valid extensions that run out on Oct. 16, and businesses with extensions that run out on Sept. 15. The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. Parts of Florida, Puerto Rico and the Virgin Islands are currently eligible, but taxpayers in localities added later to the disaster area, including those in other states, will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.
The Financial Crimes Enforcement Network (FinCEN) announced that Hurricane Irma victims in affected areas of the U.S. Virgin Islands, Puerto Rico, and Florida have until January 31, 2018, to file their Report of Foreign Bank and Financial Accounts (FBAR) report for the 2016 calendar year. The FBAR for calendar year 2016 would normally be due October 15, 2017. FinCEN is providing relief toany area designated by FEMA as qualifying for individual assistance. In addition, FinCEN will work with any FBAR filer who lives outside the disaster area but whose records required to meet the deadline are located in the affect area. For more details, go to www.fincen.gov/sites/default/files/shared/FinCEN_FBAR_Filing_Irma_Relief_09-12-2017.pdf.
The IRS announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Irma and members of their families. This is similar to relief provided last month to victims of Hurricane Harvey. Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures. Retirement plans can provide this relief to employees and certain members of their families who live or work in disaster areas affected by Hurricane Irma and designated for individual assistance by the Federal Emergency Management Agency (FEMA). For a complete list of eligible localities, visit www.fema.gov/disasters. To qualify for this relief, hardship withdrawals must be made by Jan. 31, 2018. For more information, go to Announcement 2017-13.
Tip of the DaySales tax can depend on property accompanying service . . . If the cost of installing a new item of personal property is included in the price of the item, or even if broken out separately, the combined price is often subject to sales tax. On the other hand, the cost to just move or repair the item may not be subject to sales tax. For example, Madison Inc. designs, sells and installs a cubicle system for Chatham, LLC. The cost to design and install as well as the purchase price of the cubicles is subject to sales tax. If Madison simply designs and assembles existing cubicles at the customer's location, the cost is not subject to sales tax. Check the rules in your state.
September 12, 2017
NewsThe IRS, in response to shortages of undyed diesel fuel caused by Hurricane Irma, has announced (IR-2017-149) will not impose a penalty when dyed diesel fuel is sold for use or used on the highway in the state of Florida. This relief is effective as of Sept. 6, 2017. Consistent with the Environmental Protection Agency (EPA) waiver for Florida regarding use of Non-Road Diesel Locomotive and Marine Fuel, this relief will remain in effect through Sept. 22, 2017.
The IRS has announced it continues to monitor Hurricane Irma, but reminds calendar-year partnerships that the due date for filing a return after receiving an extension remains Sept. 15 following a recent change in the tax law. The IRS issued guidance, Notice 2017-47, providing penalty relief for certain partnerships that did not file the required returns by the new due date for their tax year that began in 2016, but filed their returns or their extension requests for that year by the15th day of the fourth month after the end of their taxable year (April 18 for calendar-year filers). If not for the Surface Transportation Act, these returns and requests for extension of time to file would have been on time. See our article Penalty Relief for Late-Filed Partnership Returns.
Tip of the DayQualified plan loans . . . You can take a loan from your pension plan or 401(k), but it must meet certain requirements. For a loan other than a home loan, the loan must be repayable in no more than five years and amortization must be on a substantially level basis. Defaulting on the loan can result in the amount outstanding becoming a distribution. That's why these loans can be dangerous. A missed payment may be curable. For example, if a missed payment is made in the calendar quarter following the last day of the quarter when the payment was missed. it will not be considered a default. In recent IRS Chief Counsel Advice (201736022) the IRS also held that a missed payment could be cured by a refinancing of the loan within the cure period. Talk to your tax advisor. Chief Counsel Advice may not be used or cited as precedent.
September 11, 2017
NewsOn September 8, the President declared that a major disaster exists in the Territory of the U.S. Virgin Islands. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in U.S. Virgin Islands will receive tax relief. Victims of Hurricane Irma that took place beginning on Sept. 6, 2017 in parts of U.S. Virgin Islands may qualify for tax relief from the IRS. Relief applies to individuals who reside or have a business in the Islands of St. John and St. Thomas. The declaration allows the IRS to postpone deadlines for a number of filings. For complete details go to Tax Relief for Victims of Hurricane Irma in U.S. Virgin Islands.
Who reports the income if your minor child is the earner? In Tony Pedregon Lopez et ux. (T.C. Memo. 2017-171) the taxpayers' accountant reported their daughter's winnings and expenses from beauty pageants on the parents' return. The Court noted that Sec. 72(a) requires inclusion of amounts received in respect of the services of a child in the child's own gross income rather than that of the parents. Amounts received in respect of the services of a child encompass direct and indirect payments for services. The related expenses were also reportable on the child's return, even if the parents' made the expenditure.
Tip of the DayNexus for state income taxes . . . Nexus basically means connection. There must be a connection between your business and a state other than your home state for your business to be subject to income tax. In the past most states required some physical connection such as an office located in the state, a agent or inventory in the state, etc. Now, many states are adopting an economic presence test. Thus, just having sales in the state can make you liable for the state's income tax. Having to charge and collect sales tax imposes no economic cost other than the recordkeeping. Income tax on the other hand is both more complicated and results in an charge to the business. Apportionment of your tax liability out of your home state should make the payments equitable, but there are inequities and there's no guarantee. If you have sales in other states, discuss this issue with your tax advisor.
September 8, 2017
NewsOn September 5, 2017 the IRS added additional counties in Texas to those that qualify for relief from the IRS as a result of Hurricane Harvey. Now individuals who reside or have a business in the counties of Austin, Batrop, DeWitt, Gonzales, Karnes, Lavaca, Lee, Polk, Tyler and Walker also qualify.
By a bipartisan vote the House has approved a bill that increases the debt ceiling and would continue funding the government through December 15. Separately, an appropriations bill has been approved by the House that would provide funding to the IRS, but at some $150 million less than current levels.
In Michael L. Cantrell (T.C. Memo. 2017-170) the taxpayer argued that the returns he filed electronically using commercial tax software were not signed and therefore were not treated as "filed" for purposes of the fraud penalty. (The civil fraud penalty is applicable only in cases where a return of tax is filed.) The Court noted that the IRS may waive the requirement of a s signature or provide for alternative methods of signing or subscribing a return. Thus, the strict requirements for the filing of a paper return by an agent do not apply with full force to electronically filed returns. Where it is clear that a preparer had actual authority to electronically file a return for a taxpayer, the IRS acts within its discretion in waiving the signature requirements. The Court found that as fact that the joint returns filed by petitioner and his then wife for the years at issue met the signature requirements adopted by the IRS. The Court found the taxpayers liable for the civil fraud penalties under Sec. 6663 for the years at issue.
Tip of the DayTimely bill payment . . . You've got $2,200 in credit card debt, are about to pay off your mortgage early and are current on your car loans, earn $220,000 a year between and your spouse and just had your credit rating lowered because a $25 doctor copay is in collection. Strange, but true. In years past many companies like local utilities didn't report late payments to credit reporting agencies. That's changed. There's not much you can do if you can't pay a $10,000 doctor bill, but getting your credit rating dinged because of a $25 copay or a $125 utility bill that got lost in your in box is foolish. There are other consequences, depending on the situation. Forget to pay your car insurance? Even if you don't have an accident, some states will suspend your driver's license. Homeowners' insurance? The carrier may not renew or renew only after a new inspection of the premises. In one case that meant fixing electrical defects and abandoning an in-ground oil tank. Make sure you have a system for paying the bills on time.
September 7, 2017
NewsDon't have complete books and records? The IRS can disallow even an amount for cost of goods sold. In Steven Mileham (T.C. Memo. 2017-168) the taxpayer argued this is cost of goods sold was higher than that allowed by the IRS. The IRS found the taxpayer's records to be incomplete and determined his cost from bank records. The Court found that although the taxpayer's records were incomplete, the IRS's approach to determining the taxpayer's cost of goods sold was lacking. The Court used a percentage markup method and arrived at a higher cost of goods sold. On a second issue the Court found that failure to file a return on time because he had not received a K-1 was not a reasonable excuse. First the Court was not convinced the taxpayer did not have the K-1 in time to file. Second, even if he did not have the K-1, he could have filed the return using the best information available and to file an amended return if necessary. The Court also noted that the K-1 reported some $3,000 in income while the taxpayer reported some $40.3 million as gross receipts from his business and some $40.1 million in cost of goods sold.
If you're filing an extension request on a individual or business tax return the best approach is to file electronically. That way you'll have a record of the filing. In Jarold R. Laidlaw et al. (T.C. Memo. 2017-167) the taxpayers claimed they filed federal extension requests for their individual returns. While the returns were filed by the extended due date, the IRS had no record of an extension request. The taxpayers left the filing of the request to their accountant, but there was no certified or registered receipt to show filing and the accountant's testimony was not considered credible by the Court for a number of reasons cited by the Court. The Court also noted that timely filing in prior years does not prove timely filing for the year at issue. The Court found no extension had been filed.
Tip of the DayTake pictures . . . It appears there's a strong possibility that Hurricane Irma will hit Florida and other parts of the east coast within the next couple of days. That doesn't leave a lot of time to do much more preparation than the essentials--supplies, gas, securing loose objects and/or evacuating. Don't forget to grab the laptop and any backup drives. They could save you a lot of time later. If you can spare an hour, document your household belongings by taking pictures. Take pictures of rooms and close ups of higher value items. Consider spreading clothing such as suits, formal wear, on the bed for a better shot. It's probably too late to sit down and make a list of books and DVDs, but a photo of a shelf can indicate the number and adds credence to your verbal statement. Not only will the pictures provide some documentation for an insurance claim or tax deduction, they can help you remember items that you might normally overlook. Not affected by this disaster? Take the time to make a list of your possessions. Start with the most valuable items and work your way down. We know of one family that priced their baseball card collection each year. After a devastating fire, the insurance company accepted the list and paid the fair market value--$18,000.
September 6, 2017
NewsThe IRS announced (IR-2017-142), in response to shortages of undyed diesel fuel caused by Hurricane Harvey, will not impose a penalty when dyed diesel fuel is sold for use or used on the highway. This expanded waiver area now covers the entire state of Texas. This relief applies beginning Aug. 25, 2017, in the areas and counties for which the Environmental Protection Agency (EPA) issued waivers for Texas Low Emission Diesel Fuel. Those areas and counties now include the entire state of Texas, an expansion of the original areas announced earlier. This penalty relief is available to any person that sells or uses dyed fuel for highway use. In the case of the operator of the vehicle in which the dyed fuel is used, the relief is available only if the operator or the person selling the fuel pays the tax of 24.4 cents per gallon that is normally applied to diesel fuel for highway use. The IRS will not impose penalties for failure to make semi-monthly deposits of this tax. IRS Publication 510, Excise Taxes, has information on the proper method for reporting and paying the tax. Finally, consistent with the EPA waivers, this penalty waiver for dyed diesel is effective through Sept. 15, 2017. Also, consistent with the EPA waiver, this waiver does not apply to the Internal Revenue Code penalty for using adulterated fuels that do not comply with applicable EPA regulations. Consequently, diesel fuel with sulfur content higher than 15 parts-per-million may not be used in highway vehicles.
In Roberta Borenstein (149 T.C. No. 10) the taxpayer's return for the taxable year 2012 was originally due on Apr. 15, 2013. She requested and received a six-month extension of time to file that return. By virtue of that extension the due date for filing her 2012 return was Oct. 15, 2013. The taxpayer made tax payments for 2012 totaling $112,000. All of these payments were deemed made on Apr. 15, 2013. P did not file a return for 2012 by Oct. 15, 2013, or during the ensuing 22 months. On June 19, 2015, the IRS issued the taxpayer a notice of deficiency for 2012. On Aug. 29, 2015, shortly before filing her petition, the taxpayer submitted a delinquent return for 2012 that reported a tax liability of $79,559. The taxpayer and the IRS agreed that for 2012 she has a deficiency of $79,559 and an overpayment of $32,441. The IRS contended that the taxpayer was not entitled under Sec. 6511(a) and (b)(2)(B) to a credit or refund of this overpayment because her tax payments were made outside the applicable “lookback” period keyed to the date on which the notice of deficiency was mailed. The taxpayer argued that she was eligible for the three-year lookback period specified in the final sentence of Sec. 6512(b)(3) and that she is entitled to a refund of $32,441 under that provision. The Tax Court held the taxpayer was not eligible for the three-year lookback period specified in the final sentence of Sec. 6512(b)(3) because the notice of deficiency was not mailed to her “during the third year after the due date (with extensions) for filing the return of tax.” The Court also held she did not file her 2012 income tax return before the notice of deficiency was issued and did not pay her tax liability within two years of the mailing of the notice of deficiency. The Court therefore lacked jurisdiction to award a refund or credit of P's $32,441 overpayment for 2012.
Tip of the DayLegal fees associated with divorce . . . You can't deduct legal and court costs for getting a divorce. But you may be able to deduct legal fees paid for tax advice in connection with a divorce and legal fees to get alimony. You may also be able to deduct fees you pay to appraisers, actuaries, and accountants for services in determining your correct tax or helping to get alimony. But chances are good that any deductible fees may be part of a larger bill. Be sure your lawyer, accountant, etc. provides a detailed breakdown of the bill. (That's good advice for all legal, accounting bills you might be able to claim a deduction for.)
September 5, 2017
NewsThe IRS has added additional counties in Texas to those that qualify for relief from the IRS as a result of Hurricane Harvey. Now individuals who reside or have a business in the counties of Colorado, Fayette, Hardin, Jasper, Jefferson, Montgomery, Newton, Orange, Sabine, San Jacinto and Waller in addition to those listed earlier qualify.
In Steven A. Mcguire et ux. (149 T.C. No. 9) the taxpayers received an advance premium tax credit under the Affordable Care Act. That credit was paid directly to a health insurance provider to reduce the amount of the premium to be paid by the taxpayers. As a result of a change in financial circumstances, the taxpayers ultimately were not entitled to the premium tax credit. After the close of the tax year, they did not receive a Form 1095-A, Health Insurance Marketplace Statement. The taxpayers did not report the excess tax credit as an increase to tax on their return. The Court held it does not have the equitable power to override the clear and unambiguous language of the Internal Revenue Code. Excess premium assistance credits are an increase in tax under Code Sec. 36B(f)(2). However, the Court found, on the facts of this case, the taxpayers were not liable for an addition to tax. The Court noted that it has held that nonreceipt of an information return (Form 1095-A in this case) may contribute to a reasonable cause and good-faith defense when a taxpayer neither knows nor has reason to know that he or she has received taxable income.
Tip of the DayHurricane Harvey webpage . . . The IRS has published a page specifically for informing Hurricane Harvey victims of the special tax relief and assistance available to taxpayers in Presidential Disaster Areas. The page has a number of links to other guidance, some in Spanish, to assist victims. Go to Help for Victims of Hurricane Harvey.
September 1, 2017
NewsIn 310 Retail, LLC, Zeller-310, LLC, Tax Matters Partner (T.C. Memo. 2017-164) the Tax Court found that the deed of easement the taxpayer conveyed to the charitable organization acted as a de factor contemporaneous written acknowledgment of the taxpayer's gift because it was properly executed and recorded and indicated that the taxpayer received nothing in return for the gift.
Taxes can get very complicated when you have transactions among relatives. In Robert Fiscalini (T.C. Memo. 2017-163) the taxpayer purchased a home with his parents some years ago. The parents paid $40,000 for their interest; the son paid $234,312 for his. Sometime later the parents gifted their interest in the home to the taxpayer. The home increased in value significantly and the taxpayer refinanced the property and took out cash from the new mortgages. The taxpayer eventually had some $664,000 in loans secured by the property. In order to avoid foreclosure on the property the taxpayer sold the property to his parents. The parents borrowed $682,500 to purchase the property and paid off the taxpayer's loans. The closing statement showed that the “Total Consideration” for that sale and that purchase was $975,000 and that petitioner was making a “Gift of Equity To Buyer [the Fiscalinis]” of $295,655.35. The buyer's closing statement also showed that petitioner incurred settlement charges totaling $16,751.24 (petitioner's settlement costs). The title company filed a Form 1099-S with the IRS showing gross proceeds of $975,000. The IRS started by claiming the entire $975,000 was capital gain. The Tax Court rejected that argument. First the Court found that the taxpayer's basis included his original cost, his parent's original cost basis of $40,000 that he received as a gift. Then the Court found that the taxpayer received $664,000, the amount of the discharged liabilities, less some $16,750 in settlement costs. The difference between that and the $975,000 fair market value shown on the contract was a gift to the taxpayer's parents. That meant his gain was some $372,500. The Court refused to add to the taxpayer's basis $50,000 of claimed improvements because the taxpayer relied on his self-serving, uncorroborated, and general testimony to establkish the costs of the improvements.
Tip of the DayHiring a contractor? . . . If you're having work done on a commercial property and getting a bank loan, you'll most likely be required to get certificates of insurance and proof of worker's compensation from every contractor. Contractors may also be required to be bonded. But if you're having a major remodel of your home and not getting a loan, there's no such requirement. You should make sure all the contractors (both prime and subs) are licensed by the town, county or state as required, have current proof of insurance, and have worker's compensation coverage. Even the best contractors have accidents that damage other parts of the property, a neighbor's property or public utilities. And they often run into financial difficulties (it can be a tough business, particularly if their supplying materials). If the job is big, asking for a bond is not out of line.
August 31, 2017
NewsThe IRS announced (IR-2017-139), in response to shortages of undyed diesel fuel caused by Hurricane Harvey, will not impose a penalty when dyed diesel fuel is sold for use or used on the highway. This relief applies beginning Aug. 25, 2017, in the areas and counties for which the Environmental Protection Agency (EPA) issued waivers for Texas Low Emission Diesel Fuel. Those areas and counties are as follows: The Houston-Galveston-Brazoria area (the counties of Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, and Waller); the Beaumont-Port Arthur area (the counties of Hardin, Jefferson, and Orange); the Dallas-Fort Worth area (the counties of Collin, Dallas, Denton, Tarrant, Ellis, Johnson, Kaufman, Parker, and Rockwall); and the counties of Anderson, Angelina, Aransas, Atascosa, Austin, Bastrop, Bee, Bell, Bexar, Bosque, Bowie, Brazos, Burleson, Caldwell, Calhoun, Camp, Cass, Cherokee, Colorado, Comal, Cooke, Coryell, De Witt, Delta, Falls, Fannin, Fayette, Franklin, Freestone, Goliad, Gonzales, Grayson, Gregg, Grimes, Guadalupe, Harrison, Hays, Henderson, Hill, Hood, Hopkins, Houston, Hunt, Jackson, Jasper, Karnes, Lamar, Lavaca, Lee, Leon, Limestone, Live Oak, Madison, Marion, M atagorda, McLennan, Milam, Morris, Nacogdoches, Navarro, Newton, Nueces, Panola, Polk, Rains, Red River, Refugio, Robertson, Rusk, Sabine, San Jacinto, San Patricio, San Augustine, Shelby, Smith, Somervell, Titus, Travis, Trinity, Tyler, Upshur, Van Zandt, Victoria, Walker, Washington, Wharton, Williamson, Wilson, Wise, and Wood. This penalty relief is available to any person that sells or uses dyed fuel for highway use. In the case of the operator of the vehicle in which the dyed fuel is used, the relief is available only if the operator or the person selling the fuel pays the tax of 24.4 cents per gallon that is normally applied to diesel fuel for highway use. The IRS will not impose penalties for failure to make semimonthly deposits of this tax. IRS Publication 510, Excise Taxes, has information on the proper method for reporting and paying the tax. Ordinarily, dyed diesel fuel is not taxed, because it is sold for uses exempt from excise tax, such as to farmers for farming purposes, for home heating use and to local governments for buses. Finally, consistent with the EPA waivers, this penalty waiver for dyed diesel is effective through Sept. 15, 2017. Also, consistent with the EPA waiver, this waiver does not apply to the Internal Revenue Code penalty for using adulterated fuels that do not comply with applicable EPA regulations. Consequently, diesel fuel with sulfur content higher than 15 parts-per-million may not be used in highway vehicles. The IRS is closely monitoring the situation and will provide additional relief as needed.
The IRS has announced that there will be outages of e-Services products as it plans for routine maintenance at Labor Day and as it moves e-Services to a new platform the following week. IRS will conduct annual Labor Day maintenance on numerous electronic systems beginning Saturday, Sept. 2 at 8:00 p.m. ET and ending Tuesday Sept. 5 at 5:00 a.m. ET. The Transcript Delivery System, TIN Matching, e-file Application, ACA and Registration Services will not be operational during this timeframe. Additionally, the IRS announced new dates for the transition of e-Services to a new platform. To complete this transition, it must take all products offline for varying times. Here’s the schedule for the platform transition:
However, state users will be unable to submit new or change existing e-File and TDS applications from September 7 until late October. States will still retain access to TDS. States with a critical need to change employee applications should contact their IRS government liaison. This is the second of two Quick Alerts today related to planned changes this summer and fall affecting all e-Services users. See Important Update about Your e-Services Accoun.
Tip of the DayUsing the right amount of risk . . . Often we lose sight of the risk we should be taking in our investments. It's not unusual to find older individuals heavily invested in stocks; younger ones in bonds. Part of determining the right level of risk is an individual's risk tolerance. A second part involves other investments and overall finances and life situation. Fred's 70 and still has his entire portfolio of personal and retirement funds in stocks. But he also has several rental properties that are cash cows. He lives modestly and his only child is well off on her own. Nothing wrong with Fred's choice, if he understands the risk. Sue is 35 has a secure job and isn't married. She has 75% of her funds in low risk investments, largely because she told her broker she was risk adverse. Truth was, she wasn't that risk adverse. Putting more money in stocks now will pay off later. And should the market go down, there's plently of time to recover. Much the same applies to business decisions.
August 30, 2017
NewsThe first press release with respect to the tax reform package is expected to be released by Republican legislators by mid-September, prehaps earlier. The release is expected to consist of a several page outline.
In Gregory L. Acone et ux. (T.C. Memo. 2017-162) the taxpayer was a pilot for a South Korean airline but spent only about a third of each year in South Korea and more than 40% in the U.S. He returned home frequently and spent most of his days off in the U.S. When in South Korea he stayed as the same hotel provided to him at no cost by the airline. The taxpayer retained his U.S. citizenship, voting registration, driver's license, bank accounts and church membership. On his returns for the years at issue he claimed the foreign earned income exclusion. The IRS disallowed the exclusion. The Tax Court held that for the years at issue he was not a "qualified individual" for purposes of the earned income exclusion because his "abode" was within the U.S. and because he was not a bona fide resident of South Korea.
In Kedvin M. Bullock and Edna D. Bullock (T.C. Memo. 2017-161) the IRS settlement officer (SO) reviewed the separtated taxpayers' financial information and adjusted their reported expenses downward to comply with applicable local standards. After doing so the SO proposed separate installment agreements that required payments less than what the taxpayers could afford. The taxpayers rejected the installment agreements, but did not provide an explanation and did not claim the amounts would cause them economic hardship. Since they made no counteroffer the SO closed the case. The Tax Court agreed with the IRS and held the proposed collection action was proper as a matter of law and granted summary judgment.
Tip of the DayPhantom debt collectors . . . The Federal Trade Commission (FTC) is warning individuals that in a recent case debt "collectors" used a variety of names to make people think they were dealing with a law firm. The impostors told people they were delinquent on a payday loan or other debt and threatened them with arrest, jail time, or getting sued unless they paid by credit or debit card over the phone. Complaints about debt collectors account for nearly one-third of consumer complaints to the FTC. The FTC suggests that before paying anything ask the collectors to prove the debt by sending you a "validation notice". If they don't that's a warnning sign they may not be legitimate. For additional information, go to Phantom debt collectors impersonate law firms.
August 29, 2017
NewsTaking a taxpayer’s property for unpaid tax is commonly referred to as a seizure. To ensure that taxpayers’ rights are protected, the IRS Restructuring and Reform Act of 1998 amended the seizure provisions in Sections 6330 through 6344. These provisions govern many aspects of the seizure process, from notification of the taxpayer through sale or redemption of the property. Code Section 7803(d)(1)(A)(iv) requires Treasury Inspector General for Tax Administration (TIGTA) to annually evaluate the IRS’s compliance with legal seizure provisions to ensure that taxpayers’ rights were not violated while seizures were being conducted. The overall objective of this review was to determine whether seizures conducted by the IRS complied with provisions of the law and with the IRS’s own internal procedures. TIGTA reviewed a random sample of 50 of the 451 seizures conducted from July 1, 2015, through June 30, 2016, to determine whether the IRS complied with up to 60 legal and internal guidelines related to each seizure. TIGTA identified 16 instances in which the IRS did not comply with a particular I.R.C. section or the related Internal Revenue Manual requirement. For example, the sale of seized property was not always properly advertised and the required records of sale documents were inaccurate. Additionally, TIGTA reviewed all 11 real property seizure redemptions from July 1, 2015, through June 30, 2016, and identified seven instances in which the IRS did not properly inform the taxpayer or comply with a particular Code Section or the related Internal Revenue Manual requirement. In these instances, interest rates were incorrectly and inconsistently calculated. TIGTA also determined that proper instructions on the redemption process were not available for taxpayers and purchasers and IRS employees did not use a required deposit account for redemption payments. To read the complete report, go to www.treasury.gov/tigta/auditreports/2017reports/201730063fr.pdf.
In Estate of Sheldon C. Sommers, Deceased, Stephan C. Chait, Temporary Administrator, Petitioner, and Wendy Sommers, Julie Sommers Neuman, and Mary Lee Sommers-Gosz, Intervenors (149 T.C. No. 8) the decedent made valid gifts to Ns, his nieces, in December 2001 and January 2002. The decedent died in November 2002. W, his surviving spouse, succeeded to property she owned jointly with him, and his will bequeathed and devised to W all of his estate remaining after payment of debts and expenses. W succeeded to or was entitled to receive all of the property included in the decedent's gross estate, within the meaning of Sec. 2031(a). In accordance with the agreements governing their gifts from the decedent, the nieces paid the gift tax due on those gifts. The petitioner has filed three motions for partial summary judgment seeking determinations that (1) the gift tax owed at the decedent's death on his gifts to Ns is deductible under Sec. 2053, (2) the estate is entitled to a marital deduction under Sec. 2056 equal to the value of the decedent's nonprobate property that W received or to which she succeeded that, under applicable State law, was exempt from his debts and the expenses of the estate, and (3) any Federal estate tax due must be apportioned to Ns and thus does not reduce the estate's marital deduction. Ns have filed their own motion for partial summary judgment that none of the estate tax liability can be apportioned to them. The Tax Court held that because the estate's payment of the decendent's gift tax liability would have given rise to a claim for reimbursement from Ns under the agreements governing the gifts, the gift tax owed on those gifts at the decedent's death is not deductible under Sec. 2053(a). The petitioner's gift tax motion accordingly was denied. The Court also held that the petitioner's motion for partial summary judgment regarding the effect of debts and claims on the marital deduction allowed by Sec. 2056(a) was denied because the amount of the allowable deduction turned on the factual question of the extent to which assets otherwise exempt from claims against the estate were used to pay estate debts and expenses. Finally,the Court held that under the New Jersey estate tax apportionment statute, no portion of any estate tax due can be apportioned to Ns. The existing record does not allow for a determination of the effect of the estate tax on the allowable marital deduction. Accordingly, Ns' estate tax apportionment motion was granted and the decendent's was denied.
Tip of the DayWatch for Hurricane Harvey scams . . . It seems that natural disasters bring out the best--and the worst--in people. The Federal Trade Commission is already warning of potential charity scams. Fortunately, it's relatively easy to make a donation that will end up in the right hands. The easiest choice is to donate to the American Red Cross or the Salvation Army. There's little question they're equipped to help. If you're not familiar with a charity, you can do some research on a number of sites. the Federal Trade Commission has tips on how to avoid scams and links to five sites that rate charities. Go to Federal Trade Commission--Wise giving in the wake of Hurricane Harvey. Keep in mind that payments directly to individuals don't qualify for a deduction.
August 28, 2017
NewsRevenue Ruling 2017-16 contains a list of the average annual effective interest rates on new loans under the Farm Credit System. This revenue ruling also contains a list of the states within each Farm Credit System Bank Territory.
In Benyamin Avrahami and Orna Avrahami v. Commissioner; Feedback Insurance Company, Ltd. (149 T.C. No. 7) claimed deductions under Section 162 on their 2009 and 2010 tax returns for amounts paid by their passthrough entities to captive insurance company C wholly owned by PW and to off-shore company A which reinsured a portion of its risk with C. The IRS denied the deductions and determined that C's elections under Section 831(b) to be treated as a small insurance company and under Section 953(d) to be taxed as a domestic corporation were invalid, as the amounts paid did not qualify as insurance premiums for federal income tax purposes. The IRS also determined that amounts transferred out of C were distributions to the taxpayers, not loans, and that the taxpayers were liable for accuracy-related penalties under Section 6662(a). The Tax Court held that mounts paid to C and A are not insurance premiums for federal income tax purposes and are not deductible under Section 162 and that the taxpayers' ection 831(b) and section 953(d) elections were invalid for 2009 and 2010. The Court also held the amount transferred directly from C to PW is an ordinary dividend and that the amount transferred indirectly from C to the taxpayers is not taxable to the extent it is a loan repayment, but the excess is either taxable interest or an ordinary dividend. Finally, the Court held that the taxpayers were not liable for accuracy-related penalties under Section 6662(a) except in relation to the amounts determined to be ordinary dividends or taxable interest.
Tip of the DayLabor market getting tighter . . . While salaries may not reflect a tighter market yet, that doesn't mean an employee won't jump ship for a better office, shorter commute, perks, etc. or just a different boss. Contract labor or gig workers may be even more susceptible to an offer of higher pay and a full-time job. There are still individuals who were let go during the recession and haven't gotten a full-time job or accepted something outside their field or below their former pay. You should concentrate on identifying and keeping workers you want to retain. Your options here will depend on your particular situation. But now is not the time to be complacent about your workforce.
Copyright 2017 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536