News and Tip of the Day


Small Business Taxes & ManagementTM--Copyright 2019, A/N Group, Inc.

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October 16, 2019

News

The IRS has released an updated draft copy of Form 1040 Schedule 1 asking whether or not you received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currecy during 2019. The new form also asks the date of original divorce or separation agreement. In the new part two of the form, the IRS is asking for the date of original divorce agreement with respect to alimony paid. The IRS has also released a number of other draft forms for individuals. You can find them at Draft Tax Forms at irs.gov.

Tip of the Day

Paying off loans? . . . You've got a mix of debt--student loans, credit cards, home mortgage, etc. You also want to put away money for retirement. How should you allocate your income? The first move is generally easy. Pay off credit card debt. There are few investments that will give you a return that's higher than credit card debt. It's harder to choose amongst the other options. If your student loans are high, you should pay them down to a reasonable level, even if the interest rate is low. Getting credit for a home, business financing, etc. could prove more difficult if your student loans are high. Plus, you don't want to be paying them off when you're older. Car loans, particularly new cars, are generally at a low rate, but you should keep the loan to five years or less. (A car loan can actually improve your credit score) The younger you are the more time you'll have to put money away for retirement, so you can afford to delay for a while. One thing you should do is enroll in your employer's 401(k) or set up an IRA for yourself. Making at least minimum contributions will get you hooked on a good habit. Try harder to make contributions to your employer's plan if there's a match program. When it comes to saving for retirement, there's nothing like starting early. If cash is tight, start small and vow to increase your contribution each year.

 

October 15, 2019

News

The Social Security Administration has announced the cost-of-living adjustments (COLA) for social security benefits for 2020. The increase is 1.6 percent. That translates into an average for all retired workers of $1,503 per month versus the 2019 amount of $1,479. The maximum social security benefit for a worker retiring at full retirement age is $3,011 per month versus $2,861 for 2019. The maximum earnings subject to social security tax (OASDI portion only) will increase to $137,700 from $132,900. (There's no limit on the Medicare portion.) The amount for a quarter of coverage increases to $1,410. For a listing of all the COLA adjusted amounts go to Fact Sheet at ssa.gov.

In 2016 the IRS published a notice of proposed rulemaking (REG-130314-16) by cross-reference to the temporary regulations which include Secs. 1.385-3T and 1.385-4T. The temporary regulations expire on October 13, 2019. The IRS has issued Notice 2019-58 which provides that, following the expiration of the temporary regulations under Section 385, taxpayers may rely on the notice of proposed rulemaking cross-referencing the temporary regulations.

The IRS has issued final regulations (T.D. 9878) relating to to the election to accelerate the timing of a loss sustained by a taxpayer attributable to a federally declared disaster. The final regulations adopt the proposed regulations substantially without change and this document removes the temporary regulation. The election to take the loss in the preceding year is made on an original return for the preceding year or an amended return for the preceding year. The deadline for making the election is six months after the due date for filing a return for the disaster year (determined without regard to any extension of time to file).

In Coleman Moore (T.C. Memo. 2019-129) the petitioner claimed an abuse of discretion by an IRS settlement officer (SO) when his offer-in-compromise (OIC) was terminated for noncompliance, arguing that the IRS did not follow the required administrative procedures for doing so. (Failure to meet any of the terms and conditions of the OIC could result in default on the offer reinstatement of the original liabilities.) The petitioner argued that an OIC potential default letter was not sent, and, after examining the administrative record, the Court agreed. The Court found the IRS did not follow administrative procedures before terminating the OIC. The Court also found neither Notice CP 2000 nor the notice of deficiency warns that a 2010 income tax deficiency would result in the OIC's termination. Neither notice informs petitioner of an opportunity to cure the default or set a deadline to cure the default. Neither notice was sufficient under the administrative procedures for a potential default letter. A potential default letter provides an opportunity to cure. Neither Notice CP 2000 nor the notice of deficiency mentioned such an opportunity or the OIC.

Tip of the Day

Returns due today! . . . More than a few taxpayers (and professionals) are having trouble dealing with the changes in the tax law. But the 15th is absolutely the last day to file if you need to make an election on your return. Few elections can be made on a late filed return. Some can be made on an amended return. There are other reasons for getting your return in on time. Missing some information? Not sure of how to handle an issue? That's not a reason not to file. Go with the best information you have. You can file an amended return to correct an error.

 

October 11, 2019

News

The IRS has issued proposed regulations (REG-128246-18) which allows a State (or its agency or instrumentality) to establish and maintain a tax-advantaged savings program under which contributions may be made to an ABLE account for the purpose of paying for the qualified disability expenses of the designated beneficiary of the account. The affected Code section was amended by the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act allows certain designated beneficiaries to contribute a limited amount of compensation income to their own ABLE accounts. The regulations also deal with the definition of poverty line for additional contributions and the return of excess contributions.

The IRS is reminding taxpayers with expiring Individual Taxpayer Identification Numbers (ITINs) can get their ITINs renewed more quickly and avoid refund delays next year by submitting their renewal application soon. An ITIN is a tax ID number used by taxpayers who don't qualify to get a Social Security number. Any ITIN with middle digits 83, 84, 85, 86 or 87 will expire at the end of this year. In addition, any ITIN not used on a tax return in the past three years will expire. As a reminder, ITINs with middle digits 70 through 82 that expired in 2016, 2017 or 2018 can also be renewed. For more information, see IR-2019-168 at IRS.gov.

Fail to file a return and you could lose the chance to elect to itemize your deductions. In Claude Tate George (T.C. Memo. 2019-128) the taxpayer was incarcerated and did not file a return. The IRS filed a substitute return, taking the standard deduction and one exemption. The Court held that incarceration was not an excuse for not filing and noted the taxpayer did not file an extension. Finally, the Court held that a taxpayer can only itemize by electing so on a return.

Tip of the Day

Buying based on financing . . . When you're buying a car or house you've got to consider how much you can pay monthly on the loan. But just because you can afford to pay more doesn't mean you should automatically buy a more expensive car or bigger home. That's a separate decision. Don't buy more than you need or want. Much the same goes for financing other purchases. You may be able to pay of that new refrigerator in 12 equal installments. Or even defer payment for a year interest free. But do you need the new refrigerator? Buying just because there's a sale or cheap financing isn't smart. Financing smaller purchases make even less sense. Of course, if you need a new suit for work and you don't have the cash, there may be no other option. Just don't let the deal dictate the purchase.

 

October 10, 2019

News

As part of a wider effort to assist taxpayers and to enforce the tax laws in a rapidly changing area, the IRS has issued two new pieces of guidance for taxpayers who engage in transactions involving virtual currency. Expanding on guidance from 2014, the IRS is issuing additional detailed guidance to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency. The new guidance includes Revenue Ruling 2019-24 and frequently asked questions (FAQs).Rev. Rul. 2019-24 (IRB 2019-44) addresses the tax treatment of hard forks of cryptocurrency in which no new cryptocurrency is received by the owner of the original cryptocurrency from an airdrop following the hard fork, as well as the tax treatment of cryptocurrency hard forks that are followed by an airdrop of units of a new cryptocurrency to owners of the original cryptocurrency. Rev. Rul. 2019-24 provides that a hard fork not followed by an airdrop of units of a new cryptocurrency does not result in gross income to owners of the original cryptocurrency. Rev. Rul. 2019-24 further provides that a hard fork followed by an airdrop of units of a new cryptocurrency results in gross income to the recipients of units of new cryptocurrency from the airdrop.

The IRS has released its 2019-2020 Priority Guidance Plan. The 2019-2020 Priority Guidance Plan sets forth guidance priorities for the Department of the Treasury and the IRS. This plan continues to prioritize implementation of the Tax Cuts and Jobs Act, enacted on December 22, 2017. The 2019-2020 Priority Guidance Plan contains guidance projects that will be the focus of efforts during the twelve-month period from July 1, 2019, through June 30, 2020 (the plan year).

The IRS has issued proposed regulations (REG-118784-18) that provide guidance on the tax consequences of the transition to the use of reference rates other than interbank offered rates (IBORs) in debt instruments and non-debt contracts. The proposed regulations are necessary to address the possibility that an alteration of the terms of a debt instrument or a modification of the terms of other types of contracts to replace an IBOR to which the terms of the debt instrument or other contract refers with a new reference rate could result in the realization of income, deduction, gain, or loss for Federal income tax purposes or could result in other tax consequences. The proposed regulations will affect parties to debt instruments and other contracts that reference an IBOR.

Tip of the Day

Deals cut in a recession fare the best . . . If you're buying a business, real estate, etc. or negotiating a long-term contract to purchase goods, on average you'll get the best deal when the economy is doing poorly. If you think about it, the reason is obvious. Business valuations are low because the target business's earnings are down and the seller may discount the price from there because there are few takers or he needs the cash. That's why as the economy is going down you should stockpile cash or line up financing to do deals when few are. It's easier said than done, but by watching your cash outflow you can do it.

 

October 9, 2019

News

Victims of Tropical Storm Imelda that took place from Sept. 17-23, 2019 in Texas may qualify for tax relief from the IRS. The President has declared that a major disaster occurred in several Texas counties. Following the recent disaster declaration for individual assistance issued by the FEMA, the IRS announced today that individuals who reside or have a business in Chambers, Harris, Jefferson, Liberty, Montgomery, and Orange counties may qualify for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Sept. 17, 2019 and before Jan. 31, 2020 are granted additional time to file through Jan. 31, 2020. This includes taxpayers who had an extension to file their 2018 return to October 15, 2019. In addition, penalties on payroll and excise tax deposits due on or after Sept. 17, 2019 and before Oct. 2, 2019, will be abated as long as the deposits were made by Oct. 2, 2019. For more information, go to IRS announces tax relief for Texas victims of Tropical Storm Imelda.

The Tax Court may show some deference as to procedures if you represent yourself. In Neil L. Whitesell and Tracy L. Whitesell (T.C. Memo. 2019-126) the taxpayers timely filed a petition with the Tax Court for redetermination of the deficiencies and addition to tax. They also filed an amended petition. In the current case the taxpayers filed a motion for leave to file an amendment to the amended petition premised on the theory that if the disputed amount is includable in an S corporation's income (and, since they were the 100 percent owners, includable in their income), it is includable only for the 2013 tax year, beyond the three-year period for assessing tax. The taxpayers argued that they did not seek to plead this theory earlier because they were unrepresented. The Court noted that while technically that was true, they had legal and accounting professionals behind the scenes. The Court found their was no excuse for their delay in raising the new argument. The Court also noted the IRS was unfairly surprised by the new argument. The Court denied the taxpayer's motion to file their amendment to the amended petition.

Tip of the Day

Cybercriminals prey on small firms . . . Think you're immune from cyber threats because your business is small? In fact, a high percentage of small firms have been targeted. And for good reason. They usually don't have the security of larger companies and employees may be too busy to exercise sufficent cautions. The attacks are usually in the form of emails with a link or attachment that, if clicked on, downloads malware to the computer. While malware and virus protection can help, they shouldn't be your only line of defense. Warn employees not to click on links or attachments without double checking to make sure they're from legitimate sources. Since the cybercriminals are generally after customer, client, or patient data, don't put that on computers used outside the office unless absolutely necessary. Keep in mind that tablets and smartphones are also vulnerable, often more so.

 

October 8, 2019

News

The IRS has issued final regulations (T.D. 9877) addressing when certain obligations to restore a deficit balance in a partner's capital account are disregarded under Section 704 of the Code, when partnership liabilities are treated as recourse liabilities under Section 752, and how bottom dollar payment obligations are treated under section 752. These final regulations provide guidance necessary for a partnership to allocate its liabilities among its partners.

The IRS has issued final regulations (T.D. 9876) concerning how partnership liabilities are allocated for disguised sale purposes. The regulations replace existing temporary regulations with final regulations that were in effect prior to the temporary regulations.

In William Elias Rosenberg (T.C. Memo. 2019-124) the taxpayer's former spouse transferred retirement funds to him. Instead of withdrawing the funds from her retirement account at a broker and making a cash payment to him, she arranged for those funds to be transferred from her retirement account to an IRA that the taxpayer opened at the same broker. Within seven days of this transfer he withdrew the funds and closed the account. The taxpayer argued that the transfer from his former spouse's retirement account to his IRA and the withdrawal should disregarded the the transaction treated in substance as a cash payment from his former spouse to him as prescribed in the Property Order. The Court said that it could not ignore the language of Sec. 72 (the distribution rules) and held the transaction was taxable and subject to the 10 percent penalty.

Tip of the Day

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

 

October 7, 2019

News

The IRS is expanding the opt-in Identity Protection Personal Identification Number (IP PIN) program to taxpayers in an additional 10 states for the 2020 filing season. This brings the availability of IP PINs to taxpayers in a total of 19 states and the District of Columbia. The opt-in program is designed for taxpayers who are not victims of identity theft or refund fraud. For 2020, IP PINs will be available to taxpayers who previously filed in Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Georgia, Florida, Illinois, Maryland, Michigan, Nevada, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Texas and Washington.

The IRS will issue a CP2100 or CP2100A Notice if the payee’s name and Taxpayer Identification Number (TIN) on the information return filed does not match IRS records. This notice informs payers they may be responsible for beginning backup withholding, if they haven’t already done so. Publication 1281, Backup Withholding on Missing and Incorrect Name/TIN(s) (PDF), contains all the information payers need to comply with backup withholding requirements.

In Raymond Chico and Ruby Chico (T.C. Memo. 2019-123) the Tax Court sided with the IRS in finding the taxpayers had unreported income from their marijuana cigarette container business. The taxpayers did not provide books and records so the IRS used the bank deposits method to reconstruct their income. Because of a lack of records the Court sustained the IRS's disallowance of supplies, vehicle, travel, and othe expenses. The Tax Court also found the taxpayers had unreported income in the form of constructive dividends from a C corporation. Finally, the IRS was able to show fraudulent intent related to the underpayment of taxes and the Tax Court sustained the fraud penalty.

Tip of the Day

Rent out property? . . . Or rent property for your business? Either way you should have a lease. That may be especially true if the lessee or lessor is a related party. Besides having a lease for your protection, if the IRS audits you, that lease could become a very important document. Unless you're well versed in real estate, you should get an attorney. At least to draft a master lease that you can modify if you have more than one tenant.

 

October 4, 2019

News

It's all about the details. In Seaview Trading, LLC, AGK Investments, LLC, Tax Matters Partner (T.C. Memo. 2019-122) the taxpayer argued that a notice of final partnership administrative adjustment (FPAA) was issued after the period of limitations had expired. Generally, the period for assessing any income tax attributable to partnership items for a partnership taxable year will not expire before the later of a date which is three years after (1) the partnership files its return for the taxable year in question or (2) the last day for filing such return for such year (without extensions). However, the IRS may assess tax attributable to a partnership or affected item at any time if the partnership does not file a return. The taxpayer contended the return was filed when it faxed a copy of the return to an IRS Revenue Agent and again when the taxpayer's attorney faxed a copy to the IRS's counsel. The IRS argued it did not file a return because it failed to submit the return at the proper place of filing. The Tax Court agreed. The designated place for filing is the service center prescribed in the relevant IRS revenue procedure, publication, form, or instructions to the form. In this case the Ogden Utah service center. The Court held no return was ever filed and the period of limitations had not expired.

Tip of the Day

Caution on scam websites . . . It wasn't too long ago that scam sites were easy to spot--bad spelling and grammar, etc. Not so anymore. In addition there are sites that look official, but charge for services that are free from the government. A few years ago sites would offer to get your business a taxpayer identification number online. You could (and still can) do the same thing from the IRS for free and using the IRS site wasn't any more difficult. Plus you weren't revealing any sensitive data. The scam is still around for some other government sites. Search for the DMV in one state to renew your car registration and at the top of the list is a site that will do it for you--for a fee. Again, the state site is just as easy. And again, without revealing personal data. The private site has a warning and a link that you can go to the state site and do it for free, but you'll miss that if you're in a rush.

 

October 3, 2019

News

You've heard the ads about settling your outstanding tax liability for pennies on the dollar. And that's certainly possible, but it's not as easy as many think it is. In Michael D. Brown (T.C. Memo. 2019-121) the taxpayer claimed the settlement officer abuse her discretion in keeping a 20 percent Tax Increase Prevention and Reconciliation Act (TIPRA) payment when the taxpayer's offer in compromise was denied by the IRS. The offer was denied because there was open Abusive Tax Avoidance Transaction (ATAT) investigation. When making the offer in compromise the taxpayer acknowledged that the 20 percent payment (totaling $80,000 in this case) required when the total number of installments to be made is five or less was nonrefundable. The Court found the settlement officer did not abuse her discretion.

Just because the business is in partnership or S corporation doesn't mean the IRS can't challenge it as a not-for-profit activity ("hobby loss"). In WLP Realty, LP, Olympia Realty, Inc., Tax Matters Partners (T.C. Memo. 2019-120) the Court examined seven factors usually used to ascertain whether the taxpayer had an intention to make a profit from the activity and determined that the taxpayer had engaged in the activity with a profit objective, despite a number of years of substantial. The Court noted the taxpayer was experienced in real estate and golf courses and spent considerable time on the activity. The Court did find that it did not appear that the taxpayer would benefit from the golf course's assets. The Court noted there was considerable planning involved in improving the course and the taxpayer invested considerable capital.

Tip of the Day

Got delinquent customers? . . . Almost every business that doesn't get payment at the time of purchase or providing service has at least one. There are a number of different ways to "encourage" payment. One of the old standbys is to stop shipping goods or providing services until at least some payments are made. But what if the customer stops ordering? That leverage is gone. One option is to cajole him to pay at least a part of the amount due. In doing so the customer acknowledges the debt making it more difficult to dispute later and a customer making partial payments, even if it's a fraction of what he owes, is more likely to continue making payments.

 

October 2, 2019

News

The IRS has issued proposed regulations (REG-136401-18) to clarify the application of the employer shared responsibility provisions and certain nondiscrimination rules under the Code to health reimbursement arrangements (HRAs) and other account-based group health plans integrated with individual health insurance coverage or Medicare (individual coverage HRAs), and to provide certain safe harbors with respect to the application of those provisions to individual coverage HRAs. The proposed regulations are intended to facilitate the adoption of individual coverage HRAs by employers, and taxpayers generally are permitted to rely on the proposed regulations. The proposed regulations would affect employers, employees and their family members, and plan sponsors.

The IRS has issued Revenue Procedure 2019-40 and proposed regulations (REG-104223-18) that provides relief to certain U.S. persons that own stock in certain foreign corporations. The Revenue Procedure limits the inquiries required by U.S. persons to determine whether certain foreign corporations are controlled foreign corporations (CFCs). The Revenue Procedure also allows certain unrelated minority U.S. shareholders to rely on specified financial statement information to calculate their subpart F and GILTI inclusions and satisfy reporting requirements with respect to certain CFCs if more detailed tax information is not available. It also provides penalty relief to taxpayers in the specified circumstances. Finally, the Revenue Procedure announces that the IRS intends to amend the instructions for Form 5471 to reduce the amount of information that certain unrelated minority U.S. shareholders of the CFC are required to provide. It will also limit the filing requirements of U.S. shareholders who only constructively own stock of the CFC solely due to downward attribution from another person.

The IRS conducts a Tax Gap study periodically to determine the nature and extent of taxpayer noncompliance to assist in formulating tax administration strategies. The last study, completed in April 2016, estimated the amount of tax liability not paid voluntarily and timely was $458 billion annually for Tax Years 2008 through 2010. The nonfiling portion of the Tax Gap is estimated to be $32 billion annually, while the underreporting portion is $387 billion annually, and the underpayment portion is $39 billion annually. The Tax Gap study also found that noncompliance varies with the amount of information reporting by third parties (e.g., employers, banks, partnerships). Items subject to substantial information reporting and withholding (e.g., wages) have a misreporting rate of 1 percent for the individual income tax, while the misreporting rate for items subject to lesser degrees of information reporting are considerably higher. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether the IRS uses Schedule K-1 data effectively to identify taxpayers not submitting tax returns or taxpayers underreporting tax while also minimizing unnecessary notices to taxpayers. Schedules K-1 are used by flow-through entities to report recipients' allocated share of income, deductions, credits, and other amounts. Unlike other information returns, Schedules K-1 are not submitted directly to the IRS, but are attachments to flow-through returns submitted on paper or by electronic filing. Schedules K-1 will limit the IRS's ability to identify potential noncompliance, resulting in the loss of tax revenue and inequitable treatment of taxpayers as well as potentially creating unnecessary work and increasing taxpayer burden. TIGTA found that improvements are needed with the IRS’s process design and collection of Schedule K-1 data to strengthen efforts to address the noncompliance of nonfilers and underreporters. Specifically, TIGTA found that the IRS: 1) annually accepts flow-through returns with approximately 3 million Schedules K-1; 2) did not identify approximately 4,000 nonfilers who received $25,000 or more of Schedule K-1 income; and 3) could improve identification of underreporter noncompliance. For the full report, go to www.treasury.gov/tigta/auditreports/2019reports/201930078fr.pdf.

Scan it . . . Now that you've done your taxes (or even if you're on extension) consider scanning your documentation. Doing so solves two problems--one, you've got a copy in case you lose the paper in a fire, flood, etc. or just misplace it. The IRS and courts don't accept excuses, no matter how good they are. You may be able to get a portion of the original deduction for many items, but auto mileage, T&E, etc. are not entitled to any leeway. Two, while you should still keep paper for three years for several reasons, after that you can send much of the material to the shredder. Individuals and many small business owners can scan the documents on a multifunction copier/printer/scanner. Keep in mind that cash register receipts and similar documentation are printed on heat sensitive paper. These often don't last three years; in a warm environment it can be less than a year. Most of the material can be loaded 25 to 50 sheets at a time. Nonstandard documents (e.g. cash register receipts) will take a little more work, but it'll be worth it. Devices have become cheap and reliable. And don't forget to scan the hard copy of your tax return.

 

 

October 1, 2019

News

Farmers and ranchers who were forced to sell livestock due to drought may have an additional year to replace the livestock and defer tax on any gains from the forced sales. The farmer or rancher must be in an applicable region. This is a county designated as eligible for federal assistance plus counties contiguous to that county. The relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, or poultry, are not eligible. To qualify, the sales must be solely due to drought, flooding or other severe weather causing the region to be designated as eligible for federal assistance. Livestock generally must be replaced within a four-year period, instead of the usual two-year period. The IRS is also authorized to further extend this replacement period if the drought continues. The one-year extension gives eligible farmers and ranchers until the end of the tax year after the first drought-free year to replace the sold livestock. Details, including an example of how this provision works, can be found in Notice 2019-82.

Revenue Procedure 2019-39 sets forth a system of recurring remedial amendment periods for correcting form defects in a Sec. 403(b) plan (both for Sec. 403(b) individually designed plans and Sec. 403(b) pre-approved plans) first occurring after March 31, 2020 (the ending date for the initial remedial amendment period under Rev. Proc. 2013-22 ends. It also provides a limited extension of the initial remedial amendment period for certain form defects.

Tip of the Day

Get financing first . . . That's what most financial advisors recommend when purchasing a home. It's just as important when looking for a car. It's a rare stop at the financing desk at an auto dealership where you'll get the best deal. They want to help you finance in part to sell the car, but also to make money on the financing. Check your (and other) banks for rates. If you belong to a credit union, be sure to check there. They often can do better than a regular bank.

 

September 30, 2019

News

The IRS has announced that because of new wage and income reporting requirements, it is discontinuing the Form W-2 Verification Code pilot for the 2019 tax year. Federal law now requires employers to submit Forms W-2 by January 31 each year, which helps the IRS combat fraud and identity theft and superseded the need for a verification code. The IRS expresses its appreciation to the many stakeholders, especially the payroll service providers and industry software developers, who joined in the verification code project.

When a taxpayer that has a filing requirement fails to file a tax return, the IRS is authorized under Section 6020(b) to determine and assess a tax liability. For certain business nonfilers with unfiled employment tax returns, the IRS can systemically prepare a substitute return using the Automated 6020(b) (A6020(b)) program. A6020(b) program closures decreased by 92 percent, from 261,582 in Fiscal Year (FY) 2013 to 21,746 in FY 2017, caused by a reduction in resources assigned to the program. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether the IRS is using the A6020(b) program to improve the filing compliance and revenue collection for business return nonfiler taxpayers. TIGTA found the nonfiler case creation process for business returns has been declining since FY 2011 and virtually stopped in October 2016 due to significant reductions in staffing. The creation of fewer nonfiler cases resulted in a reduction of potential inventory to select work from for the A6020(b) program. Because of resource limitations, A6020(b) program new case starts have been declining since FY 2014 and were halted November 7, 2016. As a result, the A6020(b) program secured fewer returns and collected less revenue on a portion of employment tax nonfiler cases during the time period that new cases were not started. High-dollar nonfiler employment tax cases currently have to be manually assigned to the A6020(b) program to be worked, due to a low dollar threshold used for systemic assignment. If the IRS removed the dollar threshold associated with systemic and manual case selection, hundreds of thousands of high-dollar cases could be worked by the A6020(b) program. TIGTA identified 243,210 standalone nonfiler employment tax modules (taxpayers with unfiled tax returns but no balances due) that were assigned to other Collection functions as of January 2019. If the IRS assigned the top 86,554 modules to the program, based on the highest dollar proposed assessments, the IRS could potentially assess more than $10.2 billion and potentially collect more than $3.3 billion. From A6020(b) cases closed between FYs 2011 and 2017, TIGTA also identified 6,784 cases for which the A6020(b) program did not post a tax assessment when it should have, resulting in a loss of proposed assessments of $19.7 million and potentially $6.4 million of revenue collected. To see the complete report, go to www.treasury.gov/tigta/auditreports/2019reports/201930069fr.pdf.

Tip of the Day

Recognizing identity theft . . . The IRS has just posted Tax Tip 2019-124 that lists many of the signs that a tax professional may have experienced a data theft. The theft of a tax professional's data often results in fraudulent returns being filed. Tax professionals should suspect a theft if clients receive tax transcripts that didn't request, receive a refund yet haven't filed a return, etc. But there's an important lesson for ordinary individuals. If you get correspondence by mail or email that you're not expecting--e.g., a credit card, notice of an address change for your bank account, an unexpected tax refund, etc., don't ignore it. Your identity may have been compromised.

 

September 27, 2019

News

The IRS has released (IR-2019-158) a new set of tax gap estimates on tax years 2011, 2012 and 2013. The results show the nation's tax compliance rate is substantially unchanged from prior years. The gross tax gap is the difference between true tax liability for a given period and the amount of tax that is paid on time. The average gross tax gap was estimated at $441 billion per year based on data from tax years 2011, 2012 and 2013. After late payments and enforcement efforts were factored in, the net tax gap was estimated at $381 billion. The tax gap estimates translate to about 83.6%, of taxes paid voluntarily and on time, which is in line with recent levels. The new estimate is essentially unchanged from a revised Tax Year 2008-2010 estimate of 83.8%. After enforcement efforts are taken into account, the estimated share of taxes eventually paid is 85.8% for both periods. And it is line with the TY 2001 estimate of 83.7% and the TY 2006 estimate of 82.3%. Tax Gap studies through the years have consistently demonstrated that third-party reporting significantly raises voluntary compliance. And compliance rises even higher when income payments are also subject to withholding. The IRS also has an array of other programs aimed at supporting accurate tax filing and helping address the tax gap. These range from working with businesses and partner groups to a variety of education and outreach efforts. To see the complete report, go to Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013 . You can also find more information and links to other sources at IRS Releases New Tax Gap Estimates.

The IRS is reporting (Tax Tip 2019-34) taxpayers should watch for new versions of tax-related scams. One such scam involves fake property liens. It threatens taxpayers with a tax bill from a fictional government agency. Here are some details about the property lien scam that will help taxpayers recognize it:

For more information go to Tax Tip 2019-34 at irs.gov.

A streamlined installment agreement (IA) with the IRS can be processed quicker and does not depend on verification of income and expenses. But for a taxpayer to qualify, his aggregate unpaid assessed liability must be $50,000 or less and he must agree to pay that liability in full in six years. The $50,000 cap on assessed liability includes assessed interest, penalties, and additions to tax, but excludes accruals of penalties and interest if they have not yet been assessed. In Merrick Rayle (T.C. Memo. 2019-119) the taxpayer's total liability was $55,433. The settlement officer suggested he pay $5,433 to reduce the unpaid balance to $50,000 to qualify for a streamlined IA. Under a streamlined IA his monthly payments would have been less than under a regular IA. The taxpayer mistakenly argued his liability was less than $50,000. When his request for a streamlined IA was rejected, the taxpayer claimed abuse of discretion by the settlement officer. The Court found no abuse of discretion by the IRS and that the taxpayer did not qualify for a streamlined IA.

Tip of the Day

Owe state taxes? . . . If you've got a big tax bill you haven't paid for federal purposes, the IRS can contact the state department to revoke your passport. Some states have other ways to encourage dealing with an outstanding tax bill. At least one state can suspend your driver's license. That can have significant consequences in the very near future because you'll need an enhanced license for all air travel, and, obviously, you won't be able to driver. And at least state posts the names of deliquents with the largest balances online. And in most states the period for which the state can collect tax that's been assessed is more than three years. Don't ignore the problem.

 

September 26, 2019

News

Revenue Procedure 2019-38 describes a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction under Section 199A. If all the safe harbor requirements are met, an interest in rental real estate will be treated as a single trade or business for purposes of the Section 199A deduction. If an interest in real estate fails to satisfy all the requirements of the safe harbor, it may still be treated as a trade or business for purposes of the Section 199A deduction if it otherwise meets the definition of a trade or business in the Section 199A regulations.

Notice 2019-55 announces the special per diem rates effective October 1, 2019, which taxpayers may use to substantiate the amount of expenses for lodging, meals, and incidental expenses when traveling away from home. This notice provides the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Tip of the Day

Exemption from sales tax? . . . Just because you don't charge customers for an item doesn't mean there's no sales tax involved. While the rules vary from state to state, in most cases if you have a contest and give away a prize (rather than cash) the item is subject to sales tax. Who's required to pay the tax depends on state law. In most cases the company giving the prize away must either collect tax on the transfer or pay the tax when it purchases the item. What about an item that you provide to a customer for his use along with a product, but don't charge for? For example, Madison Inc. sells a product to manufacturers and charges sales tax on the equipment. It provides customers with a special tool to train employees how to set up the equipment faster, but doesn't charge for the tool. In most cases Madison must pay sales tax when it purchases the tool. Sales tax rules can be tricky from the start, but can be particularly nasty because they're not always logical. And a mistake can sometimes prove very costly because if audited the examiner may extrapolate from a small sample. For example, a $100 mistake for one month can turn into a $3,600 sales tax bill during a 36-month audit period. If the transaction is new and either significant or recurring, talk to a professional.

 

September 25, 2019

News

Victims of severe storms, straight-line winds, tornadoes and flooding that took place from Feb. 22 to March 29, 2019, in Mississippi may qualify for tax relief from the IRS. On April 23, 2019, the President declared that a major disaster occurred in the state of Mississippi and the FEMA announced public assistance for emergency work and the repair or replacement of disaster-damaged facilities in certain areas. On Sept. 23, 2019, FEMA amended the declaration to provide retroactive individual assistance to those who reside or have a business in Clay, Humphreys, Issaquena, Lowndes, Monroe, Sharkey, Warren and Yazoo counties. The declaration permitted the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Feb. 22, 2019, and before July 31, 2019, were granted additional time to file through July 31, 2019. In addition, penalties on payroll and excise tax deposits due on or after Feb. 22, 2019, and before March 11, 2019, will be abated as long as the deposits were made by March 11, 2019. For more information, go to IRS announces tax relief for victims of severe storms, straight-line winds, tornadoes and flooding in Mississippi.

Bad debts that don't qualify as business bad debts are only deductible as a short-term capital loss. Business bad debts are fully deductible against income, but to qualify the debt must be incurred as part of the taxpayer's business. For example, a bad account receivable. In Charles E. Bercy, Deceased, Elaine Bercy, Successor in Interest, and Elaine Bercy (T.C. Memo. 2019-118) the taxpayers' took a bad debt deduction for a loan made to an unrelated business. The taxpayers recovered only part of the amount lent. The IRS claimed the debt was a nonbusiness debt and disputed the year it became worthless. The Court noted the taxpayer was in the business of lending money for real estate ventures through a corporation and was personally made loans to a variety of borrowers, solely for his own account on a regular basis. His personal lending activity was substantial, comprising numerous loans totaling an estimated $25 million. And he engaged in this activity with the intent of making a profit. The Court also noted the taxpayer did his due deligence and the loan was not to a related party. The IRS sought to make a distinction between the taxpayer's real estate loans and his less frequent personal property loans. The Court refused to coinstrue the term "trade or business" so narrowly. The Court also found that the taxpayer was correct in waiting for the sale of the property to determine the amount of the loan that was worthless. However, the Court did not side with the taxpayer refusing to accept a discount of the note for the lower interest on the note after it was transferred to second creditor.

Tip of the Day

Credit union or bank? . . . Many credit unions now provide commercial accounts and many commercial services. Which is better? For many small businesses, with no more than a few employees, a credit union may fit the bill. Fees may be less and you may be able to earn more interest on your deposits. Most of the services are comparable. But you may decide to go with a commercial bank if you need specialized services, business loans, travel to or do business in other states, etc. Keep in mind that many credit unions are very local and branches and ATMs limited. Make a list of your requirements and then take a look at a couple of credit unions. For personal banking, credit unions almost always have the edge. They pay higher interest on deposits and generally have lower rates on car loans and mortgages.

 

September 24, 2019

News

In Jason Stewart and Kristy Stewart (T.C. Memo. 2019-116) the taxpayer claimed the IRS settlement officer improperly engaged in an ex parte communication with the IRS revenue officer during the taxpayers' collection due process (CDP) proceeding, committing an abuse of discretion. The Court noted ex parte communications are allowed when the communications involve matters that are ministerial, administrative, or procedural and do not address the substance of the issues or positions taken in the case. The revenue officer's notes in petitioners' administrative file were procedural. While the revenue officer did make comments regarding the taxpayers' representative generally “uncooperative” nature, these comments were made contemporaneously as a part of his job function as a revenue officer. The Court held that the communication in the IRS's administrative file regarding petitioners was not a prohibited ex parte communication.

Tip of the Day

Can't sell the product? . . . Sell an upgrade or maintenance contract instead. Some customers are becoming cautious in their outlook on the economy and are beginning to cut back on big purchases. While options vary depending on the product you sell, try selling an upgrade to their existing equipment, extending a warranty for a fee, or selling a maintenance contract.

 

September 23, 2019

News

The IRS has issued final regulations (T.D. 9875) that amend the rules relating to hardship distributions from Section 401(k) plans. The final regulations reflect statutory changes affecting section 401(k) plans, including changes made by the Bipartisan Budget Act of 2018. The regulations affect participants in, beneficiaries of, employers maintaining, and administrators of plans that include cash or deferred arrangements or provide for employee or matching contributions.

If you do business under more than one entity, you should be cautious about transfers between them. That's particularly true if one or more is a C corporation. In Benavides & Co., P.C.; Al Benavides and Louise A. Benavides (T.C. Memo. 2019-115) the taxpayer transferred receipts from a professional services corporation to other entities. The IRS claimed the amounts distributed were dividends, and taxable as such. He argued that he could simply have taken the amounts out as salary. The Court sided with the IRS in finding the amounts were constructive dividends, taxable to the shareholder but not deductible by the corporation. In addition, the IRS determined through the bank deposits method of reconstructing income that the taxpayer had unreported income. The Tax Court agreed.

Tip of the Day

Check your supply chain . . . For most businesses the supply chain has gotten less diversified and, with less inventory on hand, more critcial. If it's toner for a standard copier you can have a replacement tomorrow. But if it's a part for a machine in the factory it could take much longer. Make sure you keep track of your suppliers, that they're financially healthy and that they're not planning to drop a line you need. Determine the most critical elements of your chain and pay particular attention to those suppliers. If possible have an alternate source. You should also watch your customers. You can't keep an eye on all of them, but you should keep abreast of the larger ones. Again, not only for financial health but to make sure they're not planning drop a line you supply, seek an alternate source, etc. A merger or buyout of a customer may persage the dropping of a product line or a switch in vendors.

 

September 20, 2019

News

The IRS has announced that the Modernized e-File Production System (MeF) will be unavailable from 7:00 a.m. Eastern on Saturday, September 21, 2019, through 11:00 a.m. Eastern on Sunday, September 22, 2019.

The IRS has released draft versions of the 2019 Form 1040 as well as the new Form 1040-SR, U.S. Tax Return for Seniors. To see these draft copies, go to Draft Tax Forms.

Tip of the Day

Payroll service goes under . . . You might have seen it in the news--payroll company goes out of business. Employees weren't paid. This is so recent they don't know the extent of the damage. The big numbers could be yet to come. The withholding and employment taxes can quickly exceed 25% of the gross payroll and that underpayment can accumulate for more than a year. Even if you had nothing to do with the fraud, an employer will still be liable for the withheld taxes the government never got. The IRS may be sympathetic to your plight, but that's about all the help you'll get. It's best not to go with a local company. There are several big payroll companies in the field. You're unlikely to get into trouble with them. If you must do the payroll internally or use a small company, make sure you're able to check that the deposits are being made in your name. You should also be listed with the IRS to get a duplicate of any underpayment notices sent.

 

September 19, 2019

News

You may be able to recover costs involved in disputing an IRS deficiency, but you'll have to pass a number of hurdles. In David K. Wagstaff and Jeffrey A. Davis (T.C. Memo 2019-114) the taxpayers were issued an SSA-1099, Social Security Benefit Statement, by the Social Security Administration (SSA) for the 2014 tax year that reported a “workers' compensation offset” of $14,055.60, which is taxable income. Despite what was reported on the SSA-1099, the taxpayers did not receive any workers' compensation in or for the 2014 tax year and filed their tax return excluding the workers' compensation offset. When the taxpayers filed their tax return, they included a statement notifying the IRS that the SSA-1099 they had received contained incorrect information and a compensation payment history printout from the U.S. Department of Labor's website showing that they did not receive workers' compensation in 2014. In October 2016 the IRS notified the taxpayers of certain proposed changes to their tax return, including the inclusion of the SSA-1099 income. Between October 2016 and October 2017 the taxpayers supplied multiple items to the IRS from other Federal agencies that showed that the SSA-1099 may have been incorrect. The IRS, based on the position that the SSA-1099 was accurate, issued a notice of deficiency on July 31, 2017, determining a $3,763 deficiency in the taxpayers' tax for the 2014 tax year. The taxpayers claimed that they were able to secure and deliver documentation to the IRS at that time showing that the SSA-1099 was incorrect, but the Service appeared to have lost the documentation. Following the intervention of the Taxpayer Advocate Service, the IRS reversed its position, issued a “no change” certification that the taxpayers' 2014 tax return was accepted as filed, and mailed them a proposed decision document reflecting the concession of the deficiency. The taxpayer sought litigation costs from the IRS of $154.98 and asked the Court to adopt a rule that would be applied when two or more Federal agencies provide conflicting information to a taxpayer, the taxpayer discloses the conflict in his or her return, the taxpayer provides documentation supporting his or her position, and the taxpayer continues to respond timely to the IRS. The IRS replied to the taxpayers' motion by claiming it failed to file an affidavit attesting that they met the net worth requirements. It had conceded the other points. During the trial the IRS conceded the net worth requirement, but claimed the Court did not have jurisdiction to adopt the taxpayers' requested rule. The Court allowed the costs of $154.98, but found it had not jurisdiction with regard to a rule change.

Tip of the Day

Use caution with competitors . . . Your company is still tiny but making a name for itself. You've got a great idea that is spot on. You're approached by Mega Inc. about a potential deal. Flattered, and thinking they might want to buy you out so you and your partner can retire at 25, you discuss some of your methods and ideas. A few months later you find you've just created your biggest competitor. It's happened--and more than once. If they're serious about a buyout or investment, get it in writing. You'll need an attorney qualified in the field to draft the documents and advise you. This is not the time to go online for a DIY approach. And make sure all employees who have inside knowledge sign nondisclosure and noncompete agreements.

 

September 18, 2019

News

Notice 2019-52 (IRB 2019-41) expands the emergency housing and compliance monitoring relief provided in Rev. Proc. 2014-49 and Rev. Proc. 2014-50, in response to the devastation caused by the 2018 California Wildfires to Butte, Los Angeles, and Ventura counties in the State of California. The expanded relief in this notice is limited to the CA Wildfires Major Disaster (as defined in the notice). This notice also solicits public comment regarding any desirable amendments to Rev. Proc. 2014-49 and Rev. Proc. 2014-50.

If you don't file a return or file a frivolous return, the IRS frequently files a substitute return for the taxpayer and assesses tax based on that return. In George J. Smith and Sheila Ann Smith (T.C. Memo. 2019-111) the taxpayers filed frivolous returns, arguing the amounts they received as wages were not part of their gross income. The taxpayers claimed that because the IRS assessed Sec. 6702 frivolous return penalties, it must make Sec. 6020 substitute returns before it can claim they returns they filed were incorrect. The Tax Court held that Sec. 6020 does not require the IRS to make a substitute return for the taxpayers, even if the returns they filed are subject to the frivolous return penalties. The Court also found the taxpayers subject to the penalty for failure to file a timely return and sanctions for maintaining frivolous and baseless positions.

Tip of the Day

Do your homework . . . Do you believe all the salesmen you encounter? You probably shouldn't. There have been more than a few tax court cases where an individual or business taxpayer has paid good money to ostensibly save tax dollars. Not many of them work. That can prove costly. In most cases not only have the taxpayers had to pay the tax, but interest and penalties also. The latter two items can easily increase the bill by 50 percent. But there are plenty other situations where a salesmen's pitch can be misleading at best and often costly. Sure this truck can pull a 10,000 pound trailer. Switching to LED lightbulbs will decrease the temperature in the building by 10 degrees. Switching to Bangor Mutual Insurance will save you $600 a year on your auto insurance. Some pitches are salesmen's fluff; some show a lack of knowledge on the part of the salesman; some are outright lies. But all can cost you. Do some research on your own. The bigger the dollar and time committment, the more research you should do.

 

September 17, 2019

News

The IRS mails more than 200 million notices and letters each year to individual and business taxpayers and their representatives. When the IRS does not maintain current taxpayer addresses, it wastes postage and labor processing undeliverable mail. For example, in Fiscal Year 2018, about 14.4 million pieces of undeliverable mail were returned to the IRS at an estimated cost of $43 million. In addition, the IRS missed opportunities to help taxpayers understand their tax obligations. The Treasury Inspector General for Tax Administration (TIGTA) to assess the IRS’s efforts to reduce undeliverable mail and to follow up on corrective actions that the IRS planned to take to address recommendations made in TIGTA’s May 2010 audit report. TIGTA found t he IRS has taken a number of actions to improve the accuracy of taxpayer addresses in its systems, thereby reducing the volume of undeliverable mail. However, the IRS closed some of TIGTA’s prior recommendations as completed, yet this review identified the same deficiencies. As a result, the IRS continues to waste postage and labor by mailing and processing undeliverable correspondence. During Fiscal Year 2018, the IRS mailed a total of 103,512 nonstatutory notices and letters to taxpayers whose tax accounts had an undelivered mail indicator. Using the IRS’s estimate of $3 per piece to process undeliverable mail, the IRS needlessly spent almost $311,000 mailing correspondence to known undeliverable addresses. In addition, the IRS does not always suppress correspondence to taxpayers whose address of record is an IRS campus (because the IRS cannot find a valid address). The IRS mailed more than 144,000 notices to those taxpayers during Fiscal Years 2016 through 2018 at a cost of almost $433,000. TIGTA also found that some correspondence returned by the United States Postal Service with an updated address continued to be destroyed without updating taxpayers’ accounts. In addition, the IRS has not made sufficient progress implementing the Taxpayer Correspondence Delivery Tracking initiative, which would save between $1.4 million and $1.72 million annually in labor costs and about $1.2 million annually in cost avoidance through a reduction in undeliverable mail. Finally, address hygiene software has not been installed on the Real-Time System to perfect taxpayer addresses on the system and reduce undeliverable mail. During Fiscal Years 2016 through 2018, the IRS reported that a total of 221,373 notices issued through the Real-Time System were returned as undeliverable at an estimated cost of $664,000. To read the complete report, go to www.treasury.gov/tigta/auditreports/2019reports/201940074fr.pdf.

If you're claiming a deduction for an auto (or other listed property), you need to keep a contemporaneous record of the usage. In Suresh Hatte (T.C. Memo. 2019-109) the taxpayer did not keep such a record. Instead, he offered spreadsheets created during the IRS audit with online maps to determine the mileage. But there was no evidence where the taxpayer started each trip and the spreadsheets did not show which of several vehicles was used. In addition there appeared to be inconsistencies in the spreadsheets and the Court found his testimony not credible. The Court also noted he did not produce at trial any notes, calendars, or other contemporaneous documents to support the entries on the spreadsheet.

Tip of the Day

Buy term and invest the difference . . . That's an old saying. The idea is that term life insurance is much cheaper (in the early years) than whole life and if you take the savings and invest them you'll come out ahead. The problem is that a significant percentage of insurance buyers won't invest the saving. You've got to decide if you'll use the savings wisely. As with many investment decisions, the best option depends on personal as well as investment factors. Whole life can make sense for many because of the forced savings it generates. The downside is that if you've got to tap those savings unless you borrow on the policy you could owe taxes at ordinary income rates on the earnings. The downside to term is it gets very expensive as you get older. Talk to your financial adviser and discuss your objectives. If you want to be sure there's money available just for your children's college, term can be the best approach. The same applies to protecting your family while you're paying off an acquistion. On the other hand, for long-term protection for a spouse or child, whole life may be the best option.

 

September 16, 2019

News

The IRS has released final regulations and additional proposed regulations under Section 168(k) on the new 100% additional first year depreciation deduction that allows businesses to write off most depreciable business assets in the year they are placed in service. The regulations just released may vary slightly from the published documents due to minor editorial changes. The documents published in the Federal Register will be the official documents. The final regulations finalize the proposed regulations issued in August 2018 which implement several provisions included in the Tax Cuts and Jobs Act (TCJA). The proposed regulations contain new provisions not addressed previously. The 100% additional first year depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify. The deduction applies to qualifying property acquired and placed in service after Sept. 27, 2017. The final regulations provide clarifying guidance on the requirements that must be met for property to qualify for the deduction, including used property. The final regulations also provide rules for qualified film, television and live theatrical productions. Additionally, in the proposed regulations, the IRS proposes rules regarding (i) certain property not eligible for the additional first year depreciation deduction, (ii) a de minimis use rule for determining whether a taxpayer previously used property; (iii) components acquired after Sept. 27, 2017, of larger property for which construction began before Sept. 28, 2017; and (iv) other aspects not dealt with in the previous August 2018 proposed regulations. The proposed regulations also withdraw and repropose rules regarding application of the used property acquisition requirements (i) to consolidated groups, and (ii) to a series of related transactions. See T.D. 9874; REG-106808-19; and Rev. Proc. 2019-33.

The Collection Due Process (CDP) hearing provisions are designed to give taxpayers an opportunity for an independent review to ensure that the levy action that has been proposed or the Notice of Federal Tax Lien that has been filed is warranted and appropriate. An effective process is necessary to ensure that statutory requirements are met and taxpayers’ rights are protected. The Treasury Inspector General for Tax Administration (TIGTA) is statutorily required to determine whether the IRS complied with the required procedures under Sections 6320 and 6330 when taxpayers exercised their rights to appeal the filing of a Notice of Federal Tax Lien or the issuance of a Notice of Intent to Levy. TIGTA Appeals properly informed taxpayers that CDP and Equivalent Hearings were conducted by an impartial hearing officer with no prior involvement with the tax or tax periods covered by the hearing. However, TIGTA identified some errors that were similar to errors identified in prior reports. Specifically, the Office of Appeals did not always classify taxpayer requests properly, and as a result, some taxpayers received the wrong type of hearing. TIGTA reviewed a statistically valid stratified sample of 140 cases and identified nine taxpayer cases that were misclassified. This is approximately the same number of misclassified cases that were identified in the prior year’s review. Based on the same stratified sample, TIGTA determined that the Collection function did not timely process the hearing requests for an additional five taxpayers. When taxpayers mail or fax their hearing request to the wrong Collection function location, Collection function procedures require employees to fax the taxpayer’s request to the appropriate Collection Due Process Coordinator at the correct location on the same day. While the Office of Appeals provided taxpayers with the correct hearing type in these cases, the Collection function did not follow procedures. As a result, the IRS may not have adequately protected the taxpayers’ rights due to the untimely processing of the misdirected hearing requests. In addition, TIGTA continued to identify errors related to the determination of the Collection Statute Expiration Date (CSED) on taxpayer accounts. TIGTA identified eight taxpayer cases that had an incorrect CSED. For five taxpayer cases, the IRS incorrectly extended the time period, allowing the IRS additional time to collect delinquent taxes. In the remaining three taxpayer cases, the IRS incorrectly decreased the time to collect the delinquent taxes. Overall, this is approximately the same number of CSED errors that were identified in the prior year's audit. For the complete report, go to www.treasury.gov/tigta/auditreports/2019reports/201910058fr.pdf.

In Denise Celeste McMillan (T.C. Memo. 2019-108) the Tax Court looked to settlement agreement to determine if the award the taxpayer received was paid on account of personal physical injury or sickness. The Court found the settlement document specified that the defendant paid the taxpayer to drop her suit and take down her website—that is, it wasn't compensating her for physical injuries or sickness. In addition, her suit was not filed because she was injured or ill. The Court sided with the IRS in finding the settlement proceeds were taxable. The Court also noted that when settlement proceeds are income, so is whatever portion of them goes to attorney's fees. Payments to the attorney cannot be used to offset the income.

Tip of the Day

Listen carefully . . . Don't be taken in by claims of superiority based on numbers. At the very least, take a minute to check if they make sense. For example, Madison Investments promises an interest rate six times its competitor, Chatham Inc. on its money market fund. Chatham's rate is 0.05 percent. That makes Madison's return 0.3 percent. Of more interest is the absolute return on, say $100,000. That's $50 for Chatham and $300 for Madison or $250 more for Madison. Hardly a reason to move your portfolio. The difference in absolute terms becomes even less if you normally only carry an investable balance of $25,000.
Copyright 2019 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

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