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March 31, 2020
NewsNotice 2020-21 (IRB 2020-16) provides that employment tax credits for paid qualified sick leave wages and paid qualified family leave wages required by the Families First Coronavirus Response Act (“the Act”) will apply to such wages and compensation paid for periods beginning on April 1, 2020 and ending on December 31, 2020, and that days beginning on April 1, 2020 and ending on December 31, 2020 will be taken into account for credits for paid qualified sick leave equivalents and paid qualified family leave equivalents for certain self-employed individuals provided by the Act. The IRS has a web page that contains a readable summary of the law.
Tip of the DayEconomic impact payments . . . The $1,200 stimulus payments (economic impact payments) will be in the mail starting in the next three weeks. The IRS has a new web page that answers a number of questions regarding the payments.
March 30, 2020
NewsThe IRS has announced that, due to staff limitations, the Practitioner Priority Service (PPS) line, the e-Services Help Desk line and the e-Services, FIRE and AIR system help desks are closed until further notice. The IRS is temporarily suspending acceptance of new Income Verification Express Services (IVES) requests at this time and is experiencing delays with existing IVES processing as well as CAF number authorizations. Practitioners with an e-Services account and client authorization can access the Transcript Delivery System to obtain prior-year transcripts. Taxpayers can use Where’s My Refund? and Get Transcript services. Additionally, the IRS is unable to answer any questions as yet on stimulus payments. Normal operations will resume as soon as possible. Please check IRS.gov for updates.
Tip of the DayFiling postponement clarified . . . The change in filing date to July 15 applies to Form 1040, 1041, and 1120 series that had a due date of April 15, 2020. There's no requirement the taxpayer be quarantined, have COVID-19, or any other requirement. But the postponement does not apply to any other date, before or after.
March 27, 2020
NewsWhat's in the stimulus package. Here are the highlights:
March 26, 2020
NewsThe IRS has announced (IR-2020-59) a sweeping series of steps to assist taxpayers by providing relief on a variety of issues ranging from easing payment guidelines to postponing compliance actions. Some of the actions being taken include the option of suspending all payments on accepted offers in compromise to July 15, liens and levies (including any seizures of a personal residence) initiated by field revenue officers will be suspended during this period. However, field revenue officers will continue to pursue high-income non-filers and perform other similar activities where warranted, before July 15, the IRS will generally not start new field, office and correspondence examinations. See IR-2020-59 for more information.
March 25, 2020
NewsThe IRS has announced that it is taking steps to protect its employees, taxpayers, and partners. It is curtailing some operations during this period but continuing its functions including accepting tax returns and sending refunds. The Service has published a new page, IRS Operations During COVID-19, that provides answers to many questions about filing dates, help for small business, status of IRS services, etc. The IRS also has a Q and A site, Filing and Payment Deadlines Questions and Answers.
Revenue Procedure 2020-18 (IRB 2020-15) provides issuers of qualified mortgage bonds, as defined in Section 143(a) of the Code, and issuers of mortgage credit certificates, as defined in Section 25(c), with (1) nationwide average purchase prices for residences located in the United States, and (2) average area purchase price safe harbors for residences located in statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam.
Tip of the DayCheck your work . . . If you're using a computer to prepare your return the software will check for certain errors such as unchecked boxes, missing info on some forms, etc., but it can't do catch bad data entry. Common mistakes are putting a number on the wrong line of the form and transposing numbers, such as entering 5432 ans 5423. Only a second look can catch those errors. If you're entering stock transactions, make sure your totals agree with those on the brokerage statement.
March 24, 2020
NewsThe IRS has issued final Income Tax Regulations (T.D. 9895) under Section 901(m) with respect to transactions that generally are treated as asset acquisitions for U.S. income tax purposes and either are treated as stock acquisitions or are disregarded for foreign income tax purposes. These regulations are necessary to provide guidance on applying Section 901(m). These regulations affect taxpayers claiming foreign tax credits.
Tip of the DayOther deadlines . . . The IRS has extended the deadline for paying and filing income tax returns to July 15, but certain other dates are unchanged. Contributions to IRAs, both traditional and Roth, are due April 15. There's no change there. If you're approaching the income limits for contributions, you'll need to do a draft return or, alternatively, you can withdraw the excess contribution and income to avoid the 6 percent excess contribution penalty. Contributions to SEPs are due by the extended due date of the return. The April 1 deadline for your first required minimum distribution from IRAs and qualified plans is also unchanged. There are other deadlines too. For example, contributions to SIMPLE plans are due 30 days after the end of the month for which the contributions are to be made.
March 23, 2020
NewsNotice 2020-18 expands and clarifies earlier announcements with respect to the April 15th deadline. The April 15th deadline for all taxpayers--individuals, trusts, estates, partnerships, or corporations--has been delayed to July 15th. Thus, both filing and paying can be delayed without interest or penalties. Interest will begin to accrue on July 16. Taxpayers do not have to file Forms 4868 or 7004 for an extension, it's automatic. In addition, there is no longer any limitation on the amount of tax that can be postponed as there was under prior guidance. The relief also includes the April 15 estimated tax payments (including payments of tax on self-employment income) due April 15, 2020 for a taxpayer's 2020 tax year. No extension is provided for the payment or deposit of any other type of Federal tax or for the filing of any Federal information return. That means any employment or other tax payments are not included in this notice and have not been granted relief at this time. This notice supersedes Notice 2020-17.
Tip of the DayStocks and dividends . . . With stocks well off their highs it's tempting to pick up some issues for their attractive dividend yield. Under the current conditions such a move should be approached with extreme caution. There are three considerations. First, stocks could decline further from this point. Second, because earnings of all but a few businesses are likely to suffer tremendously, the dividends companies are currently paying are likely to be in jeopardy. Third, some companies with balance sheet issues could find themselves insolvent, having to restructure, or merging with another firm. Analyze the company's balance sheet and its income prospects carefully before investing.
March 20, 2020
NewsThe Senate plan to provide cash support to Americans would send checks for $1,200 to individuals and $2,400 to a married couple. This would be a one-time payment, phased out as the individual or couple's income exceeded a certain threshold. With bipartisian support for some sort of direct relief to individuals, and $1,000 being the most discussed amount, there's a good chance of passage in a substantially similar form. There's an extra $500 for individuals and couples for each child. The phase-out would begin for individuals making up to $75,000 annually and $150,000 for a married couple. The payments would be fully phased out at incomes of $99,000 (single) and $198,000 (married). Taxpayers with little or no tax liability would receive lower payments.
The Families First Coronavirus Response Act was signed nto law on March 18. The law contains a number of provisions that are not tax related such as providing emergency food to food banks and low income indviduals, payment of Covid-19 testing, and waiver of certain school lunch rules. The law requires certain employers to provide an employee with paid sick time to the extent that the employee is unable to work or telework due to a need for leave because the employee is subject to Federal, State or local quarantine or isolation order related to Covid-19, has been advised to self-quarantine, is experiencing symptoms of Covid-19 and seeking diagnosis or is caring for an individual who is subject to quarantine. If the employee is quarantined he or she is entitled to up to two weeks of paid sick time. Additional sick time will be paid at two-thirds pay for an additional 10 weeks. Employers are entitled to tax credits for paid sick and family and medical leave. The refundable credit is equal to the wages paid but no more than $511 ($200 per day for leave taken to take care of a relative). The credit is increased by the amount of the employer's qualified health pan expenses as are allocable to the qualified sick leave wages for which the credit is allowed. The credit is applied agains the employer's Social Security taxes (OASDI) or RRTA tax. The employer was report a similar amount as income. Credit is also available for sick leave for certain self-employed individuals. A similar credit is also available to employers where an employee is unable to work due to a need to care for a son or daughter under age 18.
Tip of the DayCapital loss utilization . . . Individuals can carry a capital loss forward indefinitely, but each year you lose $1,500 or $3,000 (depending on your filing status) whether or not you file or you can use the loss that year. And that loss expires on a taxpayer's death. Any unused carryforward loss at that time expires.
March 19, 2020
NewsThe IRS has identified a new version of a phishing email scam targeting tax professionals. The fake email states the preparer's EFIN has been put on a temporarily hold and warns the EFIN will be suspended unless the preparers open an embedded document and confirm or deny that they submitted the Form 1040. The embedded "1040" document likely contains malware.
You can only deduct losses in a pass-through entity such as a partnership or S corporation up to your amount "at risk". The rules as to the amount at risk differ with respect to partnerships versus S corporations. For partnerships, a taxpayer's amount at risk for an activity generally includes: "(A) the amount of money and the adjusted basis of other property contributed by the taxpayer to the activity, and (B) amounts borrowed with respect to such activity". Amounts borrowed are considered to be at risk only to the extent that the taxpayer: "(A) is personally liable for the repayment of such amounts, or (B) has pledged property, other than property used in such activity, as security for such borrowed amount (to the extent of the net fair market value of the taxpayer's interest in such property)". Furthermore, a taxpayer shall not be considered at risk with respect to amounts protected against loss through nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements. The IRS claimed that the taxpayer, while guaranteeing the debt of an LLC, was not at risk with respect to the debt and could not deduct the losses. The IRS argued that under state law a member of an LLC is not personally liable for the debts of the LLC. But here the taxpayer became liable for the debt because he executed a personal guarantee for that debt. The Court found the taxpayer was personally liable for the loan and there was no right for a contribution or reimbursement from any other member. Nor was there any loss protection on the amount guaranteed. The Court found the taxpayer at risk with respect to the loans. Rock Bordelon and Torie Bordelon, T.C. Memo. 2020-26)
Tip of the DayMiscellaneous deductions . . . There's a host of prior deductions that are no longer allowed. Tax preparation fees, trustee's administrative fees for an IRA, safe deposit box rental, excess deductions of an estate, etc. are not deductible. However, there are a limited number which are still deductible. They incluide amortizable premium on taxable bonds, casualty losses from income producing property, Federal estate tax on income in respect of a decedent, gambling losses up to the amount of gambling winnings, unrecovered investment in an annuity, and impairment-related work expenses of persons with disabilities.
March 18, 2020
NewsIn most cases the taxpayer bears the burden of proof and the IRS is presumed correct. In Alvin E. Keels, Sr. (T.C. Memo. 2020-25) the IRS notice of deficiency did not refer to petitioner's yearend termination or extended termination payment balances from his relationship with an insurance company, deferred compensation, pension and profit-sharing plan, employee benefit programs, or section 409A. Nor was that mentioned in the IRS's pretrial memo, or otherwise before trial. The Court noted that The basis for tax due in a notice of deficiency must be stated in the notice of deficiency. (Sec. 7522(a) and (b)(1).) Failure to state the basis does not invalidate the notice, Sec. 7522(a), but the burden of proof shifts to the IRS. To meet its burden of proof, the IRS had to show that the plan failed to include any one of three required elements. The Court found it was able to do so.
Tip of the DayScan those receipts . . . As you're going through your receipts for your tax prep consider scanning or copying them. Most stores now print receipts on heat sensititve paper. The big advantage for them is no ribbon or other source of ink to replace. The downside for the customer is that receipt will become unreadable over time. How long? Depends on several factors, but the paper is very heat sensitive. At room temperature they can become worthless after a year or two. The IRS wants to read the receipt. If it's faded you might get sympathy from the examiner, but no deduction.
March 17, 2020
NewsSome IRS requirements aren't as strict as others. In some cases you can provide information after filing; in some cases you can claim substantial compliance. But in some cases failing to dot the i's and cross the t's can be fatal. It was in the case of Oakhill Woods, LLC, Effingham Managers, LLC, Tax Matters Partner (T.C. Memo. 2020-24). The LLC made a charitable contribution of a conservation easement but did not report its cost basis in the property on Form 8283, Noncash Charitable Contributions. The LLC argued the it strictly (or at least substantially) complied with the applicable regulation. The petitioner alteratively contended that the regulation governing reporting of cost basis is invalid or (if it is valid) that the LLC had reasonable cause for failing to comply with it. The Tax Court denied the deduction in the amount of some $7.9 million. The Court noted that the requirement to disclose cost or adjusted basis when that information is reasonably obtainable is necessary to facilitate the Commissioner's efficient identification of overvalued property. In this particular case the per acre value of the donated easement was far above the cost of the property just 17 months earlier. The Court noted that fact would have alerted the IRS to a potential overvaluation.
Tip of the DayInterest on home under construction . . . You can treat a home under construction as a qualified home for a period of up to 24 months, but onliy if it becomes your qualified home at the time it is ready for occupancy. The 24-month period can start any time on or after the day construction begins.
March 16, 2020
NewsThe IRS has added a number of municipalities where victims of earthquakes that took place beginning on December 28, 2019 in parts of the Commonwealth of Puerto Rico may qualify for tax relief. The additional municipalities include Aguada, Anasco, Barceloneta, Coamo, Moca, Naranjito, Salinas, and Santa Isabel. As a result, individuals and households who reside or have a business in the municipalities of Adjuntas, Aguada, Anasco, Arecibo, Barceloneta, Cabo Rojo, Ciales, Coamo, Corozal, Guánica, Guayanilla, Hormigueros, Jayuya, Juana Diaz, Lajas, Lares, Las Marías, Maricao, Mayaguez, Moca, Morovis, Naranjito, Orocovis, Penuelas, Ponce, Sabana Grande, Salinas, San German, San Sebastian, Santa Isabel, Utuado, Villalba and Yauco may qualify for tax relief.
Due dates and the coronavirus . . . The IRS has yet to issue guidance regarding any extension of due dates of returns. That means S corporation and partnership returns are due tomorrow, March 16. Keep in mind that the penalty for failure to file isn't based on the income shown on the return but on the number of K-1s. The penalty for both S corporations and partnerships is $205 per shareholder or partner per month (or any part thereof) for up to 12 months. Two partners, two months late would be $820. There is also a penalty based on the number of K-1s that are not furnished to a shareholder or partner or that doesn't have the required information or incorrect information. That's the federal penalty. Most states also impose some sort of penalty. Clearly, failure to file can be costly. Filing an extension is easy, even if you have to do it on paper.
March 13, 2020
NewsThe IRS has announced (IR-2020-55) the release of final regulations that increase the Offer in Compromise application fee to $205 and provide an additional way for the IRS to waive the Offer in Compromise application fee for low-income taxpayers, based on their adjusted gross income (AGI). Applicants who meet the definition of a "low-income taxpayer" receive a waiver of their OIC application fee. A new provision from the Taxpayer First Act provides an additional way for low-income taxpayers to qualify for a waiver of the OIC application fee. Normally, the IRS determines if taxpayers fall at or below 250% of the poverty level by looking at their household's size and gross monthly income. The new law provides an additional standard for the IRS to use in making the calculation. The IRS will now also look at a taxpayer's AGI from the most recent tax return to determine whether it is at or below 250% of the poverty level.
Tip of the DayNo W-2? . . . Authorized IRS e-file Providers are prohibited from submitting electronic returns to the IRS prior to the receipt of all Forms W-2, W-2G, and 1099-R from the taxpayer. If the taxpayer is unable to secure and provide a correct Form W-2, W-2G, or 1099-R, the return may be electronically filed after Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. is completed in accordance with the use of that form. This is the only time information from Pay stubs or Leave and Earning Statements (LES) is allowed.
March 12, 2020
NewsNotice 2020-15 (IRB 2020-14) provides tax relief to health plans as a result of the public health emergency posed by COVID-19, and the need to eliminate potential administrative and financial barriers to testing for and treatment of COVID-19. A health plan that otherwise satisfies the requirements to be a high deductible health plan (HDHP) under Section 223(c)(2)(A) will not fail to be an HDHP merely because the health plan provides medical care services and items purchased related to testing for and treatment of COVID-19 prior to the satisfaction of the applicable minimum deductible. As a result, the individuals covered by such a plan will not fail to be eligible individuals under section 223(c)(1) merely because of the provision of those health benefits for testing and treatment of COVID-19.
Tip of the DaySettlement costs to purchase a home . . . Settlement (or closing) costs incurred on the purchase of a home, and there can be a number of them, can't be ducted on the purchase of the home, but can be added to the cost basis. The tax benefits aren't as great as getting to deduct the costs, but it'll still reduce any potential taxes. The settlement costs that increase basis are any fees paid on purchase that you would have incurred even if you paid cash for the home.
March 11, 2020
NewsThe IRS is advising tax professionals to safeguard their EFINs. Once a criminal has a tax preparer's EFIN, they can access other data. The IRS is reminding professionals that one way to watch for suspicious activity is for preparers to check the activity on their EFIN. They can review it to see how many federal tax returns have been filed using their number. For more information and links to publications, go to IRS Tax Tip 2020-31.
The Trump administration and the Senate Finance Committee are considering fiscal relief in the face of the coronavirus. The measures that have been most talked about are a payroll tax cut for up to a year, tax breaks for specific industries such as the airlines, cruise lines, hotels, etc. that might take the form of deferring tax payments, and some sort of paid sick leave. There is incentive for quick action, but that might not happen.
Tip of the DayLoss on small business (Sec. 1244) stock . . . Stock sales normally produce capital losses that can be used to offset gains, can only reduce $3,000 of ordinary income in any one year. If your stock investment in a small business meets certain requirements (contributed capital $1,000,000 or less, certain activities excluded, etc.) you can deduct up to $50,000 ($100,000 if married filing jointly) as an ordinary loss. That will produce a lot more in tax savings.
March 10, 2020
NewsThe IRS has released a 2nd quarter update of its 2019-2020 Priority Guidance Plan. The second quarter update to the 2019-2020 priority guidance plan reflects 40 additional projects which have been published (or released) during the period from October 1, 2019 through December 31, 2019.
Notice 2020-14 (IRB 2020-13) sets forth the 2020 Cumulative List of Changes in Plan Qualification Requirements for Pre-Approved Defined Benefit Plans (2020 Cumulative List). As described in section 17 of Rev. Proc. 2016-37, 2016-29 I.R.B. 136, Cumulative Lists identify changes in the qualification requirements of the Internal Revenue Code that are required to be taken into account in a pre-approved plan document submitted under the pre-approved plan program administered by the Internal Revenue Service (IRS) and that will be considered by the IRS for purposes of issuing opinion letters.
The IRS has released updates of Publication 590-A, Contributions to Individual Retirement Arrangements, and Publication 590-B, Distributions from Individual Retirement Arrangements. The IRA publications have been updated to reflect the SECURE Act, signed into law in December 2019.
Tip of the DayPay electronically . . . The old days of cutting a check to pay the IRS and make estimated payments is fading fast. If you're using your computer to do your return, you can pay electronically by just entering the bank routing number (a 9-digit number) and your bank account number in the software and you're done. Don't want the government to have your money any longer than necessary? You should be able to set the date of withdrawal of the funds to anytime up till the due date. The same is true for most states. If you're generating estimated taxes you should be able to set up automatic withdrawals on the due dates. You can also accomplish the same thing with just a few extra keystrokes by going to the Direct Pay page at IRS.gov.
March 9, 2020
NewsVictims of the severe storms, tornadoes straight-line winds, and flooding that began on March 3, 2020 in Tennessee may qualify for tax relief from the IRS. The President has declared that a major disaster occurred in the State of Tennessee. Following the recent disaster declaration for individual assistance issued by the FEMA, the IRS announced that affected taxpayers in certain areas will receive tax relief. Individuals and households who reside or have a business in Davidson, Putnam and Wilson 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 March 3, 2020, and before July 15, 2020, are granted additional time to file through July 15, 2020. The July 15, 2020 relief applies to the individual income tax returns due on April 15, 2020 and quarterly estimated income tax payments due on April 15, 2020, and June 15, 2020, and to quarterly payroll and excise tax returns normally due on April 30, 2020. It also applies to tax-exempt organizations, operating on a calendar-year basis, that have a 2019 return due on May 15, 2020. Among other things, affected taxpayers will also have until July 15, 2020 to make their 2019 IRA contributions. In addition, penalties on payroll and excise tax deposits due on or after March 3, 2020 and before March 18, 2020, will be abated as long as the tax deposits were made by March 18, 2020. Go to IRS announces tax relief for Tennessee victims of severe storms, tornadoes and flooding for more information and links to additional resources.
Innocent spouse relief was designed to relieve a spouse of joint liability on a tax return where the spouse had no knowledge of the reason for the deficiency and received no benefit from it. But what sounds straightforward can get complicated. In Rick E. Jacobsen (U.S. Court of Appeals, Seventh Circuit) the Appeals Court affirmed a Tax Court ruling that the petitioner was not liable for the unreported income of his former wife for the first year at issue, but once he learned of her embezzlement on her arrest, he had knowledge of the income in the second year. The Tax Court granted him relief for the first year, but not for the second. The Appeals Court found the Tax Court had not unduly weighed knowledge of the income over other factors and not abused its discretion.
Tip of the DayCashing in life insurance or annuity? . . . Doing so can result in taxable income. How much of what you'll get will be taxable can usually be determined only by the insurance company. But it can be a heavy hit and a bad surprise at tax time. You can, however, trade a life insurance contract, an annuity, an endownment contract or a qualified long-term care insurance contract for a similar contract in another company. The trade will be defer taxes until you take the money out. You may have some other exchange options. You'll receive a Form 1099-R, with a code 6 in Box 7, indicating a Section 1035 exchange.
March 6, 2020
NewsA bipartisian bill has been introduced in the Senate that would extend and expand energy-related tax incentives such as increasing the per-manufacturer limit on the credit for electric vehicles, the credit for renewables such as wind and solar, geothermal, energy storage and waste heat, and expand and extend the credits for energy efficient buildings.
For many years now Form 1040 has contained a question on Schedule B relating to foreign bank accounts, specifically, did you have a financial interest in or signature authority over a financial account located in a foreign country. It's pretty straightforward. An account with $5 has to be reported. If the account is larger than $10,000 you have to file a special form (FBAR) to report the interest. In Dennis R. Ott (U.S. District Court, E.D. Michigan) the taxpayer had a foreign bank account with balances that had aggregate highest balances of $1.9 million, $770,000 and $1.76 million for the three years at issue. The box on Schedule B was checked "NO" (the default in the software the return prepared used) and no FBAR was filed for the three years. The IRS claimed that the taxpayer had constructive knowledge of his reporting requirements by signing his tax retutns which included a reference to the FBAR on Schedule B and the naming his sister's Canadian address on the accounts was an act of concealment. The taxpayer argued that he was simply negligent and there was no will failure to file the FBARs. The Court examined the definition of willfulness. The Court held that the taxpayer he clearly ought to have known that a filing requirement was not met and that he was in a position to find out for certain very easily. The Court agreed with the IRS the taxpayer willfully failed to file the FBAR and agreed with the IRS penalties for the three years in the amount of $988,245.
Tip of the DayWorthless securities . . . Stocks, stock rights, and bonds that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. This will affect your holding period to determine if its short term or long term. Worthless securities also include securities that you abandon. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it.
March 5, 2020
NewsJust because you inherit and asset doesn't mean there's no income tax consequences. If the deceased purchased the asset with after tax money, there's no income tax. But if the asset was purchased with pre-tax money, there will be income tax to pay. In Richard Essner (T.C. Memo. 2020-23) inherited an IRA and did not report tax on the distributions. Investments in IRAs are generally made with pre-tax funds. That is, you have no basis in the IRA because you got a deduction on the contribution. The Court found the taxpayer could not substantiate that any part of the IRA represented his late father's original investment. The Court held the distributions were fully taxable. In a second issue, the taxpayer argued that the IRS should be barred from assessing a proposed deficiency for one year because the Service violated Sec. 7605(b) by conducting a second inspection of the taxpayer's books and records. Section 7605(b) provides: "No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary." The taxpayer contended that because both the AUR program (which automatically matches 1099s with returns and sends notices where income such as dividends, interest, etc. aren't reported) and an IRS Officer examined his 2014 return, the IRS violated Sec. 7605(b). The Court noted that under Sec. 7605(b) the AUR program's matching of third-party-reported payment information against the taxpayers already-filed 2014 return was not an examination of his records.
Tip of the DayIRA distribution penalty . . . Distributions from IRAs and other qualified retirement plans before age 59-1/2 are generally subject to a 10-percent excise tax or penalty. But there are a number of exceptions. The exceptions include a qualified disaster distribution (a distribution to cover expenses in certain designated declared disaster situations), a qualified HSA funding distribution from an IRA (other than a SEP or SIMPLE IRA), a distribution from a traditional or SIMPLE IRA that was converted to a Roth IRA, a rollover from a qualified retirement plan to a Roth IRA and a distribution of certain excess IRA contributions. There are a number of others, but these are recent additions.
March 4, 2020
NewsUnconventional IRA investments--such as real estate, certain precious metals, private equity, and virtual currency--can introduce risks to account owners who assume greater responsibility for navigating the complex rules that govern tax-favored retirement savings. IRS enforces tax rules relating to IRAs and can assess additional taxes. The General Accountability Office (GAO) was asked to examine the challenges associated with enforcing rules governing IRAs invested in unconventional assets. This report examines (1) the extent to which IRS offers guidance to help taxpayers understand the rules governing unconventional IRA assets; and (2) the challenges IRS faces in enforcing those rules. GAO identified and analyzed IRS information to help taxpayers understand four compliance areas. GAO reviewed IRS analysis of nonmarket IRA assets reported by IRA custodians, and IRS audit procedures and training materials; and interviewed relevant IRS officials to identify enforcement challenges. The GAO recommended that IRS (1) assess options for updating its IRA publications to provide more information for taxpayers with unconventional assets, (2) evaluate the feasibility of requiring disclosure for high-risk IRA asset types associated with abusive tax schemes, and (3) develop auditor resources (such as training materials or job aids) that explain how IRAs with unconventional assets can generate unrelated business income tax. IRS generally agreed with GAO's recommendations. To see the complete report, go to www.gao.gov/assets/710/704168.pdf.
Tip of the DayHelp your tax preparer . . . More than a few taxpayers go to their tax preparer with a pile of unorganized papers and then complain about the bill. Many preparers base their fees on a formula (e.g., a certain amount per rental property, per form, etc.) but don't ignore the time involved. Most preparers who have been doing taxes for a while realize many individuals don't understand all the paperwork they receive, but virtually anyone can put the material in some order. Here are some tips.
March 3, 2020
NewsRevenue Procedure 2020-17 (IRB 2020-12) exempts from foreign trust information reporting requirements certain U.S. individuals' transactions with, and ownership of, certain tax-favored foreign trusts that are established and operated exclusively or almost exclusively to provide pension or retirement benefits, or to provide medical, disability, or educational benefits. In addition, this revenue procedure provides procedural guidance for certain eligible individuals on how to request abatement of penalties that have been assessed, or refunds of penalties that have been paid, for a failure to comply with the information reporting requirements regarding these foreign trusts.
Congress provided the IRS with tools to address taxpayers identified as submitting fraudulent or reckless refundable credit claims. These tools include the authority to assess the erroneous refund penalty and require taxpayers to recertify that they meet refundable credit eligibility requirements for credits claimed on a return filed subsequent to disallowance of a credit, and the ability to apply two-year or 10-year bans on taxpayers who disregard credit eligibility rules. The Treasury Inspector General for Tax Administration (TIGTA) performed a review that found that the IRS did not always recertify the eligibility of taxpayers who received Earned Income Tax Credit (EITC) before allowing the credit. The audit was initiated to evaluate the IRS's use of available tools to deter taxpayers from repeatedly claiming erroneous or fraudulent refundable tax credits. TIGTA found the IRS does not use the tools provided by Congress to the extent possible to address erroneous credit payments. This is despite the IRS's estimate that 25 percent ($18.4 billion) of the EITCs for Fiscal Year 2018 are likely improper, as well as nearly 33 percent ($8.7 billion) of Additional Child Tax Credit payments in Tax Years 2009 through 2011, and more than 31 percent ($5.3 billion) of American Opportunity Tax Credit payments during Tax Year 2012. While the IRS assessed the erroneous refund penalty on 3,190 returns, TIGTA identified 494,555 taxpayers with more than $2.6 billion in withholding and refundable credits that were disallowed for Tax Years 2015, 2016, and 2017 for which almost $534.7 million in potential penalties was not assessed. TIGTA also identified 289,059 returns processed during Calendar Year 2018 for which the IRS did not verify the taxpayers' eligibility before recertifying them to receive a refundable credit. These taxpayers received more than $532 million in refundable credits. In addition, recertification indicators were not placed on 6,259 Tax Year 2017 tax returns for which the IRS disallowed $6.2 million in refundable credits as part of its Automated Questionable Credit program. IRS criteria also allows taxpayers to claim erroneous refundable credits for multiple years before a two-year ban is placed on their tax account. TIGTA identified 3,934 taxpayers who claimed more than $12.9 million in credits in Tax Year 2017 and had the same credit disallowed in multiple prior tax years. TIGTA estimates it costs the IRS nearly $1.1 million to re-audit taxpayers who have previously been denied a refundable credit. To read the complete report, go to www.treasury.gov/tigta/auditreports/2020reports/202040008fr.pdf.
Tip of the DayCheck the box . . . There's a new question on this year's Form 1040--In 2019 did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? It joins a number of other questions such as those associated with foreign bank accounts, amount at risk (on Schedules C and E), whether or not you were required to file Forms 1099 (on Schedules C and E), questions concerning business use of a vehicle (numerous forms), etc. The questions should not be overlooked or taken lightly. You're signing the tax return under penalty of perjury--and that includes the check the box questions. The consequences of a mistake may vary. If you're preparing your own return, check the instructions carefully, and, if still not sure, ask a tax professional. If you're using a paid preparer, he or she should ask pertinent questions. Make sure you answer carefully.
March 2, 2020
NewsSection 4980H creates two separate assessable payments, one that is applicable when an Applicable Large Employer ("ALE") fails to offer its full-time employees ("FTE") essential minimum coverage, the other that is applicable when the ALE offers FTEs essential minimum coverage, but at a rate that is not considered affordable to them. The ALE is not liable for the Section 4980H(a) payment until at least one FTE is certified as qualified for the premium tax credit (PTC). Section 4980H(b) imposes a separate payment on ALEs that offer insurance that is unaffordable so that one or more FTEs are certified to the employer as being qualified for PTC. In recent Field Attorney Advice (20200801F) the IRS held that because there is no return that contains the necessary date to calculate the amount of ESRP (Employer Shared Responsibility Payment) that could be owed by the employer, there is no statute of limitations for the ESRP under Section 6501(a).
The IRS has announced (Rev. Rul. 2020-07) that interest rates on under- and overpayments for the quarter beginning April 1, 2020 will remain the same. The rate will be 5 percent for overpayments (4 percent for corporations), 5 percent for underpayments, and 7 percent for large corporate underpayments.
Tip of the DayCoronavirus and business . . . How bad will this get? No one can say. There's no reason to panic or to go to extremes, but you should be doing some planning. The steps you take to protect your business will depend on your industry, your product sources, your workforce, etc. Some businesses may have to take drastic steps if this worsens; some may have to do little. Here are some steps you can take that won't lock you into a strategy and that won't cost much, if anything.
There are sure to be other options depending on your situation. Time spent now won't be wasted if the virus never hits your area. Some of the measures can be used in any emergency, others can be used for the next flu season.
February 28, 2020
NewsUnconventional IRA investment--such as real estate, certain precious metals, private equity, and virtual currenc--can introduce risks to account owners who assume greater responsibility for navigating the complex rules that govern tax-favored retirement savings. IRS enforces tax rules relating to IRAs and can assess additional taxes. The Government Accountability Office was asked to examine the challenges associated with enforcing rules governing IRAs invested in unconventional assets. The report (GAO-20-210) examines (1) the extent to which IRS offers guidance to help taxpayers understand the rules governing unconventional IRA assets; and (2) the challenges IRS faces in enforcing those rules. GAO identified and analyzed IRS information to help taxpayers understand four compliance areas. GAO reviewed IRS analysis of nonmarket IRA assets reported by IRA custodians, and IRS audit procedures and training materials; and interviewed relevant IRS officials to identify enforcement challenges. GAO is recommending that IRS (1) assess options for updating its IRA publications to provide more information for taxpayers with unconventional assets, (2) evaluate the feasibility of requiring disclosure for high-risk IRA asset types associated with abusive tax schemes, and (3) develop auditor resources (such as training materials or job aids) that explain how IRAs with unconventional assets can generate unrelated business income tax. IRS generally agreed with GAO's recommendations.
Tip of the DayStock market fears . . . The market is down over 10 percent from its highs, but that's not a reason to panic. If you're in for the long term, and you should be, the market will recover. It could be in few days, it could be months. It could get worse before it gets better. But there's one thing for sure--no one actually knows. You'd feel dumb if you bailed today, paid tax on any gains, only to see the market recover. No one knows how the Corona virus will affect the U.S. or business, but it's something the market will recover from. People will continue to use banks, buy groceries, need clothing, etc. Activity may be subdued, but in many areas pent-up demand caused by the virus may come close to making up for an intermittent downturn. One side effect could be more manufacturing coming back to the U.S. from China. If you've got stocks with good long-term prospects, especially those paying a dividend, and you're investing for the long term, there's no reason to overreact. On the other hand, if you're holding second tier stocks that could be vulnerable, you should review your holdings. Talk to your investment advisor.
February 27, 2020
NewsIn another conservation easement case (Railroad Holdings, LLC, Railroad Land Manager, LLC, Tax Matters Partner; T.C. Memo. 2020-22)) the taxpayer made a conservation easement deed in favor of a charitable organization. The deed provided that, if the easement were ever extinguished and proceeds were to be allocated between the taxpayer and the charity, then the charity "shall be entitled to a portion of the proceeds at least equal to the fair market value of the Conservation Easement . . . as of the date of this Conservation Easement", rather than being entitled to a proportionate share of the proceeds. The taxpayer claimed a charitable contribution deduction for the contribution, and Rthe IRS disallowed the deduction. The Court held the taxpayer was not entitled to the deduction because, as a result of the extinguishment provision, the conservation purpose of the easement was not "protected in perpetuity" within the meaning of Sec. 170(h)(5)(A).
Tip of the DayFile now and pay later . . . Can't pay what you owe with the return? You can still file and delay payment to April 15. If you're paying by check, just mail the voucher and the check by the 15th. If you're paying electronically you can have the money withdrawn from your bank account at any time (but no later than the due date of the return). Filing now and paying later makes even more sense if you're getting a refund on either your state or federal return. Get the refund on one and delay paying the other.
February 26, 2020
NewsYou may be able to receive a charitable contribution deduction if you contribute an easement to a qualified organization. But that easement must be granted in perpetuity. In Nathaniel A. Carter and Stella C. Carter; Ralph G. Evans (T.C. Memo. 2020-21) a partnership (of which the taxpayers were partners) granted and easement that restrict the use of the covered property and generally prohibited construction or occupancy of any dwellings. However, the partnership retained the right to build single-family dwellings in specified "building areas", the locations of which were to be determined, subject to the charitable organization's approval. The Court held that because the restrictions applicable within the building areas permitted uses that are antithetical to the easement's conservation purposes, those restrictions are disregarded in determining whether the easement is included in the definition of "qualified real property interest" by reason of Sec. 170(h)(2)(C) (the requirement that the property be granted in perpetuity); consequently, the easement is not described in that section and the taxpayers are not entitled to charitable contribution deductions for the partnership's conveyance to the charity of a partial interest in the underlying property.
Tip of the DayHome destroyed or condemned . . . You can't defer gain on the disposition of a home even if you have replacement property. There's an important exception to that rule. If the reason for the disposition was because the property was condemned or destroyed (e.g., by a fire, hurricane, etc.) if you use any insurance proceeds to purchase a new home, you can defer gain on the disposition. In addition, in such situations the holding period for the old home can be "tacked onto" the holding period for the new one. For example, your home was destroyed by a tornado. You only owned and lived in the home nine months before the casualty. You purchase a new home and live in it for 18 months when you sell it. The new home meets the 2 year ownership and use test.
February 25, 2020
NewsThe IRS has issued proposed regulations (REG-100814-19) on the business expense deduction for meals and entertainment following changes made by the Tax Cuts and Jobs Act (TCJA). The 2017 TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation. It also limited the deduction for expenses related to food and beverages provided by employers to their employees. These proposed regulations address the elimination of the deduction for expenditures related to entertainment, amusement or recreation activities and provide guidance to determine whether an activity is considered to be entertainment. The proposed regulations also address the limitation on the deduction of food and beverage expenses. The proposed regulations affect taxpayers who pay or incur expenses for meals or entertainment. These proposed regulations generally follow Notice 2018-76.
The IRS has released the updated Publication 3, Armed Forces' Tax Guide. It contains useful filing tips for any member of the military, including reservists and the National Guard, regardless of whether they are stationed in the U.S. or abroad. Among other things it describes the provision allowing armed forces reservists to deduct their reservist-related travel expenses, regardless of whether they itemize their deductions. It also describes the moving expense deduction still available to active-duty members of the military in connection with a change of station. The publication covers the special benefits available to those serving in a combat zone, including the full or partial exclusion of combat pay and special rules for determining the IRA contribution limit. Also included in this publication are special rules for figuring the Earned Income Tax Credit for low-and moderate-income workers and families and the extended deadlines available for filing returns, paying taxes and claiming refunds.
Tip of the DayUsing computer software to prepare your return? . . . If you prepare your return using tax software you may have to file the return electronically. That's what at least one state requires. Check the rules for your state. Another point. It's often far easier to "plug" an entry rather than entering a number on a lower-level worksheet and having the software compute the entry on the form. But entering the info on the worksheet may add vital information that could be used in other ways such as computing any limitations or entering the number correctly on a state return. In more than a few cases it can generate an error message that will prevent you from filing electronically.
February 24, 2020
NewsRevenue Procedure 2020-13 (IRB 2020-11) provides procedures applicable to a taxpayer in a farming business regarding the application of Sec. 263A of the Code. Prior to the enactment the Tax Cut and Jobs Act (TCJA), a taxpayer in a farming business could elect under Sec. 263A(d)(3) to have Sec. 263A not apply to certain plants produced by the taxpayer’s farming business. The TCJA added new Sec. 263A(i) to the Code, which provides that Sec. 263A does not apply to a taxpayer, other than a tax shelter (as defined in Sec. 448(d)(3)), for a taxable year in which the taxpayer qualifies as a small business taxpayer by satisfying the gross receipts test in Sec. 448(c) of the Code. This revenue procedure provides the exclusive procedures for a taxpayer that qualifies for the Sec. 263A(i) small business taxpayer exemption to revoke its prior election under Sec. 263A(d)(3) and apply the exemption under Sec. 263(i) in the same taxable year. In addition, this revenue procedure provides the exclusive procedures for a taxpayer that qualified for and wishes to make an election under Sec. 263A(d)(3) in the same taxable year that it no longer qualifies for the exemption under Sec. 263A(i).
Notice 2020-13 (IRB 2020-11) provides for adjustments to the limitation on housing expenses for purpose of Section 911 of the Code. These adjustments are made on the basis of geographic differences in housing costs relative to housing costs in the United States. Further, if the limitation on housing expenses is higher for taxable year 2020 than the adjusted limitations on housing expenses provided in Notice 2019-24, qualified taxpayers may apply the adjusted limitations for taxable year 2020 to their 2019 taxable year.
Tip of the DayIRS Publication 17 released . . . The IRS has finally released this essential publication with guidance for doing your 2019 return. If you've got a tax question while preparing your return the first place to go is the instructions for the form or schedule; the second place is generally Publication 17. For more in-depth information, the IRS publications on specific topics (e.g., Publication 503, Child and Dependent Care Expenses) are the next source.
February 21, 2020
NewsThe IRS is reminding farmers and fishermen who chose to forgo making quarterly estimated tax payments that they must file their 2019 Form 1040 along with a payment for all taxes owed by Monday, March 2, 2020. This special rule normally applies to taxpayers whose farming or fishing income was at least two-thirds of their total gross income in either the current or the preceding tax year. Farmers and fishermen can avoid the estimated tax penalty by both filing and paying all taxes due by March 2. Those who chose to make an estimated tax payment, on or before Jan. 15, 2020, can instead wait and file by the regular April 15 deadline.
Tip of the DayIRA contributions . . . Under prior law once you reached age 70-1/2 by the close of a year you could no longer make contributions to a traditional IRA. The SECURE act passed at the end of last year removed that restriction. Now, you can contribute to an IRA at any age as long as you have the requisite amount of earned income. CAUTION. There's a catch here. The provisions applies to contributions made for taxable years beginning after December 31, 2019. That means if you reached age 70-1/2 by the end of last year you can't make a contribution for 2019. You can, however make a deductible or nondeductible contribution for tax year 2020.
February 20, 2020
NewsNotice 2020-12 (IRB 2020-11) addresses the definition of “beginning of construction” for purposes of the carbon oxide sequestration credit under section 45Q. The Notice provides guidance to help businesses determine when construction has begun on a qualified facility or on carbon capture equipment that may be eligible for the section 45Q credit.
Revenue Procedure 2020-12 (IRB 2020-11) provides a safe harbor for partnerships to make valid allocations of the carbon oxide sequestration credit under section 45Q. The safe harbor is similar to those developed for partnerships receiving the wind energy production tax credit and the rehabilitation credit. The safe harbor simplifies the application of section 45Q credit rules to partnerships able to claim the credit.
Tip of the DayRefund myths . . . The IRS delivered a news release (IR-2018-20) debunking a number of myths about refunds. Of particular interest is the fact that more than 90% of the refunds are issued in less than 21 days, but some may be delayed, sometimes for security reviews to help protect against identity theft and refund fraud. Another myth is that there are special ways to get a better idea of a refund date. The IRS indicated that the best way was to go to Where's My Refund at IRS.gov or getting the mobile app at IRSgo mobile app. Tax professionals don't have a special way of getting the answer, and calling the IRS or requesting a tax transcript won't help either. One thing is certain. Filing electronically and having a refund direct deposited is the faster way to get your money.
February 19, 2020
NewsIRS Tax Tip 2020-20 contains a list of common errors taxpayers make when preparing their own return. The errors include missing or inaccurate Social Security numbers, misspelled names, incorrect filing status, math mistakes, figuring credits or deductions, incorrect bank account numbers (for direct deposit of refunds), unsigned returns, and filing with an expired individual tax identification number. (Using tax software to prepare your return can avoid many of these errors.)
In order to fight the IRS in Tax Court the Court must have jurisdiction. In Hubert W. Chang (T.C. Memo. 2020-19) the taxpayer missed the deadline for requesting a collection due process (CDP) hearing with respect to outstanding liabilities. He also failed to timely request an equivalent hearing the IRS offered. The Court noted that in order to show that the Court has jurisdiction, petitioner must show that he timely requested CDP hearings with respect to the determination notices. The Court determined the request was untimely and held it did not have jurisdiction to try the case.
Tip of the DayRenting personal property? . . . If you're renting real property such as an office building, house, etc. the income and expenses are reported on Schedule E. But the rules are different for personal property. You report the income on Line 8 of Schedule 1 of your Form 1040. Expenses associated with the rental should be reported on Line 22 of Schedule 1.
February 18, 2020
NewsThe IRS has announced (IR-2020-32) that the Service and its Security Summit partners are calling on tax professionals and taxpayers to use the free, multi-factor authentication feature being offered on tax preparation software products. Already, nearly two dozen tax practitioner firms have reported data thefts to the IRS this year. Use of the multi-factor authentication feature is a free and easy way to protect clients and practitioners' offices from data thefts. Tax software providers also offer free multi-factor authentication protections on their Do-It-Yourself products for taxpayers. Multi-factor authentication means returning users must enter their username/password credentials plus another data point that only they know, such as a security code sent to their mobile phone. For example, thieves may steal passwords but will be unable to access the software accounts without the mobile phones to receive the security codes. The IRS also reminds tax professionals that they can track the number of returns filed with their Electronic Filing Identification Number (EFIN) on a weekly basis.
The IRS takes the deposit of employment taxes most seriously. That's because the amounts withheld from the employees never belonged to the taxpayer (they're called trust fund taxes). In Northside Carting, Inc. (T.C. Memo. 2020-18) the company owed a significant balance on its filed Forms 941 for three quarters. The taxpayer requested a collection due process (CDP) hearing with respect to a notice of federal tax lien. At first the taxpayer sought an installment agreement. The IRS settlement officer (SO) informed the taxpayer that it would need to provide certain financial information, a Form 656, Offer In Compromise or a proposal for an installment agreement, as well as signed copies of unfiled tax returns and proof of timely deposit of all federal employment taxes for the current quarter. Subsequently, the taxpayer indicated it wished an installment agreement. The SO requested additional financial data and signed quarterly tax returns. The taxpayer provided some, but not all, the requested information. The taxpayer then indicated it would pay in full and sought additional time to do so. The taxpayer then asked the IRS to consider collection alternatives and several months later the SO rejected an installment agreement that the taxpayer had not provided all the requested financial information and was not in compliance with its current filing and payment obligations. The taxpayer petitioned the Tax Court claiming, among other things, that the SO did not fully consider an offer in compromise, the taxpayer's request for penalty abatement, and that the IRS agreed to a settlement and then did not follow through. The Court noted that it has consistently held that it is not an abuse of discretion for an Appeals officer to reject collection alternatives and sustain collection action where the taxpayer has failed, after being given sufficient opportunities, to supply the necessary information. The Court also noted the requirement of current compliance as a condition of executing an installment agreement ensures that current taxes are paid and avoids the risk of pyramiding liability. The SO could have declined an installment agreement for that reason alone. The Court said the SO in this case worked constructively with petitioner and its representatives for more than six months in an effort to achieve a collection alternative. But an SO is not obligated to negotiate indefinitely. The Court found no abuse of discretion by the IRS.
Tip of the DayState returns . . . If you're doing your own return and using tax preparation software, you should be aware that most items carry automatically to your state return. That's one of the advantages of computers. But, depending on the state, the software is unlikely to handle all the special items. Some require an entry on the state return. That's especially true for nonresident and part-year resident returns. Check the instructions for any lines that require a special entry. The special treatment varies by state. New York has an unusual number of modifications, Maryland, far less. And keep in mind that almost every state with an income tax has special credits and deductions.
Copyright 2020 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