Small Business Taxes & ManagementTM--Copyright 2018, A/N Group, Inc.
For the full text of new Revenue Rulings, Revenue Procedures,
Regulations, etc. go to:
Internal Revenue Bulletins
For a Tax Court Case:
Tax Court Cases
For IRS News Releases (current month):
News Releases and Fact Sheets
For Fact Sheets:
For Letter Rulings and Technical Advice Memoranda:
IRS Written Determinations
For IRS Forms and Publications:
Forms and Publications
February 22, 2019
NewsThe IRS is always on the lookout for hobby loss activities. That's because the dollar amounts can be substantial and the Service has a good track record of winning. Anything to do with horses appears to be suspect. That's the issue in many of the cases. In a case decided in May 2018 (Cecilia M. Hylton, U.S. Court of Appeals, Fourth Circuit) the Court sided with the Tax Court in finding the taxpayer's quarter-horse activity was not engaged in primarily for profit. The Court noted that despite the taxpayer's expertise in horse breeding and the considerable time spent in the activity she incurred significant losses over a number of years (the activity did not turn a profit) yet did not seek financial advice. The Court noted the activity had significant recreational aspects. The taxpayer petitioned the U.S. Supreme Court for review. The Supreme Court has denied the petition for certiorari.
Tip of the DayQualified dividends . . . If you're entering information on dividends in your tax software, be sure to do so carefully. Dividends on most U.S. corporations are qualified and are taxed at lower capital gain rates. Generally you don't have enough information to determine the status so the company or your broker will identify them as qualified on your 1099-DIV or substitute 1099. There's one other requirement--you must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
February 21, 2019
NewsThere is a trend to a greater number of workers in the "gig economy". That may be an issue for the IRS because self-employed taxpayers must pay the self-employment tax, about 15.3% of the first $132,900 of self-employment income and self-employed taxpayers can claim expenses against that income. The IRS last estimated the self-employment portion of the annual Tax Gap at $69 billion. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit because the gig economy has since emerged and grown considerably, with thousands of new taxpayers each year being responsible for self-employment taxes. This audit was started to evaluate the self-employment tax compliance of taxpayers who earn income in the gig economy and assess the IRS’s processes and controls that identify and address noncompliance with self-employment tax requirements. TIGTA reviewed cases in the IRS’s Automated Underreporter (AUR) program for taxpayers who work in the gig economy and who have discrepancies between what is reported on their income tax returns and payments reported to the IRS on Tax Years 2012 through 2015 Forms 1099-K, Payment Card and Third Party Network Transactions, by payers. The review was limited to nine commonly recognized gig economy payer companies and identified 264,346 cases with potentially underreported payments included on Form 1099-K. The number of discrepancies involving Forms 1099-K from these gig economy payers increased 237 percent from 2012 to 2015. Like other types of AUR inventory, many cases were not selected to be worked by the AUR program due to the large volume of discrepancies that were identified. Specifically, 59 percent of taxpayers were not selected to be worked by the AUR. This includes 2,817 taxpayers with potential underreporting of their Form 1099-K income in all four tax years, involving $2.7 billion in potentially underreported payments included on Form 1099-K. AUR employees removed thousands of cases from inventory without justification or with justification that was inaccurate. Many of the cases that were worked included errors by IRS examiners. Also, AUR employees rarely refer questionable deductions claimed by taxpayers on amended returns filed in response to receiving a notice from the AUR program to the Examination function. Treasury Regulations do not require certain gig economy businesses to issue Form 1099-K unless workers earn at least $20,000 and engage in at least 200 transactions annually. Consequently, many taxpayers who earn income in the gig economy do not receive a Form 1099-K; therefore, their income is not reported to the IRS. When income is not reported to the IRS, taxpayers are more likely to be noncompliant. TIGTA recommended that the IRS take several corrective actions to improve how the AUR program addresses self-employment tax noncompliance, selects cases, and conducts quality reviews. Additionally, TIGTA recommended that the IRS Office of Chief Counsel develop and issue guidance to help clarify current third-party reporting regulations and work with the Department of the Treasury Office of Tax Policy to pursue regulatory or legislative change to reduce the information reporting gap. The IRS agreed or partially agreed with nine of TIGTA's 11 recommendations. Management’s disagreement with two recommendations was mainly due to other work priorities and the cost and difficulties associated with making changes to IRS systems. TIGTA contends that the implementation of these recommendations would be in the best interest of improving taxpayer compliance. To see the full report, go to www.treasury.gov/tigta/auditreports/2019reports/201930016fr.pdf.
Tip of the DayAuto loan deliquencies up . . . And significantly so. There are one million more deliquent loans than at the end of 2010 when the overall rates were at their worst. While their may be a number of reasons for the high rate other than an impending financial crisis (cars more expensive, buyers buying more car than they should, more loans to subprime borrowers, etc.) it is disturbing and should not be ignored. It's important to remember that many individuals rely on a car for transportation and having a vehicle repossessed could leave many individuals without a way to get to work, shop, etc. It's certainly not a preferred way to reduce cash outflow. This could be a sign of distress in the overall economy, and is a factor for business owners to watch.
February 20, 2019
NewsThe IRS is reminding farmers and fishermen who chose to forgo making quarterly estimated tax payments that they must file their 2018 Form 1040 along with a payment for all taxes owed by Friday, March 1, 2019. 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 choosing not to file by March 1 should have made an estimated tax payment by Jan. 15 to avoid a penalty.
The IRS has released Publication 5035 reporting information on partnership filings. The first, IRS Publication 5035 The Partnership Returns Line Item Estimates (Publication 5035) presents estimates of frequencies of taxpayer entries recorded on the applicable lines of the forms and schedules filed with partnership returns. This publication also contains corresponding population estimates of dollar amounts recorded on those lines (as applicable). 2010 was the first year of availability for this data. The data is for 2016, the latest year available.
Tip of the DayFind an error on your K-1? . . . It does happen. It could be an incorrect allocation of income, the wrong amount for a distribution to you, or any one or more of the dozens of items that could be on a K-1 for a partnership or S corporation. If you don't report what's on the K-1 you could be liable for a penalty if audited. The correct approach is to notify the partnership or corporation of the error and get them to correct it. Then make sure they send a correct copy to the IRS (at the top of the K-1 there's a box to check for an amended K-1). If you can't reach the entity, they don't agree with the error, or they refuse to file an amended K-1, you'll need to file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request.
February 19, 2019
NewsDue to the government shutdown, the processing of renewals for enrolled agents whose enrollment expires on March 31, 2019, will be delayed. The IRS is automatically extending enrollment card expiration for the current renewal cycle which includes all enrolled agents with social security numbers ending in 0, 1, 2, or 3. The deadline for submitting timely renewals was January 31, 2019. All renewal applications will be worked on a first in, first out basis. Enrolled agents with social security numbers ending in 0, 1, 2, or 3 who have not yet submitted a renewal should do so immediately at Pay.gov. For more information, go to www.irs.gov/tax-professionals/enrolled-agent-news.
Tip of the DayReport all income . . . Just because you didn't get a 1099 from that two-day job doesn't mean you don't have to report the income. There's no threshold. Worked one hour for $15, you have to report the income. And you shouldn't net any expenses against the income. For example, you don't usually sell parts without installing them, but for a good customer you sell him a part for $600 that cost you $575. Report the $600 as income and the $575 as cost of goods sold. The IRS has certain rules on reporting expenses.
February 15, 2019
NewsIncome from all sources is generally taxable. There are some limited exclusions. The courts narrowly construe exclusions from income. Settlement proceeds from legal action are excludable under Sec. 104(a)(2) only if the settlement is paid on account of personal physical injuries or physical sickness. In Daniel R. Doyle and Lynn A. Doyle (T.C. Memo. 2019-8) the Court noted for a taxpayer to fall within this exclusion, he must show that there is “a direct causal link between the damages and the personal injuries sustained. Here the taxpayer sued a former employer for emotional distress as a result of being fired. The employer settled and gave the taxpayer a 1099-MISC, reporting the amount of the settlement. The Court held that while the taxpayer may have had physical symptoms including nausea, vomiting, headaches, backaches--these are included in the definition of emotional distress when they result from such distress. The Court noted that the Code specifically says that “emotional distress shall not be treated as a physical injury or physical sickness." The Court found the settlement payments were not excludable from the taxpayers' income. The taxpayers did escape the accuracy-related penalty by showing they relied on competent professional advice. In addition, there was no evidence of supervisory approval for the penalties.
Tip of the DayElecting slower depreciation . . . Under the new law you're automatically entitled to claim 100 percent bonus depreciation in the year of acquistion of most tangible personal property assets. For example, your company purchases a new forklift for $50,000, you can claim Sec. 179 expensing and expense the full $50,000 in the year of purchase or take $50,000 of depreciation using the 100 percent bonus depreciation. While it appears both options produce the same result, there are some differences. But there are other considerations. What if your income, before any depreciation on the forklift, is only $15,000. Taking the full depreciation will only create a loss that can be carried forward. For various reasons, you may or may not want to do that. It may make more sense to level your income to keep you in the lower brackets (assuming you're doing business as an S corporation, sole proprietorship, etc.). There are other considerations. If taking the bonus depreciation will eliminate much, if not all, your income, discuss electing out of bonus depreciation with your accountant.
February 14, 2019
NewsThe IRS has issued Rev. Proc. 2019-13 that provides a safe harbor method of determining depreciation deductions for passenger automobiles that qualify for the 100-percent additional first year depreciation deduction and that are subject to the depreciation limitations for passenger automobiles. In general, the section 179 and depreciation deductions for passenger automobiles are subject to dollar limitations for the year the taxpayer places the passenger automobile in service and for each succeeding year. For a passenger automobile that qualifies for the 100-percent additional first year depreciation deduction, TCJA increased the first-year limitation amount by $8,000. If the depreciable basis of a passenger automobile for which the 100-percent additional first year depreciation deduction is allowable exceeds the first-year limitation, the excess amount is deductible in the first taxable year after the end of the recovery period.
If you can't pay the IRS, it's generally in their best interest to work with you so they collect either the full amount over time or at least some of the amount owed. Settlement officers (SO) will often extend deadlines, but you've got to work with them. In Steven Samaniego (T.C. Memo. 2019-7) in addition to his 2012-2013 liabilities, he had outstanding liabilities for 2007-2010. He had earlier requested an installment agreement for all open years, but had submitted an incomplete Form 433-A. That installment agreement was rejected. In response to the IRS's Final Notice of Intent to Levy the taxpayer requested a collection due process (CDP) hearing. The SO believed the taxpayer's request for a hearing was late, but offered him an "equivalent hearing". On July 29 the SO sent the taxpayer a letter scheduling a telephone conference for August 29 and informed the taxpayer to submit a new Form 433-A with supporting financial information and a copy of his wife's individual tax return for 2014 by August 15. The taxpayer submitted none of these documents and did not otherwise communicate with the SO before the hearing. The SO was still willing to consider a collection alternative for 2012 and 2013 but reminded the taxpayer he needed to submit the requested financial information. The SO agreed to extend the deadline for submitting the documents to September 12. Having received none of the documents 11 months later, the SO closed the case. The IRS issued a decision letter sustaining the levy. The Court noted a decision letter ordinarily does not constitute a “determination” within the meaning of Section 6330(d), and the Court normally lacks jurisdiction to consider a taxpayer's challenge to the outcome of an equivalent hearing. The Court noted that the taxpayer's request for the CDP hearing was timely. (The 30th day was a Saturday, so the due date of the request was Monday, the 25th.) The Court denied the taxpayer's petition finding the IRS demonstrated no abuse of discretion because the taxpayer failed to provide requested financial information and was given sufficient opportunities to do so. In addition, the taxpayer was not current in his tax filing obligation and the request for a collection alternative could have been rejected on that ground alone.
Tip of the DayChild tax credit . . . The standard deduction has increased but the exemptions are gone. On the other hand, the child tax credit is up to $2,000. Whether the changes are good or bad will depend on a number of factors, including the age of your children. A child qualifies for the child credit if he or she is your son, daughter, stepchild, foster child, half brother or sister or a descendant of any of them. In addition, the child has to be under age 17 at the end of 2018, the child lived with you for more than half the year, the child is claimed as a dependent on your return, and the child is a U.S. citizen, U.S. national, or U.S. resident alien. The credit is phased out for taxpayers with modified adjusted gross income of more than $400,000 (married, joint; $200,000 for all others). Check to make sure the credit shows up on line 12 of Form 1040. If not, and you're below the income thresholds, check to make sure you've entered all the information, and correctly, for your children. Failing to indicate the time they lived with you, have an incorrect age, etc. is likely to prevent the tax software from generating a credit. Also, be sure to double check the child's social security number. If that's incorrect, your refund may be held up.
February 13, 2019
NewsThe National Taxpayer Advocate Nina E. Olson released her 2018 Annual Report to Congress, describing challenges the IRS is facing as a result of the recent government shutdown and recommending that Congress provide the IRS with additional multi-year funding to replace its core 1960s-era information technology (IT) systems. The release of the National Taxpayer Advocate’s report was delayed by a month because of the government shutdown. Olson also released the second edition of the National Taxpayer Advocate’s “Purple Book,” which presents 58 legislative recommendations designed to strengthen taxpayer rights and improve tax administration. The largest section of the report, which identifies at least 20 of the most serious problems taxpayers face in their dealings with the IRS, is titled, “The Taxpayer’s Journey,” and is organized sequentially to track a taxpayer’s interactions with the tax system from start to finish. Among other issues, it addresses the ability of taxpayers to obtain answers to tax-law questions, return filing, notices, audits, collection actions and Tax Court litigation. The report also contains “road maps”--pictorial representations of the process.
Income from patents can be either ordinary income if the amounts are for use of the patent or long-term capital gain if the amounts are for the sale of the patent. In Anthony Meggs and Beth Meggs (T.C. Memo. 2019-5) the taxpayer relinquished a patent and reported the amount received as ordinary income but subsequently filed an amended return claiming it as a sale and a long-term capital gain. In order to qualify as a capital gain the transfer must consist of all substantial rights to the patent. The problem before the Court was that the transfer of the patnent was part of an agreement involving other payments. In addition, there was more than one issue of ambiguity in the documents. The Court was allowed to look beyond the document under Florida law and, with the testimony of the taxpayer and independent witnesses, held that the transfer of the patent qualified for capital gain treatment.
Tip of the DayRefund or owe? . . . The press is covering the story about the IRS report that refunds are down so far this year. But the story is more complicated. First, these are initial results and despite a good sample size, they could be skewed. Second, tax professionals knew that there would be winners and losers under the new law. And it depends very heavily on your particular situation. Third, it appears part of the problem could be the withholding tables, that is, not enough was withheld from employee paychecks. If you're usually a late filer, while there's no reason to panic, you shouldn't be booking that cruise just yet. If you do your own returns, put the info you have into the software and estimate missing information to get an idea of where you'll end up. If you use a professional, give him or her your info as soon as you have it. Missing a K-1 from that S corporation or from a publicly traded partnership? It won't take the preparer long to put that info in once you have it. Meanwhile they can ask any questions about and resolve any issues on the information you do have.
February 12, 2019
NewsKnowing the IRS or other creditors are after you, you can't "dissipate" assets by giving them to your children, spending them indiscriminately such as by throwing lavish parties, etc. In John F. Campbell (T.C. Memo. 2019-4) the taxpayer and his family moved to St. Thomas in the U.S. Virgin Islands and engaged an estate planning attorney to set up a family trust. Sometime after that the taxpayer made investments in real estate that proved unsuccessful. Subsequently, the taxpayer was audited and the IRS assessed a liability that was settled in Tax Court for some $1.1 million plus another $100,000 in an accuracy-related penalty. The taxpayer made an offer-in-compromise (OIC) of $12,603. The IRS rejected that offer, the settlement officer (SO) finding that the taxpayer's reasonable collection potential (RCP) was $1.499 million. The IRS's calculation included the "net realizable equity" in the trust of $1.493 million. The Appeals officer recommended the taxpayer increase his offer to $1.5 million. In the second supplemental notice the Appeals officer increased the taxpayer's RCP to more than $19.5 million. Included in those calculations were the dissipated funds used for investments between 2006 and 2010. The Court noted that when a taxpayer submits an OIC based on doubt as to collectibility, the guidelines consist of determining: (1) assets, including dissipated assets, (2) future income, (3) amounts collectible from third parties, and (4) assets available to the taxpayer but beyond the reach of the Government. But dissipated assets are to be included only in situations where it can be shown the taxpayer has sold, transferred, encumbered or otherwise disposed of assets in an attempt to avoid the payment of the tax liability” or otherwise used the assets “for other than the payment of items necessary for the production of income or the health and welfare of the taxpayer or their family, after the tax has been assessed or during a period up to six months prior to or after the tax assessment.” Normally there is a three-year look-back period. The look-back period includes the year that an OIC is submitted. An Appeals officer is allowed to look beyond the three-year period of the offer submission if the transfer of the asset(s) occurred within six months before or after the assessment of the tax liability. The Court noted that the problems the taxpayer had with his real estate investments were unforeseen and the transfer of assets to the trust occurred in 2004, six years before the assessment period look-back and 10 years before he made the OIC. The Court held that the trust assets were not available to the taxpayer, but beyond the reach of the Government. The Court found the Appeals officer abused her discretion.
Tip of the DayAvoid the President's Day rush . . . The IRS is expecting a surge in returns over the Presidents Day holiday weekend and advising taxpayers to avoid calling, but to use other means such as on-line services at the IRS.gov to handle your questions. For more information, see IR-2019-10. There's also a good chance your tax software provider will be getting an unusually large volume of calls.
February 11, 2019
NewsThe IRS has five webinars related to the new law for tax professionals:
Following the Tax Court's previous Opinion in R. Vento (T.C. Memo. 2018-32) holding that the taxpayers are not entitled to foreign tax credits under Sec. 901 for certain amounts paid to the U.S. Virgin Islands, the parties were ordered to submit computations for entry of decision under Tax Court Rule 155. In their computations the taxpayers took the position that the amounts at issue were deductible as State or local taxes under Sec. 164(a)(3), an argument they had not advanced at any prior point in the litigation. The taxpayers moved for leave to amend their petitions under Tax Court Rule 41(b)(1), setting forth another new legal argument and asserting that both new issues had been tried by consent. The taxpayers then filed a motion to reopen the record to permit the introduction of new evidence relating to their second new legal theory. The Court held that the taxpayers may not raise new issues in a Rule 155 proceeding, and their motion to reopen the record was denied. In addition, the Court held that decisions will be entered consistent with the IRS's Rule 155 computations. Renee Vento, et al. (152 T.C. No. 1)
Tip of the Day"Ghost" return preparers . . . The IRS is warning taxpayers about "ghost" preparers, those preparers who do not have a PTIN (Preparer Tax Identification Number) and don't sign the return, but tell the taxpayer to mail it to the IRS. They may also require payment for their services in cash and create income to qualify you for the earned income or other tax credits. In some states the preparer must register with the state and is required to take CPE courses unless they are CPAs, attorneys, or enrolled agents. For more information on "ghost" preparers and tips on choosing a preparer see IR-2019-09 and Choosing a Tax Professional and Understanding Tax Return Preparer Credentials and Qualifications.
February 8, 2019
NewsVictims of the earthquake that took place on Nov. 30, 2018 in Alaska may qualify for tax relief from the IRS. The President has declared that a major disaster occurred in the State of Alaska. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in certain areas will receive tax relief. Individuals who reside or have a business in the Municipality of Anchorage, Kenai Peninsula Borough and Matanuska-Susitna Borough 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 Nov. 30, 2018 and before April 30, 2019, are granted additional time to file through April 30, 2019. This includes 2018 individual income tax returns and payments normally due on April 15, 2019. It also includes the quarterly estimated income tax payments due on Jan. 15, 2019 and April 15, 2019 and the quarterly payroll and excise tax returns normally due on Jan. 31, 2019. In addition, penalties on payroll and excise tax deposits due on or after Nov. 30, 2018, and before Dec. 17, 2018, will be abated as long as the deposits were made by Dec. 17, 2018. If an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date that falls within the postponement period, the taxpayer should call the telephone number on the notice to have the IRS abate the penalty.
If the transaction is complicated, get good advice. In Lawrence P. Mann and Linda S. Mann (U.S. District Court, D. Maryland) the taxpayers purchased property with a house. Before moving in they decided they didn't want the house and decided to demolish it and build a new house on the property. They found a charitable organization that would "deconstruct" the house by removing fixtures, and other items of value which they would sell at the same time training workers. The organization advised the taxpayers they could claim a deduction for the salvaged items. The taxpayers sought to convey a separate interest in the house to the charitable organization through a private contract, but they never recorded that transaction in the land records. As a result, for tax purposes, under Maryland (where the house was located) law, the taxpayers did not properly sever the house from the property and transferred ownership of it to the organization. The taxpayers' donation was comparable to granting a license to the organization to access and use the house for salvage and training purposes. This is important because a taxpayer can claim a charitable contribution only for an undivided interest in property. For failing to make a valid transfer of an entire interes in real property, no deduction was allowed. Even if the contribution had passed the test, it would have failed because it lacked a qualified appraisal. The taxpayers had two appraisals, but both were based on the value of the home as a complete house. But the organization wanted the house only for deconstruction and workforce training.
Tip of the DayIt's annual report season . . . We're not talking about the financial reports from public companies, we're talking about annual reports required of your corporation, LLC, etc. Many states require corporations to file an annual report. Sometimes it's only a matter of listing the officers and signing the form along with a fee. The fees vary widely, but are unlikely to dent anyone's bank account. Some states require LLCs and partnerships to file similar statements. While the requirement may seem like busy work, the states do take it seriously. There may be penalties for failure to file that could be much more than the original fee and in some cases you could find yourself scrambling to file missing reports if you're going for a loan, merging with another business, selling the business, etc. Check the rules for your state. You can usually find the information on the website for the secretary of state for your state. Or check with your accountant. Another point. If you do business in a state as a foreign corporation (e.g., you're incorporated in Massachusetts and have filed to do business in New York) or LLC, partnership, etc. you might have an additional annual filing. February 7, 2019
NewsWhether a "loan" is a bona fide debt or really a capital contribution can depend on a number of factors such as whether the loan has a fixed maturity, there is adequate collateral, the financial strength of the borrower, etc. And if the advance is not bona fide debt, a worthless debt deduction will be disallowed. In 2590 Associates, LLC, 5615 Associates, LLC, as Successor in Interest to, 5615 Associates, LP, Tax Matters Partner (T.C. Memo. 2019-3) the IRS disallowed a worthless debt deduction of $2.9 million. The fact pattern is complicated. The bottom line was the Tax Court examined 13 factors that the Court of Appeals for the Fifth Circuit would consider and found the debt was indeed bona fide, allowed the worthless debt deduction and held the debt became worthless in 2011.
Tip of the DayAmended returns . . . You're probably not thinking about an amended return for this year's return. But you might discover an error on last year's return as you're doing your 2018 return. While a current year return filed electronically can be processed very quickly, an amended return has to be filed on paper and can take several weeks to get into the IRS system. After that it can take 16 weeks to process the return. And that's if there are no real issues such as errors, technical issues with the return, etc. You can check on the status of an amended return at Where's My Amended Return?
February 6, 2019
NewsThe IRS will extend its transcript faxing service beyond the previously planned Feb. 4 end date and will review options for a new timeframe. Unmasked Wage and Income Transcripts can be sent to e-Services secure mailbox by following certain procedures, which should help bring clients into compliance and allow for electronic filing. For details, please see Fact Sheet 2018-20, Steps for tax professionals to obtain wage and income transcripts needed for tax preparation.
The IRS has posted a new webpage IRS Activities Following the Shutdown. The page has links to frequently asked questions about examinations affected by the shutdown, collection issues, cases in Appeals, etc.
The IRS has announced that the IRS Cincinnati Submission Processing Center located in Covington, Ky., will be closing in 2019. Tax professionals who have clients who need a 147C letter for Backup Withholding purposes, should send their request to the Ogden or Kansas City centers.
Tip of the DayRefund timing . . . The IRS issues most refunds in less than 21 calendar days, but that's not guaranteed. The IRS cautions that it could take longer because a return contains errors or is incomplete, is affected by identity theft or fraud, includes a claim filedd for an Earned Income Tax Credit or an Additional Child Tax Credit, or simply needs further review. You increase your chances of avoiding a delay by filing electronically. Your return is checked by the software and the filed return is checked by the IRS before it's accepted. If it's rejected on IRS electronic check, you or your tax preparer will know within 24 hours. Also keep in mind that refunds can only be direct deposited in accounts in your own name, your spouse's name, or in a joint account. And the IRS can't deposit more than three electronic refunds into a single account. Want more information on refunds? Go to 2018 Tax Season Refund Frequently Asked Questions at irs.gov.
February 5, 2019
NewsYou can't delegate the responsibility for filing your tax return to your accountant. You're supposed to check. But in the case of Christopher A. Haynes, Priscilla Haynes, Plaintiffs-Appellants (U.S. Court of Appeals, Fifth Circuit) the issue was slightly more complicated. On the last day for filing (the return was on extension), the accountant electronically submitted the return to the IRS. The return was rejected because of an incorrect employer identification number. But the accountant never received a rejection notice. The error could have easily been corrected. (The return is assumed filed on time if the error is cured within a few days.) But the accountant never checked to make sure the return was accepted either. Upon receiving notification of the unfiled return, the taxpayers filed a paper copy and the IRS assessed a penalty which the taxpayers paid. The taxpayers sought a refund, but a District Court refused to abate the penalty, holding that the taxpayers' reliance on their accountant was not reasonable cause. In an unpublished opinion, the Court of Appeals held that because there was a genuine dispute of material fact over whether the accountant's actions could meet the reasonable-cause standard. The Appeals Court vacated the District Court decision and remanded the case.
Tip of the DayReceipt required . . . Undoubtedly at one time or another you've heard a contractor, plumber, landscaper, auto repair shop, etc. say "if you pay cash I don't have to charge the sales tax". You may save the sales tax, but you're unlikely to get a good receipt. And more than likely the vendor isn't reporting any of that amount to the IRS or another other taxing authority. You don't need a receipt if the work is on your personal vehicle. But if the work is on your home without a good receipt and a canceled check you won't be able to show additional basis in the house. If you've got a rental property, you need a paid invoice and canceled check and make sure the address of the property worked on and a description of the work done is on the invoice. If the work is for your business, clearly you'll need a detailed invoice and you should be able to show it was paid--either by an ACH debit, credit card receipt, canceled check, wire transfer, or one of the new, electronic ways of paying.
February 4, 2019
NewsThe IRS has released on IRS.gov the corrected draft final regulations under Section 199A (section 199A final regulations) on the new qualified business income (QBI) deduction (Section 199A deduction). These corrections include, among other edits, corrections to the definition and computation of excess Section 743(b) basis adjustments for purposes of determining the unadjusted basis immediately after an acquisition of qualified property, as well as corrections to the description of an entity disregarded as separate from its owner for purposes of Section 199A and Secs. 1.199A-1 through 1.199A-6. The corrected draft has been submitted to the Federal Register for publication.
The IRS has released the current version of Publication 17, Your Federal Income Tax for use in preparing 2018 tax returns. Tip of the DayItemize or standard deduction? . . . The standard deduction this year is $12,000 for single taxpayers, $18,000 for head of household and $24,000 for married taxpayers. If you're married and don't have a mortgage and don't break the 7.5 percent of income threshold on medical expenses, you're chances of itemizing are probably slim. The situation is different for a single taxpayer. You're entitled to the same maximum $10,000 deduction for taxes as a married couple, so if you hit that max and have just $2,100 in charitable contributions, it'll pay to itemize. What's the best approach? Since most taxpayers use computer software, put your numbers in Schedule A and let the program decide on the best option. That makes sense for a second reason. Your state may still allow you to take some deductions that are now disallowed for federal purposes. Don't try to second guess tax software.
February 1, 2019
NewsMore claimed deductions are disallowed by the IRS for lack of substantiation than for being nondeductible. In Estate of Arthur S. Andersen, Deceased, Tena Haroldson, Eric Stoval, and Harold Albright, Personal Corepresentatives (T.C. Memo. 2019-2) the Court sided with the IRS in disallowing deductions on Schedule A, C, and D, but the issues were somewhat more complicated than simple documentation. The deceased taxpayer was an independent businessman who owned a number of properties in Wyoming and South Dakota. He filed his 2010 return only after the IRS issued a notice of deficiency on the sale of certain property setting the capital gain equal to the proceeds of the sales. On his return the taxpayer claimed $526,350 of expenses on Schedule C; on a stipulated record only $64,130 was allowed. On Schedule E $363,721 was claimed; $15,013 allowed. On Schedule A $82,872 was claimed; $0 was allowed. Expenses were disallowed for lack of substantiation. The documentation he did have consisted of a handwritten leger and bank statements. The Court noted that while the bank statements support payments for something, there wasn't enough evidence to show those payments were business related. The taxpayer also claimed a basis in one property that included expenses for improvements. The Court noted that there was no support for including contract labor expenses as an increase in basis rather than a deduction on Schedule C. In any event, the only documentation for the expense was the handwritten ledger. The same ledger was the only substantiation for basis additions for a restaurant building. The Court sided with the IRS in disallowing the unsubstantiated expenses.
Tip of the DayMisplace your Social Security SSA-1099? . . . You can now print out a copy instantly. The Social Security Benefit Statement, also known as the SSA-1099 or the SSA-1042S, is a tax form Social Security mails each year in January to people who receive Social Security benefits. It's like a 1099, but one that shows your Social Security benefits received in the prior year. If you live in the United States and need a replacement form SSA-1099 or SSA-1042S, simply go online and get an instant, printable copy of the form with a my Social Security account at www.socialsecurity.gov/myaccount.
January 31, 2019
NewsTreasury Secretary Steven Mnuchin has said that tax refunds will be paid as normal. The Secretary also said that the phones are being restaffed. However, many tax professionals are dubious considering the length of the shutdown and the first implementation of the Tax Cuts and Jobs Act.
You may claim you never got a notice of deficiency (NOD) (or other correspondence) from the IRS. The IRS bears the burden of proof of mailing. But the IRS has a couple of ways it can show the NOD was mailed. In Joseph D. Meyer (U.S. Court of Appeals, Eight Circuit) the IRS produced a Form 4340, "which is a computer generated form that reflects the taxes assessed to and paid by the taxpayer in a particular year.” The Court noted there is substantial precedent the Form 4340 is an appropriate source evidencing the IRS's assessment and notice of tax arrears. In this case the IRS did not produce a Postal Form 3877 for either tax year 2002 or 2009. Thus, the rebuttable presumption of proper mailing does not apply. But the Government did not produce a Postal Form 3877 for either tax year 2002 or 2009. Thus, the rebuttable presumption of proper mailing does not apply. But the Government did produce a Form 4340 for both years. It also produced a copy of the NOD for tax year 2002 and a Case History Report for tax year 2009. The Court held the IRS established both the existence and proper mailing of NODs for both years and the taxpayer did not offer any persuasive evidence to the contrary. The Court upheld the District Court's order granting the IRS motion for summary judgment.
Tip of the DayCheck date on IRS publications . . . We post a list of the most popular IRS publications with links to the actual publication. The link will always take you to the most current publication. But early in the tax season, and it seems particularly this year, more than a few publications have not been revised. To be safe look for the return year on the cover of the publication. Thus, now a publication should have 2018. Of particular note, IRS Publication 17, one of the most important, has not been updated. Another point. Publication 535, Business Expenses, has been updated and includes a discussion of the qualified business income deduction.
January 30, 2019
NewsThe 2015 Fixing America’s Surface Transportation (FAST) Act required the IRS to begin using private collection agencies (PCA) to collect inactive tax receivables from taxpayers. The Treasury Inspector General for Tax Administration (TIGTA) is required to perform a biannual assessment of the PCA performance. As of September 2018, the IRS has assigned more than 700,000 taxpayer accounts to private collectors. The PCAs collected approximately $88.8 million (2 percent) from the balance owed on these accounts. The PCAs also established more than 21,000 payment arrangements, but taxpayers later failed to make payments on more than half of them. Both the IRS and the PCAs monitor performance using various attributes such as procedural accuracy and professionalism. All of the PCAs performed well under these attributes. However, the performance attributes focus almost entirely on the PCAs’ telephone conversations with the taxpayers and do not measure other important aspects of case management, such as returning cases to the IRS when required and the accuracy of payment arrangements. TIGTA learned that PCA payment calculators do not calculate interest and penalties accurately. The IRS reviews and approves payment arrangements over 60 months because the PCAs are prohibited by law from establishing agreements longer than 60 months. As of June 2018, the PCAs sent 2,547 such proposed payment arrangements to the IRS for approval. The PCAs’ calculation of payment terms for 92 percent of the arrangements were inconsistent with IRS payment calculators. Payment terms were different than IRS calculations by an average of over four months, and some differed by more than four years. The inaccuracies included arrangements that the PCAs computed as both too long and too short. Most PCA payment arrangements are 60 months or shorter, and the IRS does not check shorter arrangements. TIGTA sampled 100 such arrangements and determined that 65 percent differed by at least one month. To read the whole report, go to www.treasury.gov/tigta/auditreports/2019reports/201930018fr.pdf.
Tip of the DayState credits . . . State taxes are at a much lower rate than federal--typically 5 percent to 7 percent. That means a deduction at the state level isn't worth as much. A $1 deduction may only save you 7 cents in taxes. But many states offer a number of credits--and that reduces your taxes dollar for dollar. You'll have to check the list that's either in the instructions or in tax software. The credits very widely. New York offers a generous credit for installing solar energy. In farm country look for credits associated with farming. One state offers a credit for rehabbing old barns. Other typical credits are for job creation, energy saving, credits for volunteer firemen and EMTs, housing, hiring disadvantaged or disabled individuals, child and dependent care, tax breaks for seniors on property taxes, etc. It usually doesn't take long to scan the list. You only need to find one to make the effort worthwhile.
January 29, 2019
NewsThe IRS has released IR-2019-07 announcing the opening for the 2019 tax-filing season with the Service accepting and processing federal tax returns for the 2018 tax year. The IRS expects some 150 million returns to be filed. The news release goes on to provide information on the April deadline, e-filing, getting tax help, online tools at IRS.gov and a number of other helpful pointers. The IRS also reported that most refunds will be sent in less than 21 days, however refunds on returns claiming the earned income tax credit (EITC) or the Additional Child Tax Credit (ACTC) won't hit a taxpayer's bank account (if direct deposit was choosen) until February 27 a the earliest.
Tip of the DayIRA contribution limit . . . You can make an IRA contribution for 2018 up until April 15th of this year. You can also make a contribution for 2019 any time from January 1, 2019 through April 15, 2020. If you're making a contribution before April 15, make sure you specify the year (2018 or 2019) you want the contribution to apply to. And be aware that the maximum contribution for 2018 is $5,500 ($6,500 for taxpayers age 50 and older). The maximum contribution for 2019 is $6,000 ($7,000 for those 50 and older).
January 28, 2019
NewsThe government shutdown is over--at least for three weeks. But the consensus among tax professionals is that the IRS won't be returning to normal quickly. Some staffers have left and employees will be working to catch up on an almost five-week shutdown. Telephone support is sure to be strained and the IRS has warned that wait times will be longer than usual, and they haven't been great for some time. That, along with limited guidance on the new law is sure to make for a difficult tax season. (You should be aware that some publications, have yet to be released with the 2018 updated information.
The Tax Court has announced it will resume full operations effective Monday, January 28, 2019. However, the website showns a number of sessions in February as still being canceled.
Tip of the DayExcess IRA contributions . . . Contribute too much to an IRA? The excess contribution is subject to a 6 percent penalty and you'll still have to take out the contribution. There are a number of ways to make the mistake of making and excess contribution. The first is by breaking the rollover rules. For example, you take $30,000 out of an IRA at Madison Securities and roll it over to an IRA at Chatham Bank. The problem is you replaced the funds on the 61st day. The entire $30,000 is an excess contribution and it's fully taxable (unless it's a Roth and it meets certain requirements). Another way is to do a second rollover in a year that's not trustee-to-trustee. A third common way is to make a contribution to a traditional or Roth IRA when you're barred because of your income or coverage by a pension plan. This one is easy to avoid. Most tax software has a worksheet to enter your contribution, or intended contribution. Enter the requested info and it will flag any potential excess contributions.
January 25, 2019
NewsAny person who has the authority to sign checks, control finances etc., can be a "responsible person" for purposes of employment taxes. That means one or more individuals can be personally responsible for withheld taxes that weren't deposited with the IRS. In Robert L. McClendon (U.S. District Court, S.D. Texas, Houston Div.) (on remand from the Fifth Circuit) the petitioner was a doctor who founded a medical practice and along with Richard T. Stephen, Jr., a long time CFO who was also a CPA, were found to be responsible persons. As late as 2009 the CFO had informed the board that all tax obligations had been met, but that was far from the truth. The CFO pleaded guilty to first-degree felony theft. The company forfeited some $400,000 in receivables (and all new receivables) to the IRS and $250,000 in insurance proceeds from an employee theft policy. The company's ultimate liability to the IRS exceeded $11 million. The Court noted that responsibility does not turn on actual knowledge, an individual “may be a responsible person . . . even though he does not know that withholding taxes have not been paid, and he does not cease to be a responsible person merely by delegating the responsibility to others.” The Court noted the six Barnett factors--(1) “is an officer or member of the board of directors”; (2) “owns a substantial amount of stock in the company”; (3) “manages the day-to-day operations of the business”; (4) “has the authority to hire or fire employees”; (5) “makes decisions as to the disbursements of funds and payment of creditors”; and (6) “possesses the authority to sign company checks.” Being a responsible person is necessary, but not sufficient, to establish liabilty for the employment taxes. Liability attaches only if the responsible party's failure to pay taxes was willful. The Court noted that a responsible person's decision to pay salaries, utilities, rent, and outstanding loans after learning of the business's unpaid tax obligation shows willfulness.
Tip of the DayGet tax software . . . If you've done your return by hand in the past, we strongly suggest you buy one of the tax software packages available. While the new Form 1040 appears simple, there are enough changes in the law and required schedules that you could easily make a mistake. The software will also catch many procedural mistakes.
January 24, 2019
NewsThere are a lot of good reasons to file your return and file it on time. The obvious one is penalties. But filing a valid return (one with enough information to provide the IRS with a basis to calculate tax) starts the statute of limitations running. In Steven T. Waltner and Sarah V. Waltner (U.S. Court of Appeals, Ninth Circuit) the taxpayers first challenged the $8,801 tax deficiency and $978.75 penalty for failure to file a valid tax return. They claim that the three-year statute of limitations for assessing their 2008 tax liability expired by the time the IRS sent them a deficiency notice in 2012. The Tax Court determined that the statute of limitations had not begun to run because the taxpayers never filed a valid tax return for 2008. For Sec. 6501(a)'s limitations period to begin running, the filed tax return must be valid. The taxpayers already litigated the validity of their 2008 tax return in a separate action in the Court of Federal Claims. That court held that the 2008 tax return was not valid because it did not provide the IRS with sufficient information to calculate the taxpayers' tax liability.
Tip of the DayNondeductible IRA . . . They've been around a long time. There are no income restrictions on contributions to this IRA. But there isn't a lot of benefit. Income is deferred, as with a deductible IRA, but there's no upfront benefit. If you have no other options, they can make sense for some taxpayers. But there's a problem. In order to avoid paying tax on the contribution, you'll have to file Form 8606 indicating you're making a nondeductible contribution. And then you'll have to make sure you keep a record of the contribution. Taxpayers who made such contributions 30 years ago may now be starting to take distributions. In order to avoid paying tax on the principal (with a deductible IRA all distributions are fully taxable) you'll have to use Form 8606 to exclude a portion of your distribution from income. If you're taking distributions from an IRA and made nondeductible contributions, be sure to advise your tax preparer.
January 23, 2019
NewsThe Joint Committee on Taxation has released a list of Expiring Federal Tax Provisions 2017-2027. It includes provisions that expired in 2017 and 2018 and those scheduled to expire in the years 2019 through 2027.
Tip of the DayGetting rid of credit cards? . . . That's probably a bad idea, at least from the standpoint of your credit rating. Try doing the next best thing. Stop using that card. And, if you're carrying a balance, pay it down as quickly as possible. Avoid the temptation to pick up a store card, unless there's a really good reason. For example, one hardware chain offers a 5% discount on every purchase in the store. You could save a lot of money if you've just moved into a new home or are redoing your existing one. Other than that, most store cards just benefit the store.
January 22, 2019
NewsSection 199A provides a 20 percent deduction for income of passthrough entities. The deduction is taken on the individual's tax return and is subject to a limitation based on the individual's income and the W-2 wages and unadjusted basis in qualified assets. Certain specified businesses are subject to a flat income limitation. The IRS has issued TD (REG-107892-18) and Reg-134652-18 which contains proposed regulations concerning the deduction for qualified business income under Section 199A. The proposed regulations will affect certain individuals, partnerships, S corporations, trusts, and estates. The proposed regulations provide guidance on the treatment of previously suspended losses that constitute qualified business income. The proposed regulations also provide guidance on the determination of the Section 199A deduction for taxpayers that hold interests in regulated investment companies, charitable remainder trusts, and split-interest trusts.
Notice 2019-07 contains a proposed revenue procedure that provides for a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of Section 199A of the Code and Reg. Secs. 1.199A-1 through 1.199A-6 which are being published contemporaneously with this notice. To qualify for treatment as a trade or business under this safe harbor, the rental real estate enterprise must satisfy the requirements of the proposed revenue procedure. If an enterprise fails to satisfy these requirements, the rental real estate enterprise may still be treated as a trade or business for purposes of Section 199A if the enterprise otherwise meets the definition of trade or business in Sec. 1.199A-1(b)(14).
Tip of the DayIRA rollovers . . . Under current law you're allowed one IRA rollover per year where you have control of the funds. That's important to remember because a second one will be considered a distribution and taxable as well as subject to a penalty if none of the exceptions apply. The one-per-year rule applies to all IRA accounts. And the rule applies to 365 days, not by the calendar. For example, if you do rollover by taking the funds on January 15, 2019 the next time you'll be eligible is January 16, 2020. The best approach is to do a trustee-to-trustee transfer. There's no limit on the number of these.
January 18, 2019
NewsThe sale of an assets by an individual usually produces capital losses. (In the case of a business, the abandonment or sale of equipment and certain other assets can produce ordinary loss treatment. That's limits your deduction to offsetting capital gains or a maximum of $3,000 per year. An ordinary loss can be used to offset income without limitation. Abandonment losses are usually considered ordinary. In Thomas E. Watts, Mary E. Watts, et al. (U.S. Court of Appeals, Eleventh Circuit) the Tax Court held the partners of a limited partnership were not entitled to ordinary loss treatment on the abandonment of their partnership interests. The Tax Court assumed the partners had preferential interests in the partnership, but that was not the case. The Appeals Court vacated and remanded the decision and sent it back to Tax Court for that and other reasons.
Tip of the DayChanges to Form 1040 . . . If you're looking for Form 1040A or 1040EZ, you can stop. They no longer exist. Now, everyone uses a 1040. But the redesign of the 1040 makes it easier to use for lower-income taxpayers and some higher-income individuals with simple tax situations. Those with income from items such as capital gains, unemployment compensation, business income, etc. you'll need Schedule 1. If you owe other taxes such as the self-employment tax, you'll need Schedule 4.
January 17, 2019
NewsThe IRS is providing some relief to taxpayers who may have underpaid their estimated taxes for 2018. The general rule is that you must have paid in withholding and estimated payments the lesser of (1) 90 percent of the current year's taxes or (2) 100 percent of the tax shown on your prior year return (110 percent if your AGI for the previous year was $150,000 or more) to avoid a penalty. Notice 2019-11 provides a waiver of the penalty for tax payments required to be made on or before January 15, 2019. The waiver is limited to individuals whose total withholding and estimated tax payments equal or exceed 85 percent of the tax shown on the return for the 2018 taxable year.
Tip of the DayIRS Publication update . . . The bad news is that many haven't been. They have always provided a wealth of information when preparing your own return. They're even useful for tax professionals. Some, like the one on moving expenses, now has limited value. Others, such as IRS Publication 17 cover a broad range of important topics and provide answers on a host of questions when preparing your return. It's important to note that the out-of-date publications are still included in the current list. Many of the publications are still largely applicable, but use extreme caution. If a publication is for use with 2018 returns, it will say on the cover "For use in preparing 2018 returns".
January 16, 2019
NewsThe IRS has announced that it will recall some 57 percent of its staff to accommodate tax season responsibilities. That will allow the Service paper as well as electronic returns as well as issue refunds. The IRS will also open its call sites and answer taxpayer questions. That may, however, be small comfort considering the additional challenge this year of dealing with the new tax law.
The IRS has restarted the Income Verification Express Service (IVES) program. This is service that provides verification of a taxpayer's income for use in obtaining a mortage, but also for other financial market purposes. The IRS advised it could take longer than the usual 72 hours to retart the service. The extra delay is related to the backlog of requests. The IRS also reported that approximately 87 percent of IRS employees are on furlough, or about 70,000 employees. The IRS will also start other fee-based sevices.
Tip of the DayDeath and taxes go on . . . Taxpayers should keep in mind that just because the IRS is "shut down" doesn't mean there are will be any changes in the due dates of returns or payments. Payment, as well as return schedules remain unchanged. It's unlikely that in the abscence of a major distruption to a involved system, the Service well waive any penalties.
Tip of the DayJanuary 15, 2019
NewsThe IRS has announced (IR-2019-02) that an improved version of IRS Free File begins has begun as a dozen private-sector partners offer their brand-name products to help eligible taxpayers navigate the new tax reform law and electronically prepare their tax returns. The free online software program, accessible only through IRS.gov, is available for taxpayers to use in advance of the start of the filing season on Jan. 28. A number of changes have been made to Free File this year, strengthening the program to make it even more taxpayer friendly. More than 53 million taxpayers have used Free File since the program's inception 16 years ago. The public-private partnership between the IRS and the Free File Alliance provides free, brand-name tax software and free electronic filing to taxpayers who earned $66,000 or less last year. Some providers offer both free federal and free state tax preparation. Active duty military personnel with incomes of $66,000 or less may use any Free File software product offering a military option without regard to other criteria.
Tip of the Day
Resident alien . . . If you are a resident alien for the entire year, you must file a tax return following the same rules that apply to U.S. citizens. If you are a nonresident alien, the rules and tax forms that apply to you are different from those that apply to U.S. citizens.
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