Small Business Taxes & ManagementTM--Copyright 2019, A/N Group, Inc.
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December 9, 2019
NewsThe IRS has centralized where it receives all lien certificate applications and non-judicial foreclosure notices. Lien certificate applications include discharges, subordinations, withdrawals, and certificates of non-attachment. These applications are related to: selling, transferring, borrowing, refinancing, purchasing, clarifying who the lien is against, what it attaches and removing its effect from the public record. For more information, search “lien certificates” on IRS.gov or review the updated Publication 4235, Collection Advisory Group Numbers and Addresses. Tip of the Day Donor advised fund . . . If your married (and filing jointly) there's a good chance it no longer pays for you to itemize. There's a $10,000 limit on the deduction for taxes and most taxpayers can't break the threshold to deduct medical expenses. That leaves just mortgage interest and chartiable contribuitons. No mortgage? Just charitable contributions are left. If you're single and have $10,000 in tax deductions, you'll only need $2,200 in charitable contributions. For married taxpayers, you'll need $14,400 (standard deduction is 24,400). There's still a way to beat the system. If you're a regular giver, donate more $14,400 in 2019 to a "donor advised fund". A number of brokers will manage the funds. You get a tax deduction in 2019, but the funds can be doled out over a number of years to a number of different charities. That allows you to break the threshold this year, and make no contributions in, say 2020 and 2021, and claim the standard deduction. There's usually a minimum amount you must contribute to set up the fund (can be cash or securities) and there is usually a small fee. Talk to your broker and tax advisor.
December 6, 2019
NewsThe final version of the 2020 Form W-4, Employee's Withholding Certificate is now available on IRS.gov. The new W-4 form better incorporates the changes ushered in by the Tax Cuts and Jobs Act allowing employees to more accurately estimate the amount of tax they ask their employers to withhold from their paychecks beginning in 2020. In addition, the goal of the new design is to balance simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors. A few of the visual changes that were made in the last draft shared include:
Changes since the last draft include minor edits to verbiage, but more notably, on page 2, under "Your Privacy," more language was added to help the taxpayer understand exactly what checking the box in step 2(c) may do to withholdings.
The IRS has released the Criminal Investigation Division's (CI) annual report (PDF), highlighting significant successes and criminal enforcement actions taken in fiscal year 2019. The report also commemorates CI's 100th year anniversary as a law enforcement agency. Key focuses of CI in fiscal year 2019 included cybercrimes, with an emphasis on virtual and crypto currencies, traditional tax investigations, international tax enforcement, employment tax, refund fraud and tax-related identity theft. Other areas of emphasis included public corruption, corporate fraud and money laundering. CI initiated 2,485 cases in fiscal year 2019, applying approximately 75 percent of its time to tax related investigations. The number of CI special agents dropped to 2,009 by the end of fiscal year 2019, which is the lowest level since the early 1970's. Consequently, CI has increased its usage of data analytics and strengthened its international partnerships to assist in finding the most-impactful cases.
IRS News Release IR-2019-198 contains information for business owners about being targets for identity thieves. The release has tips and links to other resources.
Tip of the DayFast and furious . . . That's the pace the IRS is keeping up in releasing new tax forms for this upcoming season. The Service is publishing 10-15 new or updated forms and publications every day. To review the latest go to Forms and Publications. You can sort the list by form/publication number, title, revision date and posted date. Sort by posted date to get a list starting with the most recent releases.
December 5, 2019
NewsNotice 2019-64 (IRB 2019-52) sets forth the 2019 Required Amendments List (2019 RA List). Beginning with the 2019 RA List, all Required Amendments Lists will apply to both individually designed plans qualified under Sec. 401(a) and individually designed plans that satisfy the requirements of Sec. 403(b).
The IRS has issued final regulations (T.D. 9882) providing guidance relating to the determination of the foreign tax credit to reflect changes made by the Tax Cuts and Jobs Act. The document also finalizes certain portions of proposed regulations in 2007 relating to a U.S. taxpayer's obligation to notify the IRS of a foreign tax redetermination.
Transferring money overseas should raise a red flag in your mind. There are a number of rules that come into play and failure to adhere to them can create significant penalties. In Emily S. Wilson, as Executrix of the Estate of Joseph A. Wilson, and the Estate of Joseph A. Wilson (U.S. District Court, E.D. New York) the taxpayer set up a foreign trust to shield the assets in a potential divorce. The taxpayer failed to file Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. The taxpayer paid the penalty freely but that filed a refund claim for the 35 percent of assets penalty. The IRS argued that it could assess the 35% and a separate 5% penalty together. The Court held that, based on the facts, only the 5 percent penalty applied. Still significant, but far less so than a 35 percent penalty would be.
Tip of the DayDon't ignore state taxes . . . Because of the different ways of arriving at taxable income and the computation of the tax, state taxes can be a heavier hit than federal. One state doesn't allow the normal itemized deductions, but does allow a deduction for its chosen items. And while it allows some credits, it doesn't allow a child credit, nor preferrential treatment for long-term capital gains. As a result, a taxpayer with $100,000 of adjusted gross income could end up owing more in state taxes than federal.
December 4, 2019
NewsThe IRS has published Rev. Proc. 2019-42 (IRB 2019-49) updating Rev. Proc. 2019-09 (IRB 2019-02) which identifies the circumstances under which the disclosure on a taxpayer's income tax return with respect to an item or position is adequate for the purpose of reducing the understatement of income tax under Section 6662(d) (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the tax return preparer penalty under Section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns.
Tables presenting statistics from Forms 1120, U.S. Corporation Income Tax Return>, are now available on SOI's Tax Stats Webpage. These tables present comprehensive data on corporation income tax returns with accounting periods ending July 2015 through June 2016. Statistics are presented by industry, asset size, business receipts size, tax form type, and other selected classifiers. Separate tabulations of data reported on Form 1120S, U.S. Income Tax Return for an S Corporation, are also included.
Tip of the DayCost reduction . . . Before trying to reduce costs, consider which ones you can attack. Many costs may be "fixed". These costs are probably nearly the same for all companies in the industry. For example, if you're in the local hauling business, the cost of trucks, maintenance costs, labor, and many others will be the same as those of your competitors. You may be able to reduce some of those "fixed" costs if you use your imagination. Some years ago one company bought abandoned mills to house manufacturing and administration. Look at your costs and determine which ones show potential. Not much sense in looking at the cost of trucks if everyone is using the same ones. Small businesses often have fat that no one will admit to. An owner paying for gym membership through the business, personal use of company vehicles, etc.
December 3, 2019
NewsThe IRS has issued final regulations (T.D. 9882) today on the Foreign Tax Credit (FTC), a tax benefit that generally allows individuals and businesses to claim a credit for income taxes paid or accrued to foreign governments. The Tax Cuts and Jobs Act (TCJA) made major changes to the tax law, including revamping the U.S. international tax system. Specifically, several FTC provisions were changed, including repeal of Section 902, which allowed deemed-paid credits in connection with dividend distributions based on foreign subsidiaries' cumulative pools of earnings and foreign taxes. TCJA also added two separate limitation categories for foreign branch income and amounts includible under the Global Intangible Low-Taxed Income (GILTI) provisions. Additionally, the TCJA changed how taxable income is calculated for purposes of the Foreign Tax Credit limitation by disregarding certain expenses and repealing the use of the fair market value method for allocating interest expense. Finally, the TCJA made systemic changes to U.S. taxation of international income that impact the Foreign Tax Credit calculation. These systemic changes include the introduction of a participation exemption through a dividends received deduction for certain dividends in Section 245A and the introduction of GILTI, which subjects to current U.S. taxation foreign earnings that would have been deferred under previous law, albeit at a lower tax rate and subject to extra Foreign Tax Credit restrictions. The IRS also issued Proposed Regulations REG-105495-19 relating to the allocation and apportionment of deductions and creditable foreign taxes, foreign tax redeterminations, availability of Foreign Tax Credits under the Transition Tax, and the application of the Foreign Tax Credit limitation to consolidated groups.
The Internal Revenue Service issued final regulations (T.D. 9885) and proposed regulations (REG-112607-19) today on the base erosion and anti-abuse tax. The Tax Cuts and Jobs Act (TCJA) made major changes to the tax law including revamping the U.S. international tax system. Among other changes made by the TCJA, Section 59A imposes a tax equal to the base erosion minimum tax amount for certain taxpayers beginning in tax year 2018. When applicable, this tax is in addition to the taxpayer’s regular tax liability. This provision primarily affects corporate taxpayers with annual gross receipts averaging more than $500 million over a three-year period that make deductible payments to foreign related parties. The regulations provide detailed guidance regarding which taxpayers will be subject to Section 59A, the determination of what is a base erosion payment, the method for calculating the base erosion minimum tax amount, and the required base erosion and anti-abuse tax resulting from that calculation.
Notice 2019-63 (IRB 2019-51) extends the due dates for certain 2019 information reporting requirements for insurers, self-insuring employers, and certain other providers of minimum essential coverage under section 6055 and for applicable large employers under Section 6056. Specifically, this notice extends the due date for furnishing to individuals the 2019 Form 1095-B, Health Coverage, and the 2019 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, from January 31, 2020, to March 2, 2020. Additionally, this notice provides that the Service will not impose a penalty under section 6722 against reporting entities for failing to furnish a Form 1095-B to responsible individuals if two conditions are met. This notice also extends transitional good-faith relief from section 6721 and 6722 penalties to the 2019 information reporting requirements under sections 6055 and 6056.
Tip of the DayAlternative markets . . . Demographics change, markets change, products and services come and go. If you want to grow and secure your business you should be looking at more than just your current product or service. New products or services may keep your business growing or going depending on the market. But you should look further and take stock of your key strengths. A company used its expertise in machining metal to diversify from the aerospace industry into producing parts for medical devices and semiconductor production. Several oil delivery companies have expanded into home security services because they serve the same customer base and the monitoring service dovetails with taking orders for oil delivery.
December 2, 2019
NewsThe IRS partners with tax professionals and other entities to administer the tax system. Before accepting these individuals, the IRS conducts suitability checks such as background and tax compliance checks to determine if the individuals applying for participation should be accepted in the programs. Allowing unsuitable individuals into the programs would increase the risks to taxpayers. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to assess the effectiveness of IRS processes to ensure the suitability of applicants seeking to participate in IRS programs and to follow up on IRS planned corrective actions to address prior TIGTA recommendation TIGTA found the IRS’s suitability checks for applicants to the Acceptance Agent, Enrolled Agent, and e-File Provider Programs generally ensured that only reputable individuals were accepted in the programs during Fiscal Year 2018. The IRS’s continuous suitability checks also ensured that individuals accepted in the programs prior to the initial suitability checks had not engaged in criminal activity warranting removal from the program. However, the initial and continuous suitability checks vary depending on the specific program to which an individual applies to participate or has been approved to participate. This is despite the fact that an individual’s participation in each of the programs poses similar risks to tax administration. For example, a tax compliance check is performed for all new applicants for each of the programs. However, other checks to determine if an individual has a criminal history, is incarcerated, or is a United States citizen vary depending on the program for which the applicant is applying. Finally, the IRS has not taken sufficient actions to address the fraudulent submission of fingerprint cards by some applicants to pass their background investigations. To read the complete report, go to https://www.treasury.gov/tigta/auditreports/2020reports/202040005fr.pdf.
Tip of the DayAffordable Care Act requirements . . . Beginning this year there is no longer a penalty tax on individuals who do not have the required health insurance. But most of the other provisions of the ACA remain in effect. That includes the requirement that employers who have 50 or more full-time-equivalent employees and do not provide coverage that's affordable. (An employee who works 30 hours or more per week or 130 hours per month meet the definition of full-time). The penalties can range from $2,500 to $3,750 per employee. When factoring in the employee goodwill created by providing coverage and avoiding the penalty, it may be cost effective to provide subsidized insurance. And you should be aware that the IRS is actively working to identify employers not in compliance and has assessed penalties.
November 27, 2019
NewsRev. Proc. 2019-48 (IRB 2019-51) provides the rules for using per diem rates, rather than actual expenses, to substantiate the amount of expenses for lodging, meals, and incidental expenses for travel away from home. Use of a per diem substantiation method is not mandatory. Taxpayers who use per diem rates to substantiate the amount of travel expenses under Rev. Proc. 2019-48 may use the federal per diem rates published annually by the General Services Administration. Rev. Proc. 2019-48 allows certain taxpayers to use a special transportation industry rate or to use rates under a high-low substantiation method for certain high-cost localities. The IRS announces these rates and the rate for the incidental expenses only deduction in an annual notice.
Tip of the DayPrivate rulings from your state . . . The IRS issues private letter rulings directed to taxpayers with questions about a transaction where the tax consequences are unclear. The rulings are public, but the name and other information is omitted so the taxpayer can't be identified. Many states have a similar procedure. Thus, if there are no regulations, case law, etc. on the topic you can request a written determination asking, for example, whether a certain item is subject to sales tax. You can usually rely on the letter ruling, but only if the facts are the same as stated in the request. The good news is you can avoid getting hit with taxes and penalties if you request a ruling and the state later takes a contrary position. The bad news is if you don't like the ruling, you're stuck with it. Even if the state doesn't charge for a ruling (we don't know of any that do; the IRS does), there is an expense on your part. Requesting a ruling makes sense if the amount involved is substantial or the issue will recur. Talk to your tax adviser.
November 26, 2019
NewsYou've got to read the law carefully. In the case of Beverly Clark Collection, LLC, Nelson Clark, Tax Matters Partner (T.C. Memo 2019-150) the IRS was the party who misread the law. The IRS argued that a claimed sale of an interest in the LLC to another entity was a shame transaction, characterized as a "Son-of-BOSS" transaction. The petitioner claimed final partnership administrative adjustment (FPAA) was beyond the statute of limiations. The IRS countered that the period is extended to six years if the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return. The taxpayer reported income, but only 19.00 percent of the gain, not the full 100 percent. The Court held that the petitioner did not omit the gain, but instead understated the amount. Thus, the statute of limitations was not extended.
Tip of the DayBonuses--year deductible . . . If you're on the accrual method of accounting, you can deduct amounts in one year that are paid in the following year, but only if (1) all the events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability. That means that in order to deduct bonuses in 2019, the amount is determined with certainty and you have a legal obligation to pay the amount at the end of the year. If there is doubt as to the amount or there's no legal obligation, you can't deduct the amount until actually paid. Check with your tax advisor to be sure. Make sure you provide him or her with all the facts. If the deduction in 2019 would be valuable, you may want to cut the checks this year and deal with the cash flow consequences.
November 25, 2019
NewsThe IRS is reminding return preparers are required to protect taxpayer information and ensure that use of such information is done in accordance with the law. Effective July 1, 2019, the Taxpayer First Act of 2019 increased penalties for unauthorized disclosure or use of return information under Code section 6713. The penalty for a single instance of improper use or disclosure is now $1,000. The maximum penalty is $50,000 per person per calendar year.
One of the disadvantages of doing business as a C corporation is the possibility of constructive dividends. For example, the payment of personal expenses of a shareholder by the corporation. The result is the disallowance of a deduction by the corporation, but taxpayer income to the shareholder as a dividend. In Moacir Santos (T.C. Memo. 2019-148) the taxpayer made cash withdrawals and electronic transfers from his corporation to pay personal expenses. The Court agreed with the IRS findings of constructive dividends.
Tip of the DayFirst step to saving money? . . . Find out where you're spending it. Sounds obvious, but many individuals (and businesses) don't do it. Business owners should be tracking expenses carefully for tax purposes. But sometimes expenses get put into the wrong category or aren't broken down into sufficient detail. The trick is to break down expenses enough to control them, but not so much as to create extra work. That can be done by dollar amount. For example, if your office expenses are $20,000 it may be time to break out a few of the larger categories into their own accounts. When you know where your money is going, analyze the expense to decide what you should do. You may be able to get ride of the extra phone line, or find a cheaper provider. For individuals, the usual problem is people don't know what their spending their money on. Make a detailed list of expenses for a month or two. You may find your coffee habit is costing you just north of $100 a month. That's over $1,200 a year. How important is that to your enjoyment of life? Professionals have found once the expenses are listed, most people find it relatively easy to take action.
November 22, 2019
NewsIf you don't file a return, the IRS can do one for you, but you probably won't like it. In Francis Steffan Hayes (T.C. Memo. 2019-147) the taxpayer, by his own admission, failed to maintain adequate records for his earnings. In addition, the taxpayer did not file returns for the years 2004 through 2009. The IRS agent accordingly performed a reconstruction of the taxpayer's income using the specific item method. The IRS summoned accounts in the taxpayer's name at his bank, PayPal, and e-gold (an investment website), contacted customers and vendors to try to determine gross receipts, and attempted to ascertain whether the taxpayer had received income that he had deposited elsewhere. When performing the income reconstruction the revenue agent factored in multiple checks and money orders found in the accounts of two of the taxpayer's friends. Most of these checks had been addressed to the taxpayer (or his business names) and later endorsed over to his two friends. The IRS treated these checks as income to the taxpayer because he had unfettered use of the funds when originally received. The IRS also credited him with checks were the payee was blank where the payments had come from entities with whom he regularly did business. Finally, the revenue agent included certain otherwise unaccounted-for income items from customers of the taxpayer. The Court noted that the taxpayer generally bears the burden of proof to show the IRS' deficiency determination was arbitrary or erroneous. The Court found that the IRS estabilshed a sufficient evidentiary foundation to satisfy any threshold burden related to the taxpayer's unreported income. The taxpayer, although he disagreed with some of the IRS' income calculations introduced no evidence showing any error by the IRS. The Court noted the taxpayer failed to take up, much less carry, his burden of proof. The Court sustained the IRS' deficiency findings as well as the various penalties.
Tip of the DayCutting prices? . . . Some price cuts are uneventful and expected. The after-Christmas sale; the after-season sale of clothing and sporting goods; auto sales at the end of model year. Even mid-season sales of clothing such as a 40 percent off sale aren't shocking. You may kick yourself because you missed it, but you'll catch the next one. In electronics you expect a price drop. Want to be the first one to get the new, faster computer? You'll pay for it. Six months down the road you'll be able to get it 20 percent cheaper or with more memory. But the same may not be true for machinery and other goods sold to businesses. A 10 percent price cut is fine; a 40 percent cut may upset recent purchasers. If a competitor pays only $60,000 for a machine the purchaser of the same machine for $100,000 may feel cheated. The same might be true if a customer purchases a machine for $100,000 only to find out a new model with more features and output is being released for the same price next week. Consider price cuts carefully.
November 21, 2019
NewsIn Fact Sheet FS-2019-15 the IRS is announcing that it is taking steps to conduct special compliance efforts for individual and business taxpayers in various communities by meeting face-to-face with taxpayers with ongoing tax issues such as missing returns or taxes owed. While the first face-to-face meeting with a revenue officer is almost always unannounced, taxpayers who get such a visit have issues that have not been resolved through mail contact, typically after a number of such contacts. When an IRS revenue officer visits a taxpayer, they will always provide two forms of official credentials, both include a serial number and photo of the IRS employee. Taxpayers have the right to see each of these credentials.
Victims of the severe storms, tornadoes and flooding that began on September 9, 2019 in South Dakota may qualify for tax relief from the IRS. The President has declared that a major disaster occurred in the State of South Dakota. Following the recent disaster declaration for individual assistance issued by FEMA, the IRS announced that affected taxpayers in certain areas will receive tax relief. Individuals and households who reside or have a business in Brookings, Charles Mix, Davison, Hanson, Hutchinson, Lake, Lincoln, McCook, Minnehaha, Moody, and Yankton Counties and the Flandreau Santee Indian Reservation and the Yankton Indian Reservation 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 September 9, 2019 and before January 31, 2020, are granted additional time to file through January 31, 2020. This means individuals who had a valid extension to file their 2018 return that ran out on October 15, 2019, will now have until January 31, 2020, to file. The IRS noted, however, that because tax payments related to these 2018 returns were due on April 15, 2019, those payments are not eligible for this relief. The January 31, 2020 deadline also applies to the quarterly estimated income tax payments due on September 16, 2019 and January 15, 2020, and to the quarterly payroll and excise tax returns normally due on October 31, 2019. It also applies to tax-exempt organizations, operating on a calendar-year basis, that had a valid extension that ran out on November 15, 2019. Businesses with extensions also have the additional time including, among others, calendar-year corporations whose 2018 extensions ran out on October 15, 2019. For more information, go to IRS announces tax relief for South Dakota
Tip of the DayNoncompete agreement . . . If you're selling your business, more than likely you'll be asked to sign a noncompete agreement. Generally, there's nothing wrong with that. However, you should make it conditional on the buyer fulfilling his side of the deal. For example, if he defaults on the payments on a note, the noncompete becomes voidable. It gives you some leverage and allows you to get back in the business, if you want. Talk to your attorney. You'll probably want other guarantees.
November 20, 2019
NewsThe IRS has issued final regulations (T.D. 9883) regarding the attribution of ownership of stock or other interests for purposes of determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under Section 954(d)(3). In addition, the final regulations provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business for purposes of computing foreign personal holding company income. This document finalizes the proposed regulations published on May 20, 2019. The regulations affect United States persons with direct or indirect ownership interests in certain foreign corporations.
As opposed to other tax issues, the burden of proof is on the IRS when it comes to fraud. In Bertram Russell (T.C. Memo. 2019-146) the taxpayer had been convicted (in a prior, District Court case) of criminal tax fraud for failure to report income. He was sentenced to 66 months in prison and ordered to pay $1.1 million in restitution. In this case, the IRS argued that the taxpayer's previous conviction for tax evasion under Sec. 7201 collaterally estopped the taxpayer from denying that his failure to report income resulted in an under payment for tax and at least part of the underpayment was due to fraud. The Court agreed, finding the taxpayer liable for the civil fraud penalty.
Tip of the DayTalk to your parents . . . Chances are over the years you've come into contact with or heard about, email phishing, phone calls that someone needs bail money, less than honest charity solicitations, etc. Older individuals are more vulnerable because they may be more trusting or simply haven't heard of the scheme. When you talk with your parents (or grandparents) it won't hurt to bring up the latest scam. Do it in a conversational, not lecturing, manner. Con men are good at what they do. We've seen some highly educated individuals fall prey.
November 19, 2019
NewsIn William Cavallaro, Donor; Patricia A. Cavallaro, Donor (T.C. Memo. 2019-144) the petitioners owned KT Corp., and their three sons owned CS Corp. The petitioners and their sons merged the two in 1995, and CS Corp. was the surviving entity. In valuing the two companies for purposes of the merger, they incorrectly assumed that CS Corp. owned intangibles that instead KT Corp. owned. The petitioners therefore accepted a disproportionately low number of shares in the new company, and their sons received a disproportionately high number of shares. They thereby made disguised gifts to their sons consisting of portions of the value of KT Corp. The IRS issued notices of deficiency to the petitioners detrmining for each a gift tax liability. In Cavallaro v. Commissioner, T.C. Memo. 2014-189, the Tax Court held that the petitioners had failed to meet their burden to prove the respective values of KT Corp. and CS Corp. On the basis of that failure, and by treating the IRS's valuation of CS Corp. as a concession (compared to the zero value in the notice of deficiency), the Tax Court held that the petitioners made gifts to their sons in 1995 totaling $29.7 million. The petitioners appealed. The Court of Appeals affirmed the Tax Court's factual findings and its holding that the petitioners had the burden of proof; but the court held that the Tax Court erred in its statement of the content of the petitioners' burden of proof and concluded that the Tax Court should have considered the petitioners' arguments rebutting the IRS's expert witness testimony on the subject of valuation, in order to determine whether the resulting determination was arbitrary and excessive. On remand the Tax Court considered the petitioners' arguments concerning the IRS's expert's report. The Tax Court held the IRS's valuation expert's error caused him to overvalue the disguised gifts by $6.9 million and rendered the IRS's valuation arbitrary and excessive. The Court also held that, after correcting for that error, that the petitioners gave their sons gifts valued at a total of $22.8 million.
Tip of the DayUse a collection agency? . . . They can take 40-50 per cent of what they recover, so it's not a decision to make lightly. But half of something is better than nothing. Whether it makes sense or not overall depends on a number of circumstances. No one wants to be out the gross amount of a sale. If your customer has been good in the past and you know this is a tough time for him, you may decide on a gentler approach. On the other hand, you don't want to look like an easy mark to your customers. The best approach is to be careful in extending credit and have a strict policy of starting reminders if a customer is a day late.
November 18, 2019
NewsThe IRS has announced that the CP2100 and CP2100A Notices have a new look. The redesigned notices provide more information to payers who file certain information returns about:
The IRS sends out CP2100 and 2100A Notices twice a year, in October and the following April. The notices let payers know they may be responsible for backup withholding when TINs are missing from IRS records or have incorrect name/TIN combinations. The notice will list payees identified as having TIN issues. The payers should compare the notice with their account records and take appropriate action. More information is in IRS Publication 1281.
You may be able to avoid liability on a joint return by seeking innocent spouse relief under Sec. 6015. Generally, if you don't know about a spouse's unreported income, overstated deductions, etc. you may qualify. In Fumitaki Nishi and Sachiyo Nishi (T.C. Memo. 2019-143) the husband had a source of income in addition to his wages that went unreported. The wife was educated but had difficulty understanding financial documents and speaking English. Nonetheless, she had her own bank account, certificates of deposit, and authority to write checks for their joint account. The Court noted the wife was aware that her husband had paid fully the balance of their mortgage, within five years of purchasing their home. If she had reviewed the bank statements, she would have known that income in addition to her husband's wages was being deposited and that their spending exceeded his wages. The Court also noted a spouse requesting relief has a duty of inquiry with respect to a tax return. The level of that duty depends on the spouse's education, involvement with financial affairs, presence of expenditures that appear lavish or unusual when compared to the family's past levels of income, standard of living, and spending patterns and the nonrequesting spouse's evasiveness and deceit concerning the couple's finances. The Court sided with the IRS in denying relief.
Tip of the DayToo much sales incentives? . . . Higher sales are important if you want your business to grow, but be careful how you incentivize your employees. Making this quarter's sales quota shouldn't be done by borrowing from next quarter. Or from overselling customers only to get returns that can be hard to dispose of at a profit. Or selling to customers who are poor credit risks. Such moves can do serious damage to the company in the longer run. They can also distort future forecasts. Worse, if you're reporting to outsiders such as a bank, or shareholders, there can be more serious consequences when the practice is discovered. Sales are one of the main ways to compensate salespersons, but the formula can be modified to take into account returns, credit risks, gross margins, etc. The formula will have to be based on your situation, but the expense to develop it will be repaid.
November 15, 2019
NewsRev. Proc. 2019-46, which modifies Rev. Proc. 2010-51 to reflect certain changes enacted in TCJA, most notably, the suspension of the miscellaneous itemized deduction. Rev. Proc. 2019-46 provides that a taxpayer cannot use the business standard mileage rate to claim a miscellaneous itemized deduction during taxable years when the miscellaneous itemized deduction is suspended. The revenue procedure also modifies Rev. Proc. 2010-51 to suspend deductions for moving expenses, unless the taxpayer is a member of the Armed Forces on active duty moving pursuant to military order and to a permanent change of station. The guidance also provides rules to substantiate the amount of an employee's ordinary and necessary travel expenses reimbursed by an employer using the optional standard mileage rates. Taxpayers are not required to use a method described in this revenue procedure and may instead substantiate actual allowable expenses provided they maintain adequate records. Self-employed individuals and certain employees, such as Armed Forces reservists, qualifying state or local government officials, educators and performing artists, may continue to deduct unreimbursed business expenses during the suspension.
Notice 2019-60 provides additional temporary nondiscrimination relief with respect to closed defined benefit plans that generally meet the eligibility conditions for the relief provided in Notice 2014-5, as extended. Specifically, this notice provides that if a plan satisfies specified conditions then the plan is deemed to have satisfied certain of the nondiscrimination testing requirements relating to benefits, rights, and features.
Tip of the DayPaying business expenses out of your own pocket . . . Many business owners and sometimes employees pay busines expenses out of their own pocket and aren't reimbursed. The rule as always been, if you could have been reimbursed by the business, the expenses aren't deductible by you personally. Only if the business had a policy of not reimbursing would they be deductible. But under the new law (TCJA-2017) employee business expenses aren't deductible, no matter what the situation. In the case of a sole proprietorship, expenses the owner pays are deductible on Schedule C, as they always have been. But for a S or C corporation business owners often personally pay an expense such as travel, a hotel stay, etc. out of expediency. That's no longer deductible as a miscellaneous itemized deduction. The solution, while possibly onerous, is simple. Prepare an expense report and have the business reimburse.
November 14, 2019
NewsA conservation easement can generate a substantial tax deduction, often without significantly diminishing the value of the property. In Coal Property Holdings, LLC, Coal Land Manager, LLC, Tax Matters Partner (153 T.C. No. 7) the petitioner donated a conservation easement to a qualified organization. The easement deed provided that, if the property were sold following judicial extinguishment of the easement, the donee organization would receive a share of the proceeds, after the satisfaction of prior claims, determined by a formula. Under the formula, the donee's share was equal to the property's fair market value (FMV) at the time of sale, minus any increase in value after the date of the grant attributable to improvements, multiplied by a fraction specified in Reg. Sec. 1.170A-14(g)(6)(ii). Alternatively, if this formula produced a result different from that required by the regulation, the deed provided that the donee would receive a share of the proceeds as determined by the regulation. The Tax Court held the easement did not satisfy Reg. Sec. 1.170A-14(g)(6), because the portion of the proceeds to which the donee is entitled is improperly reduced by (a) amounts paid in satisfaction of prior claims against the petitioner and (b) amounts inuring to the petitioner that are attributable to (i) appreciation in the value of improvements existing when the easement was granted plus (ii) the FMV of any improvements the petitioner subsequently made to the property. The Court also held that the alternative calculation of proceeds specified in the deed, which is applicable only if the deed's formula is determined to be different from that required by the regulation, constitutes a condition subsequent saving clause that will not be judicially enforced. Finally, the Court held that the IRS properly disallowed in its entirety the charitable contribution deduction claimed by the petitioner because the conservation purpose of the easement was not protected in perpetuity as required by Sec. 170(h)(5)(A).
Tip of the DayUse caution with competitors . . . Your company is still tiny but making a name for itself. You've got a great idea that is spot on. You're approached by Mega Inc. about a potential deal. Flattered, and thinking they might want to buy you out so you and your partner can retire at 25, you discuss some of your methods and ideas. A few months later you find you've just created your biggest competitor. It's happened--and more than once. If they're serious about a buyout or investment, get it in writing. You'll need an attorney qualified in the field to draft the documents and advise you. This is not the time to go online for a DIY approach. And make sure all employees who have inside knowledge sign nondisclosure and noncompete agreements.
November 13, 2019
NewsThe IRS has announced (IR-2019-182) a significant increase in enforcement actions for syndicated conservation easement transactions, a priority compliance area for the agency. Coordinated examinations are being conducted across the IRS in the Small Business and Self-Employed Division, Large Business and International Division and Tax Exempt and Government Entities Division. Separately, investigations have been initiated by the IRS’ Criminal Investigation division. These audits and investigations cover billions of dollars of potentially inflated deductions as well as hundreds of partnerships and thousands of investors. In December 2016, the IRS issued Notice 2017-10, which designated certain syndicated conservation easements as listed transactions. Specifically, the Notice listed transactions where investors in pass-through entities receive promotional material offering the possibility of a charitable contribution deduction worth at least two and half times their investment. In many transactions, the deduction taken is significantly higher than 250 percent of the investment. Syndicated conservation easements are included on the IRS’s 2019 “Dirty Dozen” list of tax scams to avoid. Taxpayers may avoid the imposition of penalties relating to improper contribution deductions if they fully remove the improper contribution and related tax benefits from their returns by timely filing a qualified amended return or timely administrative adjustment request. The IRS’s comprehensive compliance efforts are focused on the abusive syndicated conservation easement transactions described in Notice 2017-10, recognizing that there are many legitimate conservation easement transactions. The IRS is committing significant examination and investigative resources to vigorously audit the entities and individuals involved in this scheme, including those who failed to properly disclose their participation as required. Additionally, the IRS is also litigating cases where necessary, with more than 80 currently docketed cases in the Tax Court. In addition to grossly overstating the value of the easement that is purportedly donated to charity, these transactions often fail to comply with the basic requirements for claiming a charitable deduction for a donated easement. The IRS has prevailed in many cases involving these basic requirements and has now established a body of law that the IRS believes supports disallowance of the deduction in a significant number of pending conservation easement cases. In addition to auditing participants, the IRS is pursuing investigations of promoters, appraisers, tax return preparers and others. Further, the IRS is evaluating numerous referrals of practitioners to the IRS Office of Professional Responsibility.
Tip of the DayKey man insurance . . . It might be your financial guru, your lead engineer, the shop manager or any one (or several) employees who are critical to your business. Replacing them would be costly, from a number of standpoints. Having key man life insurance policies where the company pays the premium and is the beneficiary on one or more of them could ease the pain of finding a replacement if they pass away. Costs vary based on age and health, but a 10-year, $250,000 term policy might only run $700 a year for a 50-year old employee. The big question is how much coverage to secure. If you're strapped for cash, anything is better than nothing, but ideally you'd like to replace a significant part of any profits that would be lost. Get good advice from your insurance agent.
November 12, 2019
NewsRevenue Procedure 2019-43 provides the List of Automatic Changes to which the automatic change procedures in Rev. Proc. 2015-13, as clarified and modified by Rev. Proc. 2015-33, and as modified by Rev. Proc. 2017-59, and by section 17.02(b) and (c) of Rev. Proc. 2016-1, apply. Note. This revenue procedure is some 377 pages and affects over 50 Code sections and even more regulation sections.
In Eaton Corporation and Subsidiaries (153 T.C. No. 6) the taxpayer and the IRS entered into two advance pricing agreements (APAs) establishing a transfer pricing methodology for covered transactions between the taxpayer and its subsidiaries. Following the Tax Court's previous opinion holding that the IRS's determination to cancel the APAs for tax years 2005 and 2006 was an abuse of discretion, the parties were required to submit computations for entry of decision under Tax Court Rule 155. The parties have not reached agreement. The IRS's position is that the computations should include 40% penalties pursuant to Sec. 6662(h). The taxpayer's position is there were no adjustments pursuant to Sec. 482. The Tax Court held no adjustments were made pursuant to Sec. 482 and that the taxpayer was not liable for penalties pursuant to Sec. 6662(a), (b)(3), (e), and (h) for tax years 2005 and 2006.
Tip of the DayBe prepared to negotiate . . . Throw a price or terms out to some vendors, customers, etc. and they'll accept what's offered. And many others will just consider your offer a starting point. Both approaches have their merits and demerits. But if you want to do a deal, more often than not you've got to be ready to negotiate. In fact, many people love the action surrounding negotiations. If you're not comfortable in such situations, get a trusted employee or outside professional such as a CPA or attorney to be in on the negotiations.
November 8, 2019
NewsSome mistakes in documents can be ignored as "drafting errors". But not all. In U.S. Auto Sales, Inc. (153 T.C. No. 5) the IRS issued to the petitioner an 11-page document purporting to be a notice of deficiency, dated May 15, 2012 (May notice), for the petitioner's taxable years ending June 30, 2003 and 2007, where the IRS purportedly determined deficiencies of $24,480 and $30,668, respectively. The first four pages of the May notice identify the petitioner as the taxpayer, while the last seven pages identify a separate corporation, related to the petitioner, as the taxpayer. On Aug. 10, 2012, the petitioner timely petitioned the Tax Court with respect to the May notice. The IRS issued to the petitioner a second notice of deficiency, dated Aug. 2, 2012 (August notice), for TYE June 30, 2007 and 2008, where the IRS determined income tax deficiencies of $3,371,690 and $2,995,911, respectively, and penalties under Sec. 6662. On Sept. 13, 2012, the petitioner timely petitioned the Tax Court with respect to the August notice. The IRS moved to dismiss this case for lack of jurisdiction. The IRS contended that the May notice failed to identify a particular taxpayer as responsible for the deficiencies determined therein. The petitioner objected, stating that the May notice made a deficiency determination and identified years and amounts at issue and thus is valid to confer jurisdiction on the Court. The Tax Court held that under its Opinion in Dees v. Commissioner, 148 T.C. 1 (2017), the May notice is ambiguous on its face because it identifies two taxpayers as potentially liable for the deficiencies determined therein. The Court also held that under Dees the petitioner must prove that the May notice reflects a determination as to the petitioner. The petitioner failed to prove that the May notice reflects a determination as to the petitioner; and copies of the petitioner's returns introduced by the IRS establish that the May notice does not reflect a determination as to the petitioner. Finally, the Court held that the May notice is invalid because it does not reflect a deficiency determination as to the petitioner.
Tip of the DayTake a break . . . Do you know the rules on breaks for employees? For federal purposes, short breaks, such as a 15 minute coffee break in the morning and after noon are compensable (you can't deduct the time). On the other hand, a lunch break can reduce the employee's total time for the day. That's important for overtime purposes. But state rules are also important. You may or may not have to provide a lunch break (it could depend on the number of hours worked), and you may or may not have to provide morning and afternoon breaks. Check the rules in your state. This is often a touchy area for employees and getting it wrong could prove costly.
November 7, 2019
NewsThe IRS has announced (Rev. Proc. 2019-44) the tax year 2020 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. Revenue Procedure 2019-44 provides details about these annual adjustments. The tax year 2020 adjustments generally are used on tax returns filed in 2021. Here are a few of the changes:
The IRS has also announced (Notice 2019-59 the contribution and other limits on pension plans, IRAs, etc. for 2020. Among other changes, the contribution limit for 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan has increased from $19,000 to $19,500 and the catch-up contribution for employees aged 50 or older will increas to $6,500. The limitation on SIMPLE plans rises to $13,500 from $13,500. The phase-out for a Roth IRA will begin at $124,000 for singles and heads of household and $196,000 for married couples filing jointly.
The IRS has released an updated version of Publication 3112 IRS e-file Application and Participation. This edition of Publication 3112 replaces the previous edition revised July 2018. This publication provides important information for Tax Professionals and Authorized IRS e-file Providers regarding applying and participating in IRS e-file.
Tip of the DayNew nexus rules for sales tax . . . Following the U.S. Supreme Court ruling in South Dakota v. Wayfair many states are changing their rules with respect to nexus for sales tax purposes. No longer is a physical presence in the state required for requiring vendors to collect sales tax. The changing rules vary from state to state, but the advisory just issued by New York is typical. Under the new rules an out-of-state vendor will have to collect and remit sales taxes on New York sales if they have tangible personal property delivered into the state of more than $500,000 and make more than 100 sales in New York during the year. Check the current rules in the states where you have sales.
November 6, 2019
NewsThe IRS has released a notice of proposed rulemaking (REG-131071-18; NPRM REG-131071-18) providing rules regarding the definition of an eligible terminated S corporation (ETSC). In addition, these proposed regulations provide rules relating to distributions of money by an ETSC after the post-termination transition period (PTTP). Finally, these proposed regulations revise current regulations to extend the treatment of distributions of money during the PTTP to all shareholders of the corporation and to update and clarify the allocation of current earnings and profits to distributions of money and other property. In order to secure these benefits, the shareholdings in the C corporation must be identical to those in the former S corporation during the two-year period beginning on December 22, 2017.
Saturday, November 16 may be the last chance you'll get to file 2016 individual returns electronically. After that, returns for that year will only be able to be filed using paper. The shutdown date for business returns will be December 26.
Tip of the DayIRS Statistics of Income . . . If you're looking for income data on individuals or businesses, one of the first places you should try is the IRS. While the information is not always the freshest, it's free and often broken down fine enough to be of real value. Go to irs.gov/statistics for a starting point.
November 5, 2019
NewsGood recordkeeping is critical not only to insure you get all the deductions you're entitled to. In Seyed-Jalil Ghadiri-Asli and Mojdeh Najile-Rahim (T.C. Memo. 2019-142) the IRS found the taxpayers' records inadequate and recontructed their income using the bank deposits method. The IRS also used information from a billing company the wife used for her medical practice. The taxpayers claimed the gross income should be reduced by overpayments refunded, but they could not substantiate the amounts claimed. The IRS further corroborated the income by matching the 1099-MISC forms received with the billing company's reported income. The Court sustained the IRS's imposition of a civil fraud penalty. The Court noted that over the three years at issue taxpayers consistently and substantially understated their income and overstated expenses. Significantly, the understatements of gross receipts grew each year. The gap between the income received and that reported on taxpayers' return each year is too substantial for them to have overlooked when they signed the returns. In addition, their records were inadequate, they concealed income from their tax preparer and were uncooperative in their contacts with the IRS.
Tip of the DayRefinance your home mortgage? . . . Rates are again low and refinancing may make sense, depending on the dollar amount of the costs to do so. Your analysis should center on how long it will take the interest savings to equal the closing costs and then consider if you'll be in the home that long. While the average time an individual owns the same home has increased to some 13 years from seven not so long ago, you may not be average. Does your job force you to relocate frequently? Is a lifestyle change (e.g., another child) going to require you to move? You don't have to be spot on with your analysis, but you should take some time to work through the numbers.
November 4, 2019
NewsThe IRS has updated the disaster area notice for victims of Tropical Storm Imelda that took place from September 17-23, 2019 in Texas to include San Jacinto County. This means that now individuals who reside or have a business in Chambers, Harris, Jefferson, Liberty, Montgomery, Orange and San Jacinto counties. may qualify for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Sept. 17, 2019 and before Jan. 31, 2020 are granted additional time to file through Jan. 31, 2020. This includes taxpayers who had an extension to file their 2018 return to October 15, 2019. In addition, penalties on payroll and excise tax deposits due on or after Sept. 17, 2019 and before Oct. 2, 2019, will be abated as long as the deposits were made by Oct. 2, 2019. For more details, go to IRS announces tax relief for Texas victims of Tropical Storm Imelda.
If you dispute an award you receive from the IRS for assisting in the recovery of taxes from a taxpayer you generally take the action to Tax Court. In Vincent J. Apruzzese (T.C. Memo. 2019-141) the petitioner receved such an award because he significantly contributed to the recovery of additional taxes. While the taxpayer was already under examination, the whistleblower alerted the IRS to issues whereupon the Service expanded the scope of the audit. The petitioner received an award of some $43,000, the usual percentage of the amount recovered. The petitioner argued that the award should be higher because the tax deficieny should have been higher. The Court noted the petitioner was asking the Court to redress this grievance by ordering respondent to re-examine the target. The Court held it did not have the authority to do so and, as a result, could not adjust the reward.
Tip of the DayPlan ahead . . . Sounds like obvious advice? Then why are so many business owners and managers not doing it? Every day we see people sending documents or checks by overnight express when they knew about the deadline weeks earlier. Or ordering product at the last minute and paying an expedite fee or upcharge. Asking for a rush job is almost always more expensive, often by a significant factor. And even if there's no cost, you know your vendor isn't happy and may not respond as well in the future. The same is true for employees. Many will put in the extra time when there's a true emergency, but will soon tire of having to always put in overtime to extinguish fires. Not planning ahead can be costly.
November 1, 2019
NewsThe IRS has announced it will not acquiesce to the holding by the Tax Court in Greenteam Materials Recovery Facility PN, et al. (T.C. Memo. 2017-122). In that case the Tax Court held that the sale of assets by the company which included contracts to provide waste collection and disposal, landfill, and recycling services to certain municipalities resulted in capital gain under Sec. 1253(a). While the Court found the contracts met the definition of a franchise, certain aspects of the ruling could be challenged.
Some business expenses need no explanation; they're clearly ordinary and necessary business expenses. But not all. In Plano Holding LLC (T.C. Memo. 2019-140) the taxpayer enlisted the aid of a financial advisor in the sale of his business. The taxpayer did not prove that it received benefits for the payments made. In addition, the taxpayer did not prove that the expense was an ordinary and necessary one. In addition, the taxpayer did not show that not incurring the fee would have resulted in negative consequences. The Court denied a deduction for the fee.
Tip of the DayDoing a catalog? . . . Or a website advertising a number of products? Consider leading with your best seller. First-time buyers are more likely to return to purchase if they're satisfied. Some years ago a company had a series of similar products with different ones to be sold monthly. They tried several several products in test mailings. When they found the best seller, that became the lead product in the series. The products weren't particularly good, but the marketing was and the company had very attractive profits on the line.
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