Small Business Taxes & ManagementTM--Copyright 2017, A/N Group, Inc.
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April 24, 2017
NewsRev. Proc. 2017-33 (IRB 2017-33) provides guidance on new rules related to Sec. 179 expensing option and bonus depreciation as provided in the PATH Act. The Rev. Proc. clarifies that generally heating and air conditioning equipment only qualify for expensing if they qualify as Sec. 1245 property. Under another rule, such equipment can qualify for expensing if a component of a building if the taxpayer makes an election. A taxpayer may now revoke a Sec. 179 election without IRS consent. The Rev. Proc. also provides guidance on qualified improvement property noting it is eligible for bonus depreciation. Qualified restaurant improvements eligible for 15-year recovery period are eligible for bonus depreciation if they also meet the definition of qualified improvement property.
Notice 2017-25 (IRB 2017-17) provides the inflation adjustment factor for the enhanced oil recovery credit under Sec. 43. The enhanced oil recovery credit for qualified costs paid or incurred in 2017 is determined without regard to the phaseout for crude oil price increases.
Notice 2017-26 (IRB 2017-17) provides the applicable percentage under Sec.613A to be used in determining percentage depletion for marginal properties for 2017. Based on the reference price determined for 2016, the percentage depletion amount for 2017 is 15 percent.
Tip of the DayRequired minimum distribution . . . Once you reach age 70-1/2 you've got to start taking money out of your IRAs (except Roth) and other qualified plans (check the rules; it can be more complicated). While most retired taxpayers are aware of the requirement, many forget that they should be paying tax currently on the distributions. More than a few believe they're surely in a lower bracket now that they're retired. Most financial institutions will ask if you want withholdings and, if you agree, automatically withhold at 10%. That's likely to be sufficient for only a small number of taxpayers. If your taxable income is over about $9,000 ($19,000 married filing joint) any extra income will be in the 15% bracket; over about $38,000 ($76,000 married, joint) extra income will be taxed at 25%. Any withholding is better than none, but the best approach is to talk to your tax advisor and run some numbers.
April 21, 2017
NewsThe IRS has provided the list of accounting method changes to which the automatic change procedures in Rev. Proc. 2015-13 (and Rev. Proc. 2015-33 and 2016-1) apply. Subject to a transition rule, Rev. Proc. 2017-30 (IRB 2017-17) this revenue procedure is effective for a Form 3115 filed on or after April 19, 2017, for a year of change endng on or after August 31, 2016 that is filed under the automatic change procedures.
If you're a responsible person, you can be held personally liable for withheld income and social security taxes. In order to be a responsible person you must be in control of the finances (e.g., you write the checks), you pay other creditors ahead of the IRS, and the failure to deposit the taxes must be willful. In Rex A. Hodges et al. (U.S. Court of Appeals, Tenth Circuit) the petitioner stipulated as to the amount of the assessed penalties, but argued he had reasonable cause for not paying over the amounts. The Court noted assessments of tax are entitled to a legal presumption of correctness. The taxpayer has the burden to show he was not a responsible person and did not willfully fail to remit the taxes in order to avoid summary judgment. To do this, the taxpayer is required to set forth specific facts showing that there is a genuine issue for trial as to those dispositive matters for which [he bore] the burden of proof. The petitioner claimed he could not pay the payroll taxes because he had to pay the expenses of the nursing home (the employer in this case) to care for the patients. The Court reviewed that and several other arguments by the petitioner, but concluded that he had not raised an issue of fact with respect to the reasonable cause exception. The Court affirmed the district court's decision to reduce the assessments to judgment
Tip of the DayNew IRS scam . . . The IRS has created a special new page on IRS.gov to help taxpayers determine if a person visiting their home or place of business claiming to be from the IRS is legitimate or an imposter. With continuing phone scams and in-person scams taking place across the country, the IRS is reminding taxpayers that IRS employees do make official, sometimes unannounced, visits to taxpayers as part of their routine casework. Taxpayers should keep in mind the reasons these visits occur and understand how to verify if it is the IRS knocking at their door. For more information go to IR-2017-86.
April 20, 2017
NewsGenerally, partners are subject to the self-employment tax on their distributive share of partnership income. Limited partners who have no management participation rights generally aren't subject to the self-employment tax. In Vincent J. Castigliola and Marie Castigliola, et al. (T.C. Memo. 2017-62) the taxpayers were member-managers of a PLLC, professional limited liability company engaged n the practice of law and excluded their distributive shares of the PLLC's income from the self-employment tax. They did receive guaranteed payments that were based on salaries in the area and paid the self-employment tax on those guaranteed payments. The IRS argued that because the members of the LLC were also managers they were subject to the self-employment tax on their distributive share. The petitioners argued that the exclusion for limited partners applied to the amounts in excess of their guaranteed payments. The Court disagreed and found all the income subject to the self-employment tax. However, the Court found the taxpayers not liable for the accuracy-related penalty as they relied on the opinion of their CPA who had over 40 years experience and was active in the profession. The Court also noted that limited partner was not defined in the statute or regulations and the exact meaning of limited partner may vary slightly from state to state for state law purposes.
Tip of the DayHow long before you get your refund? . . . In IRS News Release IR-2017-85 the Service reported that if you file electronically, 90% of the refunds are deposited in the taxpayer's bank account within 21 days. You can find the status of your refund at Where's My Refund? or using the smartphone app, IRS2Go. The service is updated one a day, usually at night, so there's no reason to check more than once per day. Most states provide a similar service.
April 19, 2017
NewsIn an S corporation you can only deduct losses up to your stock and debt basis. Your debt basis only includes amounts you actually lent the corporation. Loans incurred by the corporation you may have personally guaranteed don't add to your basis until you make payments on the guarantees. In Rupert E. Phillips et ux. (T.C. Memo. 2017-61) the wife owned 50% of an S corporation where she personally guaranteed bank loans financing the business. The S corporation encountered financial difficulties, the banks sued and recovered judgments which the taxpayers were unable or unwilling to pay. Nonetheless, the taxpayers claimed an increased basis by reason of the judgments and claimed losses from the S corporation based on the increased basis. The Court found the taxpayers were not entitled to basis credit for unpaid judgments entered against the wife on account of personal guaranties she had furnished on the defaulted loans. The taxpayers had taken the position, based on professional advice and a formal opinion from tax counsel that the wife could increase her basis by a portion of the judgment that she shared among other coguarantors. The taxpayers filed a disclosure statement along with their tax returns. The Court noted that to acquire additional basis in an S corporation's debt, there must be an actual economic outlay by the taxpayer. That is, there must have occurred some transaction which when fully consummated left the taxpayer poorer in a material sense. The courts have consistently held that a shareholder's guaranty of an S corporation's debt, without more, does not give rise to additional basis. The Court found the taxpayer had no increase in basis. The IRS also assert the 20% negligence penalty. The IRS conceded the bulk of the penalties because the taxpayers had secured an opinion from competent tax counsel.
Tip of the DayThe day after . . . If you got an extension because you just couldn't finish in time, now is not the time to put the papers aside. You've got momentum and the material is fresh. Finish it off. Then put it aside and review it a week or two later. If you owed money or are close to owing, do the return as soon as possible. If you're not fully paid with the extension, there's a failure to pay penalty of 1/2 of 1% per month. There's also interest on any unpaid amount. Save money by paying as soon as possible. If you owe a substantial amount, consider an installment agreement with the IRS or state. If you managed to complete the return on time, don't throw all your documentation back into the shoebox. Put it in order and, if appropriate, put a destroy date on the package. A smarter move is to scan the documents and store the files in a safe place.
April 18, 2017
NewsYou may be able to settle your tax debt for less than the full amount if you can show doubt as to collectibility or one of a couple of other reasons. But your idea of economic hardship may be different than that of the IRS. In Denise Lloyd (T.C. Memo. 2017-60) the taxpayer owed approximately $100,000 in assessed trust fund recovery penalties. At a collection due process hearing she made a $3,000 offer-in-compromise (OIC). On Form 433-A (financial information) the taxpayer showed monthly income of $16,621 and monthly expenses of $16,847. Her expenses included housing expenses of $6,964 per month and vehicle expenses of $1,617. The petitioner's offer was fowarded to the OIC processing unit which determined her housing expenses exceed applicable local standards by $1,000 per month and that her reasonable collection potential (RCP) was $175,035 during the remainder of the collection limits period. The Court noted that only if the local standards are inadequate to provide for a specific taxpayer's basic living expenses should the SO deviate from the standards and the taxpayer bears the burden of providing sufficient information to justify deviation. The Court also noted the SO offered the petitioner a six-year installment agreement at $1,545 per month which the petitioner rejected. The Court found the SO did not act arbitrarily or capriciously in rejecting the OIC.
Tip of the DayLast day for most . . . This is the last day to file for most taxpayers. You can request an automatic 6-month extension of time to file, and that makes more sense than rushing the return and risk missing an income items or deduction. Some taxpayers can get extra time without an extension. That includes taxpayers who are victims of certain enumerated natural disasters (the delayed filing date is specificed in the announcement of the disaster); members of the military and eligible support personnel serving in a combat zone (they have at least 180 days after they leave the combat zone); and taxpayers outside the U.S. (they have until June 15, 2017 to file and pay).
April 17, 2017
NewsThe IRS has released an update on the Data Retrieval Tool (DRT). In the first week in April it began sending, by mail, the IRS began sending letters to about 100,000 taxpayers who may be affected by the data breach and offering free credit monitoring. Just because you receive a letter doesn't mean that your identity has been compromised, just that there is a chance it has been. And any issues may or may not carry over to the filing or your return. For more information go to Questions and Answers: Mailings about suspicious activity related to the DRT and FAFSA.
As a result of two disasters in California, one during the period January 18 to 23, 2017 resulting from severe winter storms, flooding, and mudslides and the other during the period February 1 to 23, 2017 resulting from severe winter storms, flooding and mudslides, taxpayers in a number of counties can take losses incurred on either their 2016 or 2017 returns. Go to the FEMA Disaster Declarations on IRS.gov.
Tip of the DayStill missing information? . . . You may still be missing information needed to complete your return. Or you may have received a 1099 or K-1 you believe is wrong. At this point the best approach may be to use the information you have to flesh out the return as best you can so you can get an estimate of your tax liability. Then file for an extension. You should have a good estimate of your liability so you can be fully paid. A return filed after April 15 (18 this year) using an extension doesn't have a higher chance of getting audited that a return filed by the regular due date. There are two potential penalties--failure to file and failure to pay. If you don't file a return or extension, there's a failure to file penalty of 5% per month. The failure to pay penalty is only 1/2 of 1% per month. So even if you can't pay--file the return or extension and pay as much as you can, you'll save in penalties. Due a refund? There are no penalties for filing late, but you may be excluded from making certain elections. That can be important if you're a business owner, own rental properties, or have a complex return for other reasons. The worst approach is to ignore the deadline entirely.
April 14, 2017
NewsGenerally, if you file a joint return your liable for the tax on the return along with your spouse. You may escape liability for your spouse's tax debts if you can show you didn't know about the income or excessive deductions or it would be inequitable to hold you liable. But passing the hurdle to secure relief isn't easy. In Veretta Rice Yancey (T.C. Memo. 2017-59) the Court found the taxpayer knew of her husband's gambling activities and she actually prepared the tax returns. The Court examined the issue of economic hardship and found the based on her financial condition she would not suffer hardship. The Court denied relief.
The IRS will send correspondence to your last known address. If you don't notify the IRS (or state) of a change, they're not responsible if you don't receive a notice. In Ted Lawrence Williams (T.C. Memo. 2017-58) the taxpayer claimed he did not receive a deficiency notice to his last known address. The Settlement Officer (SO) verified delivery. The Court noted that absent clear and concise notice of a change of address, a taxpayer's last known address is the address shown on the taxpayer's return that was most recently filed at the time that the notice was issued. The taxpayer failed to show he provided notice of a change of address. In addition, the SO used several approaches to determine a valid address including options available from the U.S. Postal Service and third party information. The Court found that the notice of deficiency was valid.
Tip of the DayEstimated tax payments . . . If you made joint estimated tax payments during the year and you got divorced or are filing separately, you may have to decide how to split the payments. If you claim any of the payments on your tax return you should enter your spouse's or ex-spouse's number on the front of the return. If you changed your name and made estimated payments using your old name, attach a statement to the return detailing when the payments were made, the amount, your name when the payments were made and your social security number.
April 13, 2017
NewsOne of the badges of fraud is engaging in illegal activities. In Bradley A. Ballard et ux. (T.C. Memo. 2017-57) the taxpayer had a printing business and made illegal copies of copyrighted works. To conceal his piracy the taxpayer dealt mostly in cash, kept no financial or business records, and maintained numerous bank accounts. He did not report any gross receipts or expenses associated with his illicit activities. The IRS reconstructed his income using the bank deposits method and found he underreported bis income by $1.1 million for 2008 and $740,600 for 2009. The Court noted the taxpayer trafficked the cash funds in and among multiple bank accounts and intermingled this cash with his personal assets. His actions indicate he ultimately desired to conceal the income and the source, by filing false returns. The IRS asserted deficiencies totaling $458,633 for the three years along with failure to file penalties of $84,391 and fraud penalties of $341,183. For the third year at issue the taxpayers used a professional preparer and, while the IRS disallowed a number of expenses, it did not increase his reported income.
Tip of the DayPicking a professional preparer . . . It may be a little late in the game to discuss finding a preparer, but if this is the first time you're using a professional or last year's preparer isn't available it's probably not a good idea to rush your selection. That's especially true if you have a more complicated return. Not all preparers are up to dealing with special situations. It might make more sense to just file for an extension, pay any potential taxes due, and take time in making your selection after the tax season. File a return and amend it later? That's not the best choice, if only because it'll probably be more expensive.
April 12, 2017
NewsTax reform may not happen as fast as some in Washington as first assumed. In addition to problems caused by the failure of health care reform to pass, there appears to be some disagreement over more than one issue. There is talk about the end of year deadline so the filing season for 2017 returns go smoothly. Tax reform is at least as complicated as health care and there are more differing views among interest parties.
There are certain requirements to be met for a valid, filed tax return. The first is that it's made on the right form, the second that there is enough information for the IRS to calculate your tax. To be sure, there may be errors, but you've got to report your wages, pensions, interest, etc. Finally, the return has to be signed. In Brent Edward Crummey, Cherly Battista Crummey (U.S Court of Appeals, Fifth Circuit) the Court affirmed a Tax Court ruling that information reported on a Form 1041 (trust return) for the taxpayer's income followed by deductions for fiduciary fees and distributions dispite the fact that he had correctly filed using Form 1040 in prior years rose to the level of fraudulent failure to file.
Tip of the DayNeed help with your return? . . . Going it alone is not easy unless you've got a very simple return. If you need help you can call the IRS, but for many questions it's probably quicker and easier to use the IRS web page. There's a wealth of information there, particularly with regard to paying, procedures, forms and publications. For many questions you can go to the Interactive Tax Assistant. Don't forget to check our home page for quick links to the most used forms, instructions and publications.
April 11, 2017
NewsThe IRS may not appeal a case even if it doesn't agree with the outcome. The usual reason is that the Service may not think it can win on appeal. Or the facts aren't to its liking. As an alternative, the IRS can nonacquiesce or disagree with the case or with just the result. Rather than look to the case to bolster your position, you should be especially careful if you've got the same issue. And, often the facts are critical. The IRS has announced nonacquiescence in three cases. In Stine, LLC, (DC La.) The Court found that a building was placed in service when it was substantially complete, had a limited certificate of occupancy, and had shelving and merchandise. The fact that it was not yet open for business was not relevant. In another case Shea Homes,Inc. and Subsidiaries (CA-9) the Court sided with the Tax Court in holding that for a home developer using the complete contract method of accounting, the contract was complete when the entire development was complete for the 95-percent test. In the final case, Scott Singer Installations, Inc. (T.C. Memo. 2016-161) the IRS nonacquiescenced only as to result. The IRS asserted that the payment by an S corporation of the sole-shareholder/officer's personal expenses were subject to federal employment taxes. The Court held that the payments of the shareholder's expenses represented repayment of loans.
Tip of the DayFile separate or joint? . . . That's an often asked question. A married couple can file either way. But most of the time filing joint will produce a considerably better result. It's not as simple as just dividing the income. A whole new set of rules comes into play. For example, you cannot take the earned income credit and, if your spouse itemizes, you must too. Fortunately, you or your tax preparer can often quickly see if filing separately will produce a better result. Tax software programs can calculate which approach is better--but only if you've entered all the data correctly. This is not the time to start a fight with your spouse and file separately. The IRS will be the winner and both of you the losers.
April 10, 2017
It's rare that you can win if you challenge the IRS's mailing of a notice of deficiency or your mailing of a timely response to an IRS notice. In Ivan Rivas (T.C. Memo. 2017-56) the taxpayer did challenge the IRS's mailing of a notice. The Court noted when that happens the IRS settlement officer (SO) is supposed to verify independently that the notice was sent. In fact, here the SO requested a copy of the notice but didn't receive one. Normally the Court would remand the case back to the Office of Appeals, but in this case the Court found this was not fatal to the IRS's case.
Tip of the Day
To help meet the high demand to its toll-free call center that typically comes as the tax deadline nears, the IRS is extending its customer service hours. The first two weeks of April are typically some of the busiest times of the year for IRS telephone assistors, as they field thousands of calls per hour. The IRS reminds taxpayers that most questions can be answered online by using the numerous tools available at IRS.gov. The IRS toll-free telephone lines will be available Saturday, April 15, from 9 a.m. to 5 p.m. (callers' local time). The toll-free line is 800-829-1040. Remember that all IRS Taxpayer Assistance Centers now require an appointment for most services. Instead of going directly to a local IRS office with a tax issue, taxpayers should call 844-545-5640 to reach an IRS representative, who is trained to either help them resolve it or schedule an appointment to get them the help they need. And, you've got until Tuesday, April 18, this year because April 15 deadline falls on Saturday this year, and Emancipation Day, a holiday in the District of Columbia, is observed on Monday, April 17, giving taxpayers nationwide an additional day to file.
April 7, 2017
Unless it falls under one of the exceptions, cancellation of debt income is taxable. In Albert Okorogu et ux. (T.C. Memo. 2017-53) the Court found that taxpayer did not raise a reasonable argument to the items of income reported on the information returns--a 1099-C for the cancellation of debt income and a 1099-G for unemployment compensation. The Court held the transcript presented by the IRS was sufficient to establish a minimal evidentiary foundation for the IRS's determination the taxpayer received that income.
In Leif D. Rozin (T.C. Memo. 2017-52) the individual had been ordered to make restitution payments as a result of a criminal trial for fraud. The amount of the restitution was some $775,000. Restitution payments can be applied to reduce the same deficiency for a civil judgment. Here the IRS did not assess a deficiency until after the government received the restitution payments. The Court noted that restitution payments made do not reduce or discharge a deficiency determination before the deficiency is assessed. In addition by failing to waive restrictions on assessment and filing a petition in Tax Court, petitioner has effectively prevented the IRS from doing exactly what he is requesting the IRS to do-—reduce the amount due by amounts remitted before petitioner received the notice. The IRS stipulated that following entry of a final decision it would assess the income tax deficiency and penalty and would credit the petitioner's account with the restitution payments against the civil tax liabilities.
Tip of the Day
Attachments to electronic returns . . . Most forms are available for electronic filing (there may be restrictions in your software or you may be required to buy an upgrade). But not all. And sometimes an attachment is required. For example, donate a motor vehicle and get a Form 1098-C from the charity? You'll have to attach a copy with your return. Instead of listing all your capital gains and losses on Form 8949 you may be able summarize them and include the Form 1099-B from your broker as an attachment. The simplest way is to attach a PDF copy to an electronic return. If you can't do that you can file the return without it and mail a paper copy of the attachment along with a copy of Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return. Forms 1098-C, 2848, 8283 (limited cases), 8332, and 8949 are the most common attachments requiring special treatment.
April 6, 2017
One entity can charge another, related, entity a management for services it performs, but there are restrictions. The most important is that the payments must be in relation to the services provided. In Home Team Transition Management (T.C. Memo. 2017-51) the Court noted the fees paid to the taxpayer (a corporation) were initially classified as intercompany loans. The amount transferred was primarily determined according to the amount of cash need to make outside loan repayments and also to the amount of fiscal year operating profits. While the fee was discussed at board meetings, the minutes provided little guidance and there were no written materials or agreements concerning management fees or management duties performed. The Court held the taxpayer failed to meet his burden of showing that the management fees were for services rendered and/or reasonable and sustained the IRS's disallowance of the fees.
Tip of the Day
Employee business expenses . . . If you're an employee, you can deduct expenses you incur for your job, such as entertaining clients, travel to customers, etc., but only if your employer has a policy of not reimbursing for the expense. You can't deduct the expense if you simply don't seek reimbursement, or you're so late with your expense report your employer denies your request. Be especially careful here. If you're audited the IRS can ask to see the company policy and question whether incurring the expense was necessary for your job. That's in addition to the usual issue of adequate receipts.
April 5, 2017
The Currency and Foreign Transactions Reporting Act of 1970, referred to as the Bank Secrecy Act, requires U.S. financial institutions to file reports of currency transactions exceeding $10,000. The law states that no person shall, for the purpose of evading the reporting requirements, cause or attempt to cause a U.S. financial institution to fail to file a report required or structure. Whoever violates the structuring law can be fined, imprisoned, or both. Any property involved in violation of this law may be seized and forfeited. In October 2014, a new policy was instituted by IRS Criminal Investigation (CI) that it would no longer pursue the seizure and forfeiture of funds related to legal source structuring. In the same month the policy changed, the New York Times reported that CI had been seizing funds in structuring investigations without filing a criminal complaint. Property owners were left to prove their innocence, and many gave up trying. This audit was initiated to evaluate the IRS’s use of seizures against property owners suspected of structuring transactions to avoid Bank Secrecy Act reporting requirements. In an audit, the Treasury Inspector General for Tax Administration (TIGTA) did an audit and found most of the seizures for structuring violations involved legal source funds from businesses. While current law does not require that the funds have an illegal source (e.g., money laundering or criminal activity other than alleged structuring), the purpose of CI’s civil forfeiture program is to interdict criminal enterprises. As a result, $17.1 million was seized and forfeited to the Government in 231 legal source cases. CI primarily relied on patterns of banking transactions to establish probable cause to seize assets for structuring violations. In most instances, interviews with the property owners were conducted after the seizure to determine the reason for the pattern of banking transactions and if the property owner had knowledge of the banking law and had intent to structure. CI procedures required agents to give subjects advice of rights in Title 26 cases (i.e., Internal Revenue Code) but not in Title 31 cases. In only five of the 229 interviews conducted, noncustodial statements of rights, such as the right to remain silent, were provided. For 54 investigations, the property owners provided realistic defenses or explanations, and for 43 of those cases, there was no evidence they were considered by CI. In 202 interviews, the property owners were not adequately informed of important information, such as the purpose of the interview, by CI during the interview. The outcomes for legal source cases lacked consistency. In 37 investigations, the Government appeared to have bargained nonprosecution to resolve the civil case. TIGTA recommended that the Chief, CI, establish controls to ensure that CI is selecting cases that meet the IRS’s goals and policies, return funds forfeited from legal source cases with no illegal activity, ensure that reasonable explanations are considered when interviews are conducted, ensure appropriate referrals to IRS’s Examination function, and improve the process for designating grand jury information. You can read the full report at www.treasury.gov/tigta/auditreports/2017reports/201730025fr.pdf.
Tip of the Day
Home office deduction . . . If you qualify for the home office deduction you have two choices on deducting expenses--the regular method of allocating a portion of your home expenses such as insurance, mortgage interest, real estate taxes, utilities, etc.--or the simplified method. The simplified method allows you $5 per square foot for up to 300 square feet or a total of $1,500. That doesn't sound like much, but there are several advantages. First, you don't have to keep records of your expenses. Second, calculations are easier. Third, you won't have to reduce your itemized deductions for the amount of interest and real estate taxes you take for the home office. There may be a fourth reason. While no one is admitting to this, there's a possibility taking the simplified method isn't as much of an audit trigger. The only way to really find out the best method from a dollar standpoint is to run the numbers. As a rule of thumb, you will probably do better with the actual method if you rent and clearly you'll do better if you use more than 300 square feet. But chances are your office is less than 300 square feet (that's slightly over 17 x 17).
April 4, 2017
The IRS and courts take a strict approach to unpaid employment taxes. An officer, owner, shareholder, director or even a untitled employee can be held personally responsible. In Scott B. Gann (U.S. Court of Federal Claims) the plaintiff claimed that the payroll tax amounts paid to the IRS by Humanity Capital, Inc. (“HCI”) for the fourth quarter of 2006 and the first and third quarters of 2007 exceeded the amounts withheld from employee pay during those quarters. This, according to plaintiff, is evidence of his subjective intent to pay at least the trust fund tax owed for those quarters. He argued that he thus should not be subject to a penalty for willful failure to pay the trust fund tax owed for those quarters. The fact that the IRS applied those monies to plaintiff's tax debts differently, resulting in a continuing trust fund tax shortfall should not be sufficient to impute a willful motive. The Court did not agree. The Court noted the plaintiff was on notice of a problem going forward from November 2005. His failure to monitor the issued after then was, at minimum, a reckless disregard of the known or obvious risk that trust fund taxes might not be paid over to the IRS. The Court also noted that the IRS's policy of generally applying payments first to non-trust fund liabilities and second to trust fund amounts owed is no secret nor is it illegal. ). It is also not a secret that a taxpayer may make an express election to pay trust fund liabilities first by making an explicit instruction to the IRS. The fact that plaintiff made no election is not a defense, nor would it be a defense if he was ignorant of that right.
Tip of the Day
Last chance on 2013 taxes coming up . . . Haven't filed for 2013? If you're due a refund you've got to file by April 18 to secure it. After that the money belongs to the government and you're out of luck. Many states follow the same rule. What if you owe money? The statute of limitations doesn't start until you file a return so the IRS can assess a deficiency without a time limit. So if April 18th passes, you're still not in the clear. If you had a complex return in 2013 you might also want to review it. You have until April 18th to file an amended return for that year.
April 3, 2017
The IRS is developing guidance to implement the payroll tax credit election available to certain small businesses under Sec. 41(h) to claim the payroll tax credit under Sec. 3111(f). Sections 41(h) and 3111(f) allow a qualified small business to elect to apply a portion of the Sec. 41(a) research credit for the taxable year against the employer portion of the old-age, survivors, and disability insurance tax (social security tax) under the Federal Insurance Contributions Act. Sections 41(h) and 3111(f) are effective for taxable years beginning after December 31, 2015. Notice 2017-23 (IRB 2017-16) provides guidance on the definition of qualified small business (generally, less than $5 million in gross receipts for the year) and how to calculate gross receipts under Sec. 41(h).
The IRS has announced the filing statistics for the week ended March 24, 2017. Returns received and processed are still below the same time last year, but are catching up from the late start. E-filing by tax professionals are down 5.9%; self-prepared e-filed returns are down 2.8%. The total number of returns received and processed is down 4.7% and 4.5%, respectively, year over year.
Tip of the Day
Scrutinize bank and brokerage statements carefully . . . Check those statements when you're preparing your return. You've probably got a number of accounts--some in your own name, some in your children's names, some that are IRAs. Because banks and brokerage houses can issue substitute 1099s that often look like regular statements, it's easy to make a mistake. You don't want to report more income than necessary. But you don't want to underreport income and risk a penalty. And many brokerage 1099s run to two pages detailing not just dividends, interest, etc. but foreign tax credits, royalty payments, withheld federal taxes, tax-exempt interest, market discount on bonds, and investment management fees. There can be important numbers hidden in a bunch of zeros.
March 31, 2017
As an individual you may be able to claim economic hardship to have a levy reduced. In Lindsay Manor Nursing Home, Inc. (148 T.C. No. 9) a corporate taxpayer, at its CDP hearing, challenged the appropriateness of a proposed levy on the grounds that the levy would create economic hardship because of the financial condition of the taxpayer. The IRS's settlement officer (SO) did not consider the taxpayer's economic hardship argument because it is a corporate taxpayer and Reg. Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs., limits economic hardship relief to individual taxpayers. The taxpayer asserted in a motion for summary judgment that Sec. 301.6343-1(b)(4)(i) is invalid because it conflicts with Sec. 6343(a)(1)(D) and that because the regulation is invalid the SO abused her discretion when she did not consider whether a levy would create economic hardship for the taxpayer. Sec. 6343(a)(1)(D) requires the IRS to release a levy if “the Secretary has determined that such levy is creating an economic hardship due to the financial condition of the taxpayer.” Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs., defines economic hardship as certain circumstances suffered by individual taxpayers. The Tax Court held that Sec. 6343(a)(1)(D) is silent or ambiguous on this issue, and Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs., is based upon a permissible interpretation of the statute. The Court held Sec. 301.6343-1(b)(4)(i) is a valid regulation. The Court also held Sec. 6330(c)(3)(C) sets forth a balancing test which properly takes into account for all taxpayers the economic realities and consequences of proposed collection actions. The Court denied the taxpayer's motion for summary judgment in part.
You may get some relief from a levy if you can show economic hardship. But your view of economic hardship and the IRS's may be very different. In Lindsay Manor Nursing Home, Inc. (T.C. Memo. 2017-50), the taxpayer operated a nursing home and had an outstanding liability from Form 941. The IRS assessed a tax of $108,911 reported on the return and began collection efforts. The Court noted the taxpayer had a long history of noncompliance with its Federal employment tax obligations. On prior occasions the taxpayer was given an installment agreement which the IRS revoked for noncompliance. The taxpayer requested a $6,000 per month installment agreement for the unpaid liability. The taxpayer did not submit the requested Form 433-B financial statement until one day before the scheduled hearing. The IRS settlement officer (SO) noted the taxpayer had sufficient assets ($308,598) of accounts receivable to pay the outstanding balance and the taxpayer offered no explanation on how it would meet an installment agreement since its net revenue was negative. The Court found the SO did not abuse her discretion in denying an installment agreement.
Tip of the Day
Nondeductible IRA . . . If you can't make a contribution to a deductible or a Roth IRA, contributing to a nondeductible IRA can make sense. But in order to designate contributions as nondeductible, you must file Form 8606. You don't have to designate a contribution as nondeductible until your file your return. If you don't file Form 8606, any contribution will be deemed to be a deductible one. That could result in penalties if you're precluded from making a deductible contribution.
March 30, 2017
In Saeid Zolghadr and Mandana Zolghadr (T.C. Memo. 2017-49) the IRS found the taxpayers underreported their income. The wife was a dentist who reported net profits of $1,233 and 28,677 for two of the years at issue and net losses of $8,605 and 13,075 for the other two years. The IRS used the bank deposits method to reconstruct the taxpayers income. The IRS found unreported receipts from the taxpayer's dental practice for three of the years at issue as well as unreported income from a rental property and third party payers. The IRS also disallowed substantial amounts of expenses that were either unsubstantiated or unrelated to the practice. The taxpayers disputed a bank deposit of $5,000 claiming the amount was not income but a loan from the wife's mother. However, the taxpayers produced no documentation to show a loan existed. The Court noted the taxpayers had few contemporaneous records. The Court also found the taxpayers failed to meet the substantiation requirements of Sec. 179 for expensing property.
If you fail to maintain adequate books and records the IRS can reconstruct your income using the bank deposits method to estimate your income. In Muhieddin A. Ghazawi and Ghada Ghazawi (T.C. Memo. 2017-28) the IRS revenue agent employed that method to reconstruct the taxpayer's income because she determined the taxpayer's records were incomplete as a result of the taxpayer's significant use of cash in their convenience store. The taxpayers argued that deposits for November and December of the year didn't belong to them because they had sold the assets to another party. But the IRS noted the taxpayers still had control over the bank account and the taxpayers failed to show the IRS's reconstruction was in error. The Tax Court sided with the IRS in finding the taxpayers' had unreported income. The Tax Court also allowed as a mortgage interest deduction no more than the IRS allowed. The taxpayers provided evidence for the amount of the interest paid for only some of the months during the one of the years and nothing for another year.
Tip of the Day
Retirement savings credit . . . It's a nonrefundable credit, meaning it can only be used to offset your taxes, but can be as much as 50 percent of the first $2,000 of your IRA, 401(k) or similar retirement plan contribution. It's phased out as your income increases and is completely gone for single taxpayers with income of $30,750 or married taxpayers filing jointly with income of $61,500. Taxpayers must be at least 18 and can't have been a full-time student during the year and can't be claimed as a dependent on someone else's return. So in addition to a deduction for the contribution to the IRA or plan, you also get a credit. More often than not the credit is small. But there are times when your income may be in the "sweet spot" and the credit could be $1,000 for a single individual. If you're doing your return using computer software, you can quickly see how an IRA contribution could affect your return. See Form 8880 and the accompanying instructions.
March 29, 2017
The IRS has announced the cumulative filing season statistics for the week ended March 17. Returns processed are still down, but not as much as in the prior week. E-filing receipts from tax professionals are down 7.2%; self-prepared returns are down 2.9%. Direct deposit is getting more popular. Direct deposit of refunds as a percentage of returns filed is up slightly.
The Supreme Court has denied a petition from a taxpayer who filed returns after the IRS prepared substitutes for return (SFR). The petitioner sought to have his tax debt discharged in a bankruptcy proceeding. The Court of Appeals for the 11th Circuit had ruled the debt could not be discharged because the taxpayer had not filed until after the IRS filed SFR. Thus, he had not made a good faith attempt to satisfy the tax law. Christopher Michael Justice
The IRS continues to warn taxpayers about a dangerous email scam currently is circulating nationwide and targeting employers, including tax exempt entities, universities and schools, government and private-sector businesses. The scammer poses as an internal executive requesting employee Forms W-2 and Social Security Number information from company payroll or human resources departments. They may even send an initial “Hi, are you in today” message before the request. The IRS has established a process that will allow employers and payroll service providers to quickly report any data losses related to the W-2 scam. See details at Form W-2/SSN Data Theft: Information for Businesses and Payroll Service Providers. If notified in time, the IRS can take steps to prevent employees from being victimized by identity thieves filing fraudulent returns in their names. There also is information about how to report receiving the scam email even if you did not fall victim.
Notice 2017-17 (IRB 2017-15) requests comments on a proposed revenue procedure that, if finalized, will provide procedures on how a taxpayer may request automatic consent to change a method of accounting for recognizing income when the change is made for the same taxable year as the taxpayer adopts the new financial accounting revenue recognition standards. These standards are contained in FASB Update No 2014-09 and IASB International Financial Reporting Standard (IFRS) 15, and are effective for publicly-traded companies beginning with annual reporting periods beginning after December 15, 2017, and for most other businesses, for annual reporting periods beginning after December 15, 2018. The rules also allow early adoption of these standards for reporting periods beginning after December 15, 2016.
You may be entitled to a collection alternative at a collection due process hearing. However, in Rafael Martinez (T.C. Memo. 2017-47) for five of the tax years involved the taxpayer had not filed returns and the liability was based on IRS prepared returns. For another eight years the taxpayer filed but did not pay the tax reported on the returns. Because the taxpayer did not file the required financial information with the IRS, the settlement officer rejected any collection alternative. The Court found the IRS did not abuse its discretion.
Tip of the Day
IRS audits down . . . In fact they've been declining for several years. But the IRS is also auditing more efficiently and audit rates for high income taxpayers, while down, are still significant. And some issues are definitely hot buttons. Those items are almost sure to trigger an audit. And while a desk audit may just look at one item (e.g., charitable contributions) a field audit triggered by an item may be much larger and detailed in scope, particularly for higher income taxpayers and business owners. Rely on your tax professional for advice.
March 28, 2017
The IRS has announced that starting on March 21st, 2017, MeF began experiencing intermittent timeout errors in the A2A and IFA transmission channels. This issue is affecting the Production and ATS environments. MeF has identified the problem and is working to resolve it as a top priority. In addition, effective March 28th, 2017, MeF will begin performing maintenance from 5:00 a.m. to 6:00 a.m. Eastern daily. During this time period transmitters may experience timeouts errors.
Announcement 2017-4 provides relief from certain excise taxes under Sec. 4975 of the Code, and any related reporting requirements, to conform to the temporary enforcement policy described by the Department of Labor (DOL) in Field Assistance Bulletin (FAB) 2017-01 with respect to the final fiduciary duty rule published in the Federal Register on April 8, 2016 (81 F.R. 20946), entitled “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule – Retirement Investment Advice” and related prohibited transaction exemptions.
Allocation of income and expenses between related entities is a hot topic for the IRS and more particularly when the tax rates of the entities are different. In Amazon.Com, Inc. and Subsidiaries (148 T.C. No. 8) the taxpayer entered into a cost sharing arrangement (CSA) in 2005 with S, its Luxembourg subsidiary. Pursuant to the CSA, the taxpayer granted S the right to use certain pre-existing intangible assets in Europe, including the intangibles required to operate Amazon's European web site business. This arrangement required S to make an upfront “buy-in payment” to compensate Amazon for the value of the intangible assets that were to be transferred to S. (Reg. Sec. 1.482-7(a)(2), Sec. 1.482-7(g)(2)) Thereafter S was required to make annual cost sharing payments to compensate Amazon for ongoing intangible development costs (IDCs), to the extent those IDCs benefited S. As consideration for the transfer of pre-existing intangibles, S made a $254.5 million buy-in payment to Amazon. Applying a discounted cash-flow (DCF) methodology to the expected cash flows from the European business, the IRS determined a buy-in payment of $3.6 billion, later reduced to $3.468 billion. Amazon contended that the IRS's DCF methodology was substantially similar to that rejected by the Tax Court in Veritas Software Corp. Amazon contended that the IRS's determinations were arbitrary, capricious, and unreasonable and that the comparable uncontrolled transaction (CUT) method is the best method to calculate the requisite buy-in payment. Amazon used a multistep allocation system to allocate costs from its various cost centers to IDCs. See Reg. Sec. 1.482-7(d)(1), (providing that costs “must be allocated between the intangible development area and the other areas or business activities on a reasonable basis”). While accepting Amazon's allocation method in many respects, the IRS determined that 100% of the costs captured in one important cost center (“Technology and Content”) must be allocated to IDCs. Amazon contends that the IRS's determination to allocate to IDCs 100% of the Technology and Content costs is inconsistent with the regulations. The Tax Court held that the IRS's determination with respect to the buy-in payment was arbitrary, capricious, and unreasonable. The Court also held that Amazon's CUT method, with appropriate upward adjustments in numerous respects, is the best method to determine the requisite buy-in payment and that the IRS abused its discretion in determining that 100% of Technology and Content costs constitute IDCs. Finally, Amazon's cost-allocation method, with certain adjustments, supplied a reasonable basis for allocating costs to IDCs.
Tip of the Day
Tax reform outlook . . . The demise of the American Health Care Act (AHCA) is expected to affect the progress of tax reform in more than one way. In addition to lost momentum on legislation, Obamacare has a number of provisions that will be affected by tax reform. Moreover, the cost of Obamacare will reduce the options available to tax writers. Tax reform will go forward, but the job is more difficult and could take longer.
March 27, 2017
Revenue Procedure 2017-29 (IRB 2017-14) updates the maximum depreciation amounts for new and used passenger vehicles, trucks, and vans and lease inclusion tables applicable to leased vehicles.
Most court cases are published. Virtually all Tax Court cases are. But there are times when anonymity is important. In Whistleblower 12568-16w (148 T.C. No. 7) the petitioner moved to proceed anonymously in a whistleblower case. The petitioner believed that if his identity were disclosed, he would be at risk of retaliation, physical harm, social and professional stigma, and economic distress. The Court noted that because the public has an interest in knowing the identities of persons using the courts, it had to resolve the competing social interests at stake. The Court granted the motion that the petitioner may proceed anonymously until and unless the Court determines differently.
Tip of the Day
Mortgage interest deduction . . . This should be straightforward, but, as usual, that's not the case. You can deduct the interest on the first $1 million of acquisition debt. That is, debt to purchase your first and second residence. You can deduct the interest on another $100,000 of home equity interest. Interest on additional debt isn't deductible as home mortgage interest. It may be deductible as business or investment interest--but that's another topic. But borrowing to remodel your kitchen or add a garage counts as acquisitions interest. Another point. This (2016) is the last year you can deduct mortgage insurance premiums. That benefit expired at the end of 2016. There are several requirements that must be met, the most important is that the contract must have been issued on or after January 1, 2007. The benefit is phased out if your AGI exceeds $100,000 ($50,000 for married, filing separate).
March 24, 2017
You're taking a chance if you use a private postage meter to mail a return, petition, etc. that has to make a deadline. In Dale Grimm (T.C. Memo. 2017-44) the taxpayer's petition to the Tax Court failed to arrive by the deadline. In addition, the petition was received by the court later than a document would ordinarily by received if it were postmarked at the same point of origin by the U.S. Postal Service on the last day of the period prescribed for filing. The Court ruled the petition was not timely and dismissed the case for lack of jurisdiction.
Even if you think that K-1 you received is wrong, you've still got to report the income. (There is a provision for disputing it in limited cases.) In Michael Howard Dalton (T.C. Memo. 2017-43) the taxpayer had a dispute with the other 50% shareholder in an S corporation. The corporation terminated in the middle of the year and the taxpayer received a K-1 for the income of the first half. However, the taxpayer received no distributions from the corporation and disputed the amount on his K-1. The Court noted a taxpayer has to report the amount of income shown on the K-1, even if he or she receives no distribution. The Court also found there was nothing in the record to support that the income on the K-1 was overstated.
Tip of the Day
Keep information returns reporting income . . . Just about everyone knows you've got to keep a record of expenses you can deduct for tax purposes, but fewer know that the IRS requires you to retain copies of W-2s, Forms 1099, Forms 1098 (mortgage interest), bank and brokerage statements, Forms K-1, mutual fund statements, etc. Don't assume the IRS will have copies of the amounts.
March 23, 2017
When major tax legislation is passed may depend on the fate of AHCA (American Health Care Act) moves through the legislative path. However, under an amendment to the AHCA, certain taxes imposed by the ACA would be repealed as of the beginning of 2017. Those taxes include the 3.8-percent net investment income tax (NIIT), the 0.9-percent Additional Medicare tax and the excise tax on qualified medical devices. In addition, the 10-percent AGI threshold for deducting medical expenses would be reduced.
The IRS has released Fact Sheet FS-2017-4 to assist tax professionals in helping their business and individual clients who are victims of tax-related identity fraud. The Fact Sheet has tips on identifying when identity fraud has occurred as well as steps that can be taken and links to IRS publications.
In a recently released audit the Treasury Inspector General for Tax Administration (TIGTA) found that employment tax (withheld income taxes, Social Security and Medicare taxes) noncompliance is a growing problem. As of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes, interest, and penalties. The TFRP (trust fund recovery penalty) is a civil enforcement tool the IRS Collection function can use to discourage employers from continuing egregious employment tax noncompliance and provides an additional source of collection for unpaid employment taxes. In FY 2015, the IRS assessed the TFRP against approximately 27,000 responsible persons—38 percent fewer than just five years before as a result of diminished revenue officer resources. In contrast, the number of employers with employment tax noncompliance for 20 or more quarters of delinquent employment taxes is steadily growing—more than tripling in a 17-year period. For some tax debtors, assessing the TFRP does not stop the abuse. Specifically, a review of 59 individual taxpayer accounts assessed the TFRP for 10 or more entities showed that only 5 (8.5 percent) of the 59 individuals had been investigated by CI for potential criminal prosecution. In addition, TIGTA reviewed taxpayer accounts with over $1 million in TFRP assessments from FYs 2010 through 2015. There were approximately 700 individuals who were assessed in excess of $1 million each of TFRP during this time period, yet CI had opened investigations on fewer than 50 of the individuals. Although the willful failure to remit employment taxes is a felony, there are fewer than 100 criminal convictions per year. In addition, since the number of actual convictions is so miniscule, in TIGTA's opinion, there is likely little deterrent effect. TIGTA recommended that the Commissioner, Small Business/Self-Employed Division and the Chief, Criminal Investigations (CI), should consider a focused strategy to enhance the effectiveness of addressing egregious employment tax cases. In addition, the Collection function should expand the criteria used to refer potential criminal cases to CI to include cases such as those over $1 million or individuals involved in 10 or more companies that fail to remit payroll taxes to IRS. In their response to the report, IRS officials partially agreed with our recommendation. The IRS agreed with the development of a focused strategy. The IRS disagreed that the Collection function should expand criteria used to refer cases to CI citing the need to balance several factors by stakeholders and limited resources. TIGTA continues to believe that additional egregious cases should be referred for criminal investigation.
Tip of the Day
Converting residence to rental property . . . If you start renting out your former residence, your basis for depreciation purposes is the lower of your adjusted basis at the time of the change or the fair market value (FMV) of the property at that time. When you sell the property, your basis for figuring a gain is your adjusted basis in the property. On the other hand, the starting basis for computing a loss is the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use and then adjusted for depreciation, capital improvements, etc.
March 22, 2017
President Trump has released his 2018 budget blueprint which calls for another $239 million in funding for the IRS for the next fiscal year.
The IRS has released filing statistics for the week ended March 10. Returns received and processed are still behind last year's (down about 6.8% for each), but that's an improvement from last week. Receipts from tax professionals are still running behind the total.
Sometimes the details are critical; sometimes not. In Michael Shamrock and Victoria Bigg (U.S. Court of Appeals, Seventh Circuit) when the couple went to Tax Court they did so pro se, but were assisted by a lawyer. On his advice the couple stipulated that only half of the tax relief they sought was appropriate. Upon finding out that the attorney was not a member of the bar in Illinois, they asked the court to set aside the stipulation. The court refused and entered judgment against the couple. The Court of Appeals reversed and remanded and the second time around the Tax Court found that although the lawyer was not licensed in Illinois, he provided competent, valuable, diligent, and effective assistance. In addition, the taxpayers did not accuse him of malpractice. The Appeals Court the taxpayers were not prejudiced by his actions and affirmed the Tax Court's decision.
Tip of the Day
Didn't get your full refund? . . . You could have made a math error, missed an estimated tax payment, etc. in which case the IRS will send you a notice of explanation of the difference. It's also possible the IRS used some or all of your refund to offset federal or state tax debts, federal agency debts like a student loan, past-due child and spousal support, or certain unemployment compensation debts owed to a state. If that's the case you'll receive a notice listing the original refund and the offset amount as well as the agency's contact information. You may be able to dispute the offset amount. You should only contact the IRS if the offset was applied to a federal tax debt.
March 21, 2017
Revenue Procedure 2017-28 provides guidance to employers on the requirements for employee consent used by an employer to support a claim for refund of overpaid taxes under the Federal Insurance Contributions Act (FICA) and the Railroad Retirement Tax Act (RRTA). It clarifies the basic requirements for both a request for employee consent and for the employee consent and permits employee consent to be requested, furnished, and retained in an electronic format. It also contains guidance concerning what constitutes “reasonable efforts” if employee consent is not secured in order to permit the employer to claim a refund of the employer share of overpaid FICA or RRTA taxes.
Revenue Procedure 2017-25 establishes the Small Business/Self Employed Fast Track Settlement program (SB/SE FTS) to provide an expedited format for resolving disputes with Small Business/Self Employed (SB/SE) taxpayers. SB/SE taxpayers that currently have unagreed factual or legal issues in at least one open year under examination can work together with SB/SE and the Office of Appeals to resolve outstanding disputed issues while the case is still in SB/SE jurisdiction. This revenue procedure modifies and supersedes Announcement 2011-5.
Tip of the Day
Roth IRA distributions . . . Most taxpayers won't take money out of their Roth until they retire, maybe not at all. But what if you do take a distribution? If the distribution takes place after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA and after you've reached age 59-1/2 that's a qualified distribution and there's no tax and no penalty. (In addition to the age 59-1/2 exception, there are other exceptions.) If you don't meet the two requirements, you could be subject to tax and a penalty on the distribution. How much depends on your basis. Distributions are deemed to first come out of contributions, then from conversion and rollover contributions and then earnings. For example, six years ago you put $6,000 into a Roth. It's now worth $11,000. You withdraw $7,500 you're under age 59-1/2 and no other exception applies. The first $5,000 escapes tax; the $2,500 does not. It also generates a 10% early distribution penalty.
March 20, 2017
In Richard Liljeberg, et al. (148 T.C. No. 6) the taxpayers were nonresident aliens. In 2012 they were full-time students at foreign universities when they participated in the U.S. Department of State Summer Work Travel Program (SWTP). They came to the United States for no more than four months over the summer to participate in cultural exchange, travel domestically, and work in temporary or seasonal jobs. The taxpayers sought to deduct expenses they paid in connection with the SWTP, including the costs of airfare, program and visa fees, travel health insurance, and meals and entertainment. The IRS denied the taxpayers' claimed deductions, though it has since conceded the deductibility of the program and visa fees. The taxpayers in turn have conceded that the fees paid by one of them in 2011 are not deductible for 2012. The Court held the taxpayers may not deduct their expenses for airfare and meals and entertainment paid in connection with their participation in the SWTP because they were not “away from home in the pursuit of a trade or business” for purposes of Sec. 162(a)(2). The Court also held that the taxpayers could not deduct their expenses for travel health insurance under Sec. 162(a)(2) but could deduct those expenses under Sec. 213(a) to the extent they satisfy its requirements.
Tip of the Day
Got a net operating loss? . . . If you and your spouse are employees, you may not have heard of a net operating loss (NOL), at least until discussions of President Trump's taxes. But if you're a small business owner you stand a much better chance. Losses passed through from an S corporation, partnership, or sole proprietorship can generate a net operating loss on your personal return. The loss must first be carried back two years and any unused amounts can then be carried forward 20 years. You can make an election to forgo the carryback and only carry the losses forward. That makes sense if you expect to be in a higher bracket in the future. The election is made on your tax return for the year of the loss. This can be a complex area. If you do your own return complete Form 1045 to see if you have an NOL and how much. This is a good time to consult a tax professional.
March 17, 2017
In Robert L. McClendon (U.S. District Court, S.D. Texas) the IRS had assessed a trust fund recovery penalty against the taxpayer, a doctor with a medical practice. The government moved for a summary judgment finding that the taxpayer owed $4,323,343.70 plus pre- and post-judgment interest. The Court found that uncontroverted summary judgment evidence demonstrated that the taxpayer knew of the unpaid tax liability when he caused his medical practice to pay its employees rather than the IRS. The Court found the taxpayer was a responsible person who had willfully violated his duty to pay the taxes due and entered judgment for the full amount. Here the taxpayer moved for reconsideration, arguing for the first time that his personal liability was limited to $100,000, the amount of the preferential payment that was the basis of the Court's willfulness finding. The Court noted that the taxpayer could and should have raised this argument in his response to the government's motion for summary judgment, he cannot raise it for the first time in this motion for reconsideration. The Court held the taxpayer's argument also failed on the merits. The Court rejected the taxpayer's argument that his liability was limited to the $100,000 preferential payment, for two independent reasons. First, he could and should have raised the argument in the summary judgment briefing, and it therefore is not appropriately raised in this motion to reconsider. And second, even if the argument was properly before the court, the taxpayer had the burden of proof on the issue of the availability of funds. He had the burden to come forward with competent summary judgment evidence that would prove up the funds available to his medical practice and demonstrate the absence of sufficient unencumbered funds to cover the practice's tax liability. He did not do so.
In order to sustain a deduction, the expense must be an ordinary and necessary business expenses and you've got to adequately document it. In Luczaj and Associations, Martin J. Luczaj and Alisa M. Luczaj (T.C. Memo. 2017-42), the taxpayers deducted a variety of expenses that the IRS and Court disallowed. Some expenses, such as vehicle expense were not adequately documented, particularly with respect to mileage logs, and for some others the taxpayers failed to show the business relationship. The Court disallowed claimed deductions for a portion of their home, and expenses on credit card statements where they were annotated to show the difference between corporate and personal but did not establish the business purpose for each expenditure. Expenditures reported as gifts lacked the documentation required for gifts and some exceeded the $25 limit.
Tip of the Day
Converting personal residence to a rental? . . . You've got to establish your basis in the property for depreciation purposes. The rule is your basis is the lower of your cost or the fair market value. That means if you paid $100,000 for the house and it's now worth $475,000; your basis is $100,000. Don't forget to add improvements made over the years to your original purchase price and, for depreciation purposes only the structure and land improvements qualify; land does not. For computing depreciation you'll also have to make an allocation between the land and the house. That may not be easy. The best guide may be your real estate tax bill. Talk to your tax adviser.
March 16, 2017
The IRS has granted many businesses affected by this week’s severe winter storm additional time to request a six-month extension to file their 2016 federal income tax returns. The IRS is providing this relief to victims and tax professionals affected by this week’s storm (known as Winter Storm Stella) that hit portions of the Northeast and Mid-Atlantic. Business taxpayers who are unable to file their tax return by today’s due date (March 15, 2017) can request an automatic extension by filing Form 7004, available on IRS.gov, on or before March 20, 2017. Form 7004 provides a six-month extension for returns filed by partnerships (Forms 1065 and 1065B) and S corporations (Forms 1120S). Eligible taxpayers taking advantage of this relief should write “Winter Storm Stella” on their Form 7004 extension request (if filing Form 7004 by paper). As always, the fastest and easiest way to get an extension is to file this form electronically. (Note. New York State has granted essentially the same relief to taxpayers in New York. It's likely other states will also grant relief.)
As a result of a severe winter storm in Kansas beginning January 13 through January 16, 2017 taxpayers in the counties of Barton, Clark, Comanche, Edwards, Ellsworth, Ford, Hodgeman, Jewell, Kiowa, Meade, Ness, Pawnee, Pratt, Rush, Seward, Sheridan, Stafford and Trego who sustained losses attributable to the disaster may deduct the losses on their 2016 or 2017 tax returns.
Tip of the Day
Rental property in another state? . . . While your tax advisor should be consulted, you probably should be filing an income tax return in any state in which you have a rental property or other income producing property. An ownership interest through a partnership or LLC (or another type of entity) might also subject you to filing. The same goes for an interest in a "tenant-in-common" venture.
March 15, 2017
Revenue Procedure 2017-26 (IRB 2017-13) provides information to any individual who failed to meet the eligibility requirements of Section 911(d)(1) of the Code because adverse conditions in a foreign country precluded the individual from meeting those requirements for taxable year 2016. Rev. Proc. 2017-26 applies to an individual who left South Sudan on or after July 10, 2016.
The Department of Labor has issued guidance (Field Assistance Bulletin 2017-01) regarding enforcement of the fiduciary rule published in the Federal Register on April 8, 2016 in the event the DOL issues a final rule after April 10 implementing a delay in the applicability date or decides not to issue a delay in the fiduciary duty rule.
If you don't file a return, the IRS can file a substitute return based on the information available to it. That return is presumed to be correct. The burden is then on the taxpayer to show the IRS's determination is erroneous by providing substantial evidence to the contrary. That can be a substantial hurdle. In William Wallis (U.S. District Court, W.D. Virginia, Lynchburg Div.) the taxpayer failed to pay trust fund taxes for several closely held businesses. The IRS prepared substitute returns that assumed a 20% withholding rate; the taxpayer argued the rate was really 11%. The Court found the taxpayer's evidence of a lower withholding rate to be less than convincing. The Court questioned the documents, the choice of 941s from other periods, and noted the taxpayer failed to keep adequate records. The Court found the taxpayer did not rebut the presumption of correctness of the returns prepared by the IRS.
Tip of the Day
Paying the IRS . . . There are a number of ways to pay if you owe taxes. If you're filing electronically--either on your own or through a tax professional--you can have your bank account debited by the IRS (or state, if you owe). That's probably the simplest approach. You don't have to have the account debited at the same time as you file (unless you're filing on the deadline). You can file your return immediately and have your account debited on April 15. You can pay online or by phone using a credit card, but the processor charges a fee. Go to www.irs.gov/payments for authorized card processors and phone numbers. You can also use Direct Pay. You can schedule payments up to 30 days in advance. This option makes sense if you're filing on paper. Paying cash using the PayNearMe option is another approach. Details are available at IRS.gov/paywithcash. This approach is the most complex of all and involves 4 distinct steps. It also takes longer, so get the ball rolling earlier. You can' do this the last day. Another point. You're limited to $1,000 per day so you might have to make more than one payment--and each payment will cost $3.99.
Copyright 2017 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536