Small Business Taxes & ManagementTM--Copyright 2019, A/N Group, Inc.
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September 17, 2019
NewsThe IRS mails more than 200 million notices and letters each year to individual and business taxpayers and their representatives. When the IRS does not maintain current taxpayer addresses, it wastes postage and labor processing undeliverable mail. For example, in Fiscal Year 2018, about 14.4 million pieces of undeliverable mail were returned to the IRS at an estimated cost of $43 million. In addition, the IRS missed opportunities to help taxpayers understand their tax obligations. The Treasury Inspector General for Tax Administration (TIGTA) to assess the IRS’s efforts to reduce undeliverable mail and to follow up on corrective actions that the IRS planned to take to address recommendations made in TIGTA’s May 2010 audit report. TIGTA found t he IRS has taken a number of actions to improve the accuracy of taxpayer addresses in its systems, thereby reducing the volume of undeliverable mail. However, the IRS closed some of TIGTA’s prior recommendations as completed, yet this review identified the same deficiencies. As a result, the IRS continues to waste postage and labor by mailing and processing undeliverable correspondence. During Fiscal Year 2018, the IRS mailed a total of 103,512 nonstatutory notices and letters to taxpayers whose tax accounts had an undelivered mail indicator. Using the IRS’s estimate of $3 per piece to process undeliverable mail, the IRS needlessly spent almost $311,000 mailing correspondence to known undeliverable addresses. In addition, the IRS does not always suppress correspondence to taxpayers whose address of record is an IRS campus (because the IRS cannot find a valid address). The IRS mailed more than 144,000 notices to those taxpayers during Fiscal Years 2016 through 2018 at a cost of almost $433,000. TIGTA also found that some correspondence returned by the United States Postal Service with an updated address continued to be destroyed without updating taxpayers’ accounts. In addition, the IRS has not made sufficient progress implementing the Taxpayer Correspondence Delivery Tracking initiative, which would save between $1.4 million and $1.72 million annually in labor costs and about $1.2 million annually in cost avoidance through a reduction in undeliverable mail. Finally, address hygiene software has not been installed on the Real-Time System to perfect taxpayer addresses on the system and reduce undeliverable mail. During Fiscal Years 2016 through 2018, the IRS reported that a total of 221,373 notices issued through the Real-Time System were returned as undeliverable at an estimated cost of $664,000. To read the complete report, go to www.treasury.gov/tigta/auditreports/2019reports/201940074fr.pdf.
If you're claiming a deduction for an auto (or other listed property), you need to keep a contemporaneous record of the usage. In Suresh Hatte (T.C. Memo. 2019-109) the taxpayer did not keep such a record. Instead, he offered spreadsheets created during the IRS audit with online maps to determine the mileage. But there was no evidence where the taxpayer started each trip and the spreadsheets did not show which of several vehicles was used. In addition there appeared to be inconsistencies in the spreadsheets and the Court found his testimony not credible. The Court also noted he did not produce at trial any notes, calendars, or other contemporaneous documents to support the entries on the spreadsheet.
Tip of the DayBuy term and invest the difference . . . That's an old saying. The idea is that term life insurance is much cheaper (in the early years) than whole life and if you take the savings and invest them you'll come out ahead. The problem is that a significant percentage of insurance buyers won't invest the saving. You've got to decide if you'll use the savings wisely. As with many investment decisions, the best option depends on personal as well as investment factors. Whole life can make sense for many because of the forced savings it generates. The downside is that if you've got to tap those savings unless you borrow on the policy you could owe taxes at ordinary income rates on the earnings. The downside to term is it gets very expensive as you get older. Talk to your financial adviser and discuss your objectives. If you want to be sure there's money available just for your children's college, term can be the best approach. The same applies to protecting your family while you're paying off an acquistion. On the other hand, for long-term protection for a spouse or child, whole life may be the best option.
September 16, 2019
NewsThe IRS has released final regulations and additional proposed regulations under Section 168(k) on the new 100% additional first year depreciation deduction that allows businesses to write off most depreciable business assets in the year they are placed in service. The regulations just released may vary slightly from the published documents due to minor editorial changes. The documents published in the Federal Register will be the official documents. The final regulations finalize the proposed regulations issued in August 2018 which implement several provisions included in the Tax Cuts and Jobs Act (TCJA). The proposed regulations contain new provisions not addressed previously. The 100% additional first year depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify. The deduction applies to qualifying property acquired and placed in service after Sept. 27, 2017. The final regulations provide clarifying guidance on the requirements that must be met for property to qualify for the deduction, including used property. The final regulations also provide rules for qualified film, television and live theatrical productions. Additionally, in the proposed regulations, the IRS proposes rules regarding (i) certain property not eligible for the additional first year depreciation deduction, (ii) a de minimis use rule for determining whether a taxpayer previously used property; (iii) components acquired after Sept. 27, 2017, of larger property for which construction began before Sept. 28, 2017; and (iv) other aspects not dealt with in the previous August 2018 proposed regulations. The proposed regulations also withdraw and repropose rules regarding application of the used property acquisition requirements (i) to consolidated groups, and (ii) to a series of related transactions. See T.D. 9874; REG-106808-19; and Rev. Proc. 2019-33.
The Collection Due Process (CDP) hearing provisions are designed to give taxpayers an opportunity for an independent review to ensure that the levy action that has been proposed or the Notice of Federal Tax Lien that has been filed is warranted and appropriate. An effective process is necessary to ensure that statutory requirements are met and taxpayers’ rights are protected. The Treasury Inspector General for Tax Administration (TIGTA) is statutorily required to determine whether the IRS complied with the required procedures under Sections 6320 and 6330 when taxpayers exercised their rights to appeal the filing of a Notice of Federal Tax Lien or the issuance of a Notice of Intent to Levy. TIGTA Appeals properly informed taxpayers that CDP and Equivalent Hearings were conducted by an impartial hearing officer with no prior involvement with the tax or tax periods covered by the hearing. However, TIGTA identified some errors that were similar to errors identified in prior reports. Specifically, the Office of Appeals did not always classify taxpayer requests properly, and as a result, some taxpayers received the wrong type of hearing. TIGTA reviewed a statistically valid stratified sample of 140 cases and identified nine taxpayer cases that were misclassified. This is approximately the same number of misclassified cases that were identified in the prior year’s review. Based on the same stratified sample, TIGTA determined that the Collection function did not timely process the hearing requests for an additional five taxpayers. When taxpayers mail or fax their hearing request to the wrong Collection function location, Collection function procedures require employees to fax the taxpayer’s request to the appropriate Collection Due Process Coordinator at the correct location on the same day. While the Office of Appeals provided taxpayers with the correct hearing type in these cases, the Collection function did not follow procedures. As a result, the IRS may not have adequately protected the taxpayers’ rights due to the untimely processing of the misdirected hearing requests. In addition, TIGTA continued to identify errors related to the determination of the Collection Statute Expiration Date (CSED) on taxpayer accounts. TIGTA identified eight taxpayer cases that had an incorrect CSED. For five taxpayer cases, the IRS incorrectly extended the time period, allowing the IRS additional time to collect delinquent taxes. In the remaining three taxpayer cases, the IRS incorrectly decreased the time to collect the delinquent taxes. Overall, this is approximately the same number of CSED errors that were identified in the prior year's audit. For the complete report, go to www.treasury.gov/tigta/auditreports/2019reports/201910058fr.pdf.
In Denise Celeste McMillan (T.C. Memo. 2019-108) the Tax Court looked to settlement agreement to determine if the award the taxpayer received was paid on account of personal physical injury or sickness. The Court found the settlement document specified that the defendant paid the taxpayer to drop her suit and take down her website—that is, it wasn't compensating her for physical injuries or sickness. In addition, her suit was not filed because she was injured or ill. The Court sided with the IRS in finding the settlement proceeds were taxable. The Court also noted that when settlement proceeds are income, so is whatever portion of them goes to attorney's fees. Payments to the attorney cannot be used to offset the income.
Tip of the DayListen carefully . . . Don't be taken in by claims of superiority based on numbers. At the very least, take a minute to check if they make sense. For example, Madison Investments promises an interest rate six times its competitor, Chatham Inc. on its money market fund. Chatham's rate is 0.05 percent. That makes Madison's return 0.3 percent. Of more interest is the absolute return on, say $100,000. That's $50 for Chatham and $300 for Madison or $250 more for Madison. Hardly a reason to move your portfolio. The difference in absolute terms becomes even less if you normally only carry an investable balance of $25,000.
September 13, 2019
NewsThe Treasury Inspector General for Tax Administration (TIGTA) has issued a compilation of statistical information reported by the IRS. The data presented in the report provide taxpayers and stakeholders with information about how the IRS focuses its compliance resources and the impact of those resources on revenue and compliance over time. TIGTA conducts this review annually in response to continuing stakeholder interest in the analysis and trending of Collection and Examination function activities. The overall objective was to provide various statistical information regarding Collection and Examination function activities. TIGTA found that during Fiscal Year (FY) 2018, U.S. taxpayers filed more than 152 million individual and 11.4 million business income tax returns and forms. These filings resulted in the more than $3.4 trillion of total revenue collected during FY 2018. The challenges associated with implementing the Tax Cuts and Jobs Act of 2017 and declines in the number of employees have not helped to ease the difficulties in enforcing the tax law. While the direct impact of the FY 2019 lapse in appropriations and Government shutdown that lasted for 35 days may be difficult to quantify, the shutdown increased the challenges for the IRS in its efforts to administer the tax laws. Over the past five years, the IRS’s budget has increased approximately 2 percent to $11.4 billion in FY 2018 from $11.2 billion in FY 2014. In addition, the IRS ended FY 2018 with approximately 74,904 full time equivalents, a 4 percent decline from the 77,685 in FY 2017. The IRS collected an all-time high amount of enforcement revenue of $59.4 billion in FY 2018. Over the past several years, increases in enforcement revenue have generally been due to an increase in returns filed with a balance due, which are largely handled through automated notices and other substantially automated programs. More than half of the total enforcement revenue collected in FY 2018 was collected within the collection automated notice stream ($30.2 billion). The Automated Collection System supported the IRS’s enforcement operations by collecting approximately $3.3 million per full-time equivalent in FY 2018, while revenue officers within the Field Collection function collected, on average, over $2.6 million each. In FY 2018, the IRS identified 73.4 million taxpayers that failed to file a tax return, including 10.6 million individuals and 62.8 million businesses. Delinquencies associated with nonfilers for Tax Year 2016, the most recent year estimated, were approximately $37.5 billion. During FY 2018, 991,000 (less than 1 percent) returns were examined. The number of returns examined has declined 28 percent since FY 2014, when 1.4 million were examined. The decline in examinations is the result of decreases in staffing. From FY 2014 to FY 2018, the number of staff assigned to the IRS’s Examination functions decreased 24 percent. To read the full report, go to www.treasury.gov/tigta/auditreports/2019reports/201930063fr.pdf.
Tip of the DayTake the money? . . . More than a few banks and other lenders are offering easy money to small businesses. Typical limits are $75,000 or $100,000. Should you take them up on the offer? The answer depends on a number of factors. Do you need the money to grow your business or it's because the business is in trouble? If your business is sound and you need funds for equipment, increase inventory or finance accounts receivable, it can make sense to take the funds. On the other hand, if the business has fundamental problems such as declining market, bad product or service model, etc., throwing good moeny after bad rarely makes sense. Consider carefully whether the funds will actually help solve the problem. If you don't have a finance person on staff, consult a CPA or another trusted advisor who's got the expertise. If it makes sense to take the money, consider that the cost of the funds may be higher than other sources. For example, if you're just looking to finance some equipment, a bank loan with the equipment as collateral can often be cheaper. Often the equipment manufacturer or distributor has a cheap source of financing. Finally, keep in mind that you'll almost certainly have to personally guarantee the loan. Consider how the loan will affect the company's and your personal credit rating.
September 12, 2019
NewsBefore a levy is imposed you can seek a collection due process (CDP) hearing with a IRS settlement officer (SO). In some cases you can dispute the liability, but you always are afforded a chance to seek a collection alternative such as an installment agreement. If you believe the SO abused his or her discretion in denying relief, you can petition the Tax Court. In Taryn L. Dodd (T.C. Memo. 2019-107) the taxpayer filed a return showing a substantial liability because she incorrectly reported a real estate sale on her return where the funds had been deposited in the bank account of the law firm show worked for. She did not pay the liability. The SO informed the taxpayer of the paperwork needed to complete to have collection alternatives considered, but was not invited to file an amended return. The SO did not consider collection alternatives because the taxpayer submitted no financial information. The SO offered no additional time and three days later issued a notice sustaining the levy with the notice incorrectly asserting the taxpayer did not challenge her liability. The case was remanded and the same SO. This time the taxpayer was advised to file a 1040X (amended return) with a deadline of only some 20 days away. No supporting documentation was requested. The taxpayer did not submit the requested by the supplemental hearing date. The Court noted that the IRS is not requried ato wait indefinitely for the taxpayer to submit requested documentation. But as the IRS agreed when moving to remand this case, an abuse of discretion may be found where the taxpayer was not afforded a reasonable amount of time to comply with document requests and deadlines. The Court found the IRS abused its discretion in sustaining the levy.
Tip of the DayConsider local bank . . . If you live and do business in a rural area your choices for business (and personal) banking may be limited. And you may already be dealing with a smaller, local bank. But as you get closer to a big city, it's more likely even a small to mid-size business will be dealing with a big bank. That could be a mistake. Often a smaller bank will provide better service, lower fees, and be more responsive to any financing needs. Many credit unions are also getting into commercial banking, but the services available may be less than from a regular commercial bank. You may have to do some shopping to get the right fit, but it should be worth the effort. Make a list of the services you need, then shop the fees.
September 11, 2019
NewsSection 382 imposes a value-based limitation (Section 382 limitation) on the ability of a loss corporation to offset its taxable income in periods subsequent to an ownership change with losses attributable to periods prior to that ownership change. The IRS has issued proposed regulations (REG-125710-18) regarding the items of income and deduction which are included in the calculation of built-in gains and losses under Section 382 of the Code, and reflecting numerous changes made to the Code by the enactment of recent tax legislation. These proposed regulations would affect corporations that experience an ownership change for purposes of Section 382. This document also proposes to withdraw the following IRS notices and incorporate their subject matter, as appropriate, into these proposed regulations under section 382: Notice 87-79, Notice 90-27, Notice 2003-65, and Notice 2018-30.
After correctly reporting her 2014 wages as taxable income on Form 1040, the taxpayer submitted to the IRS a frivolous amended return on Form 1040X, on which she reported a zero tax liability and claimed the refund of all of the tax she had paid by withholding from her wages. The IRS sent her a Letter 3176C, stating that the position on her amended return was frivolous and inviting her to avoid a penalty under Sec. 6702(a)(1) for filing a frivolous return by correcting her frivolous filing. She did not comply. When the IRS did not allow the refund, she sent the IRS six letters, to each of which a photocopy of the Form 1040X was attached. In each of those six instances, the photocopy was clearly marked as a copy, and the IRS understood that the copies were not new original claims for refund. The IRS assessed against her seven $5,000 penalties (i.e., one each for the original Form 1040X and the six photocopies) under Sec. 6702(a)(1). The IRS issued to a notice under Sec. 6320 of its filing a Notice of Federal Tax Lien (NFTL) under Sec. 6323, and the taxpayer requested a “collection due process” hearing before IRS Appeals. Appeals issued a notice of determination sustaining the penalties and the NFTL filing, and the taxpayer filed her Tax Court petition. The Court held the taxpayer was liable under Sec. 6702(a)(1) for the $5,000 penalty for the filing of her frivolous amended return and the inclusion of copies of her original Form 1040X as attachments to letters or notices asking the IRS to process and honor her original Form 1040X did not constitute filing what purports to be a return for purposes of Sec. 6702(a)(1), and she was not liable for the $5,000 penalties on the six photocopies. The Court also held the IRS's Letter 3176C, inviting her to avoid that penalty by correcting her frivolous filing, was not an initial determination of penalty liability for purposes of Sec. 6751(b)(1) and that the IRS complied with the written supervisory approval requirement of Sec. 6751(b)(1) in this case. Finally, the omission from the NFTL of the assessment date for two of the penalties did not render the NFTL invalid as to those assessments. Gwendolyn L. Kestin (153 T.C. No. 2).
Tip of the DayMind the store . . . You've seen the headlines from time to time--rouge bond trader creates $8 billion loss for bank--or some similar catastrophe. While the magnitude may be less, the impact may be just as significant for a small firm. The bookkeeper who embezzled $280,000 from a 10-person consulting firm over 18 months, the salesman who inflated his numbers to increase his commissions, etc. Don't assume the numbers from your bookkeeper are automatically correct. There are number of fairly simple tests that can be done to insure that the numbers represent the actual results. One of the easiest steps is to make sure your bank statement is reconciled each month--by someone other than the bookkeeper. Use a special bank account for electronic deposits and/or a special address for incoming checks. There are a number of relatively inexpensive steps that can be taken. Talk to your CPA. And use common sense. If sales are up and your margins are the same you should be making more money. If not, why not?
September 10, 2019
NewsThe Tax Cuts and Jobs Act (TCJA) made several changes to the timing of income for accrual method taxpayers by redesignating Sec. 451(b) through (i) as Sec. 451(d) through (k), and adding new Sec. 451(b) and (c). New Sec. 451(b) and (c) are generally effective for taxable years beginning after December 31, 2017. Section 451(b), as amended by the TCJA, generally provides that for an accrual method taxpayer the all events test with respect to any item of gross income (or portion thereof) shall not be treated as met any later than when such item (or portion thereof) is taken into account as revenue in an applicable financial statement (AFS) of the taxpayer, or such other financial statement as the Secretary may specify. Section 451(c), as amended by the TCJA, provides an elective deferral method of accounting for an accrual method taxpayer that receives an advance payment during the taxable year. Rev. Proc. 2019-37 (IRB 2019-39) modifies Rev. Proc. 2018-31 to provide procedures under Sec. 446 and Reg. Sec. 1.446-1(e) to obtain automatic consent of the Commissioner to change methods of accounting to comply with Sec. 451 and the proposed regulations under Secs. 1.451-3 and 1.451.8.
The IRS Restructuring and Reform Act of 1998 (RRA 98) requires the IRS to ensure that managers do not evaluate enforcement employees using any record of tax enforcement results (ROTER) or base employee successes on meeting ROTER goals or quotas. Use of ROTERs may create the misperception that safeguarding taxpayer rights is secondary to IRS enforcement results. The Treasury Inspector General for Tax Administration (TIGTA) is required under Code Section 7803(d)(1) to annually determine whether the IRS complied with restrictions on the use of enforcement statistics to evaluate employees as set forth in RRA 98 Section 1204. TIGTA found instances of noncompliance with RRA 98 Section 1204 requirements. From a sample, TIGTA identified instances of noncompliance with each of the following subsections of the law: Section 1204(b)--27 instances in which 20 IRS managers failed to either maintain the retention standard documentation or ensure that it was appropriately signed and dated. Section 1204(c)--32 instances in which 11 IRS managers did not properly certify in writing to the IRS Commissioner whether ROTERs and/or production quotas or goals were used in a prohibited manner. TIGTA also identified 18 Code of Federal Regulations Section 430.206 policy violations in which four pertinent documents pertaining to Section 1204(b) were not signed and dated until the last 60 days of the rating period, and 14 pertinent documents pertaining to Section 1204(b) were signed and dated after the rating period ended. Furthermore, 14 managers were missing from the Fiscal Year 2018 Section 1204 employee and manager list, and a total of 466 employees and managers did not complete or did not timely complete the mandatory Section 1204 training. For the complete report, go to www.treasury.gov/tigta/auditreports/2019reports/201930056fr.pdf.
In William C. Lipnick and Dale A. Lipnick (153 T.C. No. 1) the taxpayer's father owned interests in partnerships that made debt-financed distributions to the partners. The father used the proceeds of those distributions to purchase assets that he held for investment. He treated the interest paid by the partnerships on those debts and passed through to him as “investment interest” subject to the limitation on deductibility imposed by Sec. 163(d). In 2011 and 2013 the taxpayer's father transferred interests in the partnerships to the taxpayer by gift and bequest. The partnerships continued to incur interest expense on the debts, which was passed through to the taxpayer as a new partner. He treated the debts as properly allocable to the partnerships' real estate assets and reported the interest expense on his 2013 and 2014 Schedules E, Supplemental Income and Loss, as offsetting the passed-through real estate income. For the taxpayers' taxable years 2013 and 2014, the IRS characterized the interest passed through to the taxpayer as “investment interest.” Because the taxpayers had insufficient investment income for these years, the IRS disallowed 100% of the deductions for interest expense under Sec. 163(d). The Tax Court held that the taxpayer, unlike his father, did not receive the proceeds of any debt-financed distributions and did not use partnership distributions to acquire property held for investment. Rather, he is deemed to have made a debt-financed acquisition of the partnership interests he acquired by gift and bequest, and the associated interest expense is allocated among the assets of the partnerships. The Court also held that, because the assets owned by the partnerships were not property held for investment, none of the interest expense passed through to the taxpayer was “investment interest” subject to limited deductibility under Sec. 163(d). Finally, the Court held that the interest expense passed through to the taxpayer cannot be characterized as “investment interest” on the theory that he stepped into his father's shoes.
Tip of the DayAccounts receivable watch . . . While some economists are predicting a recession in the not too distant future, the odds right now seem low. But that doesn't mean you shouldn't keep a close eye on your receivables. Some companies are having problems dealing with the tariffs, and it's likely to get worse the longer they continue. In addition, there may be a slowdown in investment because the a large part of the benefits of the 2017 tax cut may have spent. Problems are likely to arise in particular industries rather than across the board. Monitor your receivables closely and take action if a customer starts paying later. Caught early you may be able to keep the customer and get paid; at some point it can be too late for both.
September 9, 2019
NewsThe IRS has issued proposed regulations (REG-102508-16) clarifying the reporting requirements generally applicable to tax-exempt organizations. The proposed regulations reflect statutory amendments and certain grants of reporting relief announced by the IRS in prior guidance to help many tax-exempt organizations generally find the reporting requirements in one place. Among other provisions, the proposed regulations incorporate the existing exception from having to file an annual return for certain organizations that normally have gross receipts of $50,000 or less, which is found in Revenue Procedure 2011-15. The regulations also incorporate relief from requirements to report contributor names and addresses on annual returns filed by certain tax-exempt organizations, previously provided in Revenue Procedure 2018-38. A recent court decision held that the IRS should have followed notice and comment procedures in 2018 when announcing this relief with respect to providing contributor names and addresses, and these regulations provide the opportunity for notice and comment on that relief as well as on other proposed updates to existing regulations. Under the proposed regulations, filing requirements for Section 501(c)(3) organizations and Section 527 political organizations remain unchanged, and all organizations are required to keep the contributor information and make it available to the IRS upon request.
Notice 2019-47 provides penalty relief for organizations exempt from tax under Section 501(a), other than those organizations described in Section 501(c)(3), that did not report the names and addresses of their contributors on the Schedule B of their Forms 990 or 990-EZ filed for a taxable year ending on or after December 31, 2018, and on or prior to July 30, 2019.
The IRS announced (IR-2019-151) new procedures that will enable certain individuals who relinquished their U.S. citizenship to come into compliance with their U.S. tax and filing obligations and receive relief for back taxes. The Relief Procedures for Certain Former Citizens apply only to individuals who have not filed U.S. tax returns as U.S. citizens or residents, owe a limited amount of back taxes to the United States and have net assets of less than $2 million. Only taxpayers whose past compliance failures were non-willful can take advantage of these new procedures. Many in this group may have lived outside the United States most of their lives and may have not been aware that they had U.S. tax obligations.
Tip of the DayDisaster aftermath . . . There's a lot to do after a hurricane or similar natural disaster. Keep in mind that the IRS will provide certain relief such as abatement of penalties for late filing for a certain time, but you'll still have to have records of your income and deductions, whether personal or business. Both the IRS and the courts will give you sympathy with respect to alternative sources, but you'll be expected to reconstruct missing documents. From a physical standpoint, you'll be reconstructing or cleaning property such as your home, boat, etc. While disasters bring out the best in some people, they can also bring out the worst in some. It may be best to avoid contractors new to the area unless they've been throughly vetted.
September 6, 2019
NewsThe Authorized IRS e-file Provider database is a nationwide listing of all businesses which have been accepted to participate in the electronic filing (IRS e-file) program. "For Profit" Providers are included in the locator service unless they choose not to be. When searching in the database there may be multiple search results. Use the arrow at the bottom right of the Search Button to advance to the next page. Once you advance to the second page, you will be able to go forward or backward by using the appropriate arrows.
You can generally deduct up to $25,000 of passive activity losses (phased out if your AGI is more than $100,000) from rental real estate. If you can show that you're a real estate professional by spending more than half your time and more than 750 hours in real estate trades, your deductions are not limited. But you'll have to keep a contemporaneous log to show the time spent. In Ronnie Hairston and Gloria Cruz Hairston (T.C. Memo. 2019-104) but the Court noted the time spent was not shown by taxpayer, all the recorded tasks, even if trival, took at least an hour and the time for other tasks was inflated. The Court also cited the taxpayer spent 40 hours supervising a painting contractor. The Court questioned the credibility of their calendar and held that the diary was inflated by at least 150 hours, putting his time spent at less than 750 hours.
Tip of the DayRecordkeeping for capital losses . . . You can use capital losses to offset capital gains or up to $3,000 in ordinary income. Any unused amounts can be carried forward indefinitely. When the market has turned sour for an extended period taxpayers may have capital loss carryforwards for a number of years. You've got to be able to substantiate the losses. At a bare minimum you'll need your return for the year the loss arose and all intervening years to show the loss wasn't fully used. That's one reason to keep all your old tax returns.
September 5, 2019
NewsThe IRS has started a webpage with links to resources for those affected by Hurricane Dorian, but as of September 4, a Federal disaster has not been declared and the IRS has not provided relief.
Some tax accounting rules are arcane; some much more well known. In King Solarman, Inc. (T.C. Memo. 2019-103) the taxpayer was a C corporation that both manufactured and soled solar equipment. The Court found the taxpayer had to use the accural method of accounting because it had elected that method and actually used it in the past. Moreover, the company used the accrual method for internal purposes because the general ledger had accounts for accrued salaries, accounts payable, payroll taxes payable, and appeared to have an inventory account. In addition, companies must generally use the accrual method if they must account for inventories unless they fall under an exception (e.g., a small business). The taxpayer met no such exception. On a second issue, the Court found the taxpayer could not use the installment method for certain sales, noting the installment method cannot be used for property that would be held in inventory.
Tip of the DayKeep 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 retaincopies 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.
September 4, 2019
NewsA carryforward credit or deduction refers to claiming the unused portion of a tax credit or deduction on a future years' tax return. A credit reduces the tax liability amount, whereas a deduction reduces taxable income. About 2.5 million Tax Year (TY) 2015 tax returns contained claims for carryforward credits totaling $81.9 billion. In addition, 6.5 million TY 2015 tax returns claimed carryforward deductions of $55.9 billion. The Treasury Inspector General for Tax Adminstration (TIGTA) performed an audit because in two previous reviews, TIGTA recommended that the IRS develop a process to ensure the accuracy of carryforward claims. This audit was initiated to determine what corrective actions the IRS has taken in response to two previous TIGTA reviews dealing with General Business Credit carryforward claims. It was also initiated to assess the effectiveness of current IRS controls to detect and prevent questionable carryforward claims on individual and business income tax returns. TIGTA continued to find discrepances that could indicate questionable credits. It made six recommendations to the IRS. To read the full report, go to www.treasury.gov/tigta/auditreports/2019reports/201940044fr.pdf.
Tip of the DayRight to audit . . . You hire an independent contractor for consulting work and agree to reimburse him for expenses including meals, lodging, equipment rentals, subcontractors, etc. If the contract is substantial, make sure you include a right to audit his expenses. Contractors have been known to pad charges that should be legitimately passed through without a markup. Similarly, if you're a tenant in a building you should also have the right to review building cost data if a share of the expenses are being passed through on your lease.
September 3, 2019
NewsThe IRS has recently released draft copies of a number of the common schedules that will accompany 2019 Form 1040. To see these draft copies, go to Draft Tax Forms.
Under the new law personal casualty losses are no longer deductible unless they're related to a Federally declared disaster. But, if allowed, the rules generally remain the same. In Robert G. Taylor, II (T.C. Memo. 2019-102) claimed a casualty loss for damage from a hurricane. This was no ordinary loss. There was extensive damage to a wine collection of more than 6,889 bottles of wine, stained glass windows, mold and water damage, personal property damage, etc. One insurance company paid over $2.3 million in claims. The taxpayer claimed a casualty loss deduction of $888,345. He reported a basis in the property of $6.5 million, insurance reimbursements of $2.3 million, fair market value before the casualty of $15,442,059, and fair market value after the casualty of $12,250,000. The taxpayer's CPA testified that the precasualty fair market value was based on the 2009 listing price of the property, reduced for the time it spent on the market. The precasualty fair market value reported on Form 4684 is also consistent with values reported on taxpayer's insurance claims. Neither the taxpayer nor his CPA provided an explanation as to the postcasualty fair market value. The Court noted that to compute a casualty loss deduction, the following values of the damaged or destroyed property must be established: (1) fair market value before the casualty, (2) fair market value after the casualty, and (3) the taxpayer's basis in the property. As an alternative method of proving a decline in value, the regulations provide that if the taxpayer has repaired the property damage resulting from the casualty, the taxpayer may use the cost of repairs to prove the loss of value to the property from the casualty. The taxpayer must show that (a) the repairs are necessary to restore the property to its condition immediately before the casualty, (b) the amount spent for such repairs is not excessive, (c) the repairs do not care for more than the damage suffered, and (d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty. In it's opinion the Court noted the record did not establish that the valuations were based on competent appraisals, nor how the CPAs determined the precasualty or postcasualty fair market value of the property, even thought the precasualty FMV was consistent with the value reported to the insurance company. The Court was not persuaded that the appraisals were reliable measures of the taxpayer's casualty loss and declined to rely on them. The taxpayer received insurance payments well in excess of the cost of repairs thus precluding a deduction based on the alternative method of determining a loss. The Court held the taxpayer was not entitled to a casualty loss.
Tip of the DayNot worth the effort? . . . When told that taxes would take 40% (federal and state) of her short-term capital gain of $200,000 the taxpayer said "why even bother?" We've also heard the other side--sure the new pickup cost me $60,000, but it's tax deductible. Unless you don't care about money, neither statement makes sense. The woman who had the $200,000 gain was left with $120,000. Admittedly, taxes took almost half the gain, but she was still left with significant profits. The guy who got to deduct the $60,000 truck saved $24,000 in taxes, but still had to pay $36,000 for the vehicle out of his own pocket. The only time it's not worth working or the government picks up the entire cost is when tax rates reach 100%.
August 30, 2019
NewsValuation issues can be particularly tricky. If you hire five experts you'll probably get five answers--sometimes wildly divergent. In Estate of Aaron U. Jones, Donor, Deceased, Rebecca L. Jones and Dale A. Riddle, Personal Representatives (T.C. Memo. 2019-101) the issue was the valuation for gift tax purposes of a limited partnership that owned a substantial amount of timberland and an S corporation that owned a sawmill and other related assets. The general partner of the partnership was the S corporation. The operations of the mill and the timberland were intermingled. Transfer of the limited partnership units was restricted in a buy-sell agreement which contain a right of first refusal. The determination of fair market value had to take into account lack of marketability, lack of control, lack of voting rights of an assignee, and the reasonably anticipated cash distributions allocable to the units. The IRS used a net asset value approach in arriving at the partnership holding the timberland, while the taxpayer's expert used a discounted cash flow approach for both the timberland and the mill. The Court sided with the taxpayer's expert and accepting both his method, including tax affecting the value of partnership and the S corporation, and his final valuation, a far lower value that the IRS's.
Tip of the DayMore than one class of S corporation stock . . . One of the restrictions placed on an S corporation is a limit of one class of stock. But the reference here is to rights to the distributions and liquidation proceeds. An S corporation can have multiple classes of stock if the difference is limited to voting rights. For example, class A could have full voting rights; class B may be totally non voting or only allowed to vote on certain issues. The use of two or more classes can be a means of giving valued employees an owership interest in the company without ceding control. Shares with reduced or no voting rights might also receive a lower valuation. This can be a complex issue. Talk to your tax advisor or attorney before acting.
August 29, 2019
NewsThe IRS has announced (Rev. Rul. 2019-21; IRB 2019-38)) that interest rates will remain the same for the calendar quarter beginning Oct. 1, 2019, as they were in the prior quarter. The rates will be:
In Todd Myron Moore (T.C. Memo. 2019-100) the IRS disallowed a deduction for commissions paid to independent contractors as well as interest on loans. The Court allowed a deduction for the commissions, although not as much as the taxpayer claimed. The documentation for the payments was conflicting and the Court, based on the evidence available and the taxpayer's testimony, took the lowest of the three most credible exhibits. The Court disallowed the interest expense, finding there was insufficient evidence to support any bona fide indebtedness.
Tip of the DayEmployee discounts . . . They're generally a good idea. They improve morale and often can be less expensive than providing a like amount of additional salary. And who doesn't like to get something at a discount? The IRS has their eye on discounts. Done the wrong way, at least part of the discount could be additional income to the employee. In the case of property, the discount can't exceed the gross profit percentage of the price at which the property is offered to customers. In the case of services, the discount can't exceed 20% of the price at which the services are offered to customers. Discounts in excess of this amount are taxable income to the employee. For example, Andersen Marine will haul a boat out of the water, wash the bottom, put it on a cradle and shrinkwrap it for the winter for $40 a foot. Fred, an employee, has Andersen perform the services on his 35 foot boat. The charge would normally be $1,400, but Andersen charges Fred only $1,000. With a 20% discount his cost would be $1,120. The extra $120 of discount is taxable income to Fred and has to be included on his W-2. The rules can quickly become involved because of the different situations that can be encountered. However, a short talk with your tax adviser and you should be able to devise some simple guidelines that keep it simple.
August 28, 2019
NewsTruck drivers who have registered, or are required to register, a heavy highway vehicle with a taxable gross weight of 55,000 pounds or more must file Form 2290, Heavy Highway Vehicle Use Tax, and pay any tax due by the deadline. For most Form 2290 taxpayers, the deadline is Tuesday, Sept. 3, for vehicles used on the road in July. The deadline is later this year because the normal due date, Aug. 31, falls on a Saturday, and Monday, Sept. 2, is a federal holiday. The IRS is encouraging trucking business owners to take advantage of the speed and convenience of e-filing the form and e-paying the tax. E-filers receive their IRS-stamped Schedule 1 electronically minutes after filing. A printout of the schedule can then be provided to the state department of motor vehicles, without visiting an IRS office. IRS.gov contains a list of IRS-approved e-file providers. For more information, visit the Trucking Tax Center.
While a divorce will no longer generate deductible alimony for the payer or taxable alimony for the recipient, the deductible/taxable rule continues to apply to divorce decrees executed before December 31, 2018. In Maria M. Faust (T.C. Memo. 2019-100) the taxpayer received alimoney payments which she did not report as income. The taxpayer was the victim of spousal abuse and the Court examined the documents associated with the taxpayer's separation and divorce and found the payments met all the requirements of alimony. The IRS determined an accuracy-related penalty. The Court noted that even though the IRS has met its burden of production, the Section 6662(a) penalty still may not be imposed if the taxpayer produces persuasive evidence that she �acted with reasonable cause and good faith� which can be determined in light of the taxpayer's �experience, knowledge, and education.� The determination of reasonable cause and good faith �is made on a case-by-case basis, taking into account all pertinent facts and circumstances.� The Court took into account the taxpayer's limited command of English, limited educational background, and the complexity of her divorce proceedings. The Court also recognized her credible testimony and her participation in a domestic violence support group. Taking these factors into account, the Court concluded she proved she acted with reasonable cause and in good faith and found her not liable for the accuracy-related penalty.
Tip of the DaySelling a vacation home? . . . If the property is located in another state, you may have to file an income tax in that state reporting any gain. The same is true of other property located in the state. Some states require information returns on such sales and a few require withholding on the sale proceeds.
August 27, 2019
NewsThe Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether the IRS properly implemented controls to prevent data loss, including data exfiltration of personal information. The IRS is implementing a Data Loss Prevention software solution to identify and prevent Personally Identifiable Information from leaving the IRS network, whether intentionally or unintentionally. The software has multiple components that are being implemented over several years, and this audit evaluated the progress of the implementation. TIGTA found The Safeguarding Personally Identifiable Information Data Extracts Project, which is responsible for implementing the Data Loss Prevention solution, started in Calendar Year 2010 and is ongoing. The project team implemented and expanded the Data-in-Motion component of the solution that includes reviewing unencrypted e-mail and attachments, file transfers, and web traffic for the most common types of Personally Identifiable Information used by the IRS. Our testing indicated that the Data-in-Motion component generally identified and blocked common Personally Identifiable Information types from exfiltration by e-mail as designed, and that potential incidents identified by the solution were reviewed and resolved correctly. However, continued delays with implementing other components are preventing realization of the full benefits of the Data Loss Prevention solution. The causes of the delays include technical, project management, and administrative issues. Because of the delays, two key components involving data in repositories and data in use are still not operational more than eight years after the project started. Without these components, Personally Identifiable Information continues to be at risk of loss. The delays have also resulted in the inefficient use of resources of approximately $1.2 million in software costs for the components that are not operational. To read the complete report, go to www.treasury.gov/tigta/auditreports/2019reports/201920049fr.pdf.
If the IRS assesses a deficiency, interest is automatically added to the bill. In Jon D. Adams (T.C. Memo. 2019-99) the IRS first initiated a criminal in 2002. He was convicted but the conviction was vacated by the Court of Appeals. The IRS then began an examination of the same two years with the intent to pursue a civil fraud penalty. When the examination was completed the IRS added interest which the taxpayer sought to have abated. The Court noted that interest may be abated in some cases, but not in others. Abatement may be allowed if the IRS unreasonable delays performing ministerial or managerial acts. Sec. 6404(e)(1) authorizes abatement of interest only �after the Internal Revenue Service has contacted the taxpayer in writing with respect to� the deficiency in question. In other words, �the period pursuant to Section 6404(e)(1) may begin when the IRS intiates an audit. The taxpayer contended the period should begin with the first issuance of written contact regarding the earlier criminal investigation. The Court disagreed. The Court also found that the IRS did not unreasonably delay the determination.
Tip of the DayDelinquent taxes? . . . The IRS is making it more costly for deliquent taxpayers by denying passports to those owing more than $50,000. More than a few states have their own approach. One posts a list of the top 100 deliquent taxpayers online. One now has the option of denying a driver's license, or suspending a current one, to taxpayers with more than $10,000 in deliquent taxes. Neither the IRS nor the states who have such a program continue the punitive action if the taxpayer is working to correct the problem.
August 26, 2019
NewsThe IRS has issued proposed regulations (REG-101378-19) regarding special vehicle valuation rules for employers and employees to use in determining the amount to include in an employee's gross income for personal use of an employer-provided vehicle. The proposed regulations reflect changes made by the Tax Cuts and Jobs Act. The regulations make changes to the fleet-average valuation rule and the vehicle cents-per-mile valuation rule.
The IRS Lead Development Center (LDC) is working to combat tax abuse by stopping abusive promoters and tax return preparers as early as possible. The LDC follows up on internal and external referrals that provide information on tax schemes and abusive tax return preparers. The LDC also ensures that cases involving abusive tax schemes and improper tax return preparation are appropriately sent for further IRS action, including sending cases to Criminal Investigation. To report an abusive tax scheme or tax return preparer, submit Form 14242, Report Suspected Abusive Tax Promotions or Preparers along with any supporting materials to the LDC.
If you own a business as an LLC, partnership, sole proprietorship, or S corporation, you may be entitled to deduct the losses incurred by the business, but you must materially participate in the business. In Kent Alan Wegener and Shinae Wegener (T.C. Memo. 2019-98) the Court did not have to determine the number of hours the taxpayer was involved in the Schedule C activity. Instead, the Court found the taxpayer was not engaged in a trade or business. Rather, he simply made investments in farms in Ghana and wired money for the farms' operations. The farms were managed by the farmers and a manager. The Court saw the taxpayers' activities as basically financial investments.
Tip of the DayAttorney client privilege has its limits . . . The attorney-client privilege protects confidential communications between client and an attorney made for the purpose of obtaining or providing legal assistance. Information conveyed to a lawyer by a client solely for the purpose of retransmission to a third-party is generally not protected by the attorney-client privilege, and the result is no different when the third-party is the IRS and the means of retransmittal is a tax return. The issue hinges on whether the information was conveyed by the client to the attorney in confidence for the purpose of obtaining legal advice and not merely for the purpose of retransmittal to a third party. The attorney-client privilege can also be lost if you reveal the information to a third party. Best advice? If you want the information to remain privileged, talk to your attorney and make sure you understand the nuances of the law.
August 23, 2019
NewsThe IRS is reporting (IR-2019-145) a new email scam. The email subject line may vary, but recent examples use the phrase �Automatic Income Tax Reminder� or �Electronic Tax Return Reminder.� The emails have links that show an IRS.gov-like website with details pretending to be about the taxpayer�s refund, electronic return or tax account. The emails contain a "temporary password" or "one-time password" to "access" the files to submit the refund. But when taxpayers try to access these, it turns out to be a malicious file. This new scam uses dozens of compromised websites and web addresses that pose as IRS.gov, making it a challenge to shut down. By infecting computers with malware, these imposters may gain control of the taxpayer�s computer or secretly download software that tracks every keystroke, eventually giving them passwords to sensitive accounts, such as financial accounts. The IRS is reminding taxpayers it doesn't initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information. This includes requests for PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts.
Notice 2019-46 (IRB 2019-37) announces that the IRS intends to issue regulations that will permit a domestic partnership or S corporation that is a U.S. shareholder of a controlled foreign corporation to apply proposed Reg. Sec. 1.951A-5, related to the treatment of domestic partnerships and S corporations for determining the amount of the global intangible low-taxed income inclusion, for taxable years ending before June 22, 2019. The notice also addresses the applicability of penalties for a domestic partnership or S corporation that acted consistently with proposed Sec. 1.951A-5 on or before June 21, 2019, but files a tax return consistent with the final regulations under Sec. 1.951A-1(e). In order to apply the rules in proposed Sec. 1.951A-5 or for penalties not to apply under the notice, a domestic partnership or S corporation must satisfy certain notification and reporting requirements described in the notice. Prior to the issuance of the regulations described in the notice, domestic partnerships and S corporations may rely on the notice, provided they satisfy the requirements described therein.
On again, off again. That's the story on payroll tax cuts and indexing capital gains to inflation. President Trump suggested a cut in the social security taxes as a way to boost the economy; indexing has been under discussion for some time. The latter could increase tax receipts in the short term and investors sell stock they've been holding with gains where they don't want to absorb a big tax hit. Apparently both tax changes are technically no longer under consideration.
Tip of the DayReconstructing lost records . . . With hurricane season upon us, there's a chance your tax and business records may be partially or wholly destroyed, despite your best efforts. If you can show the IRS or court that your records were in the disaster area you're sure to get sympathy as well as some leeway. Nonetheless, you can't just say they were lost in the flood and expect to be believed. You're expected to take steps to reconstruct your records. That includes requesting bank and credit card statements from the financial institutions, invoices from vendors, etc. If you paid by credit card or check you should be able to secure the original invoice at many stores. Paid cash at the gas pumps? No way you'll recover those. Often the IRS and courts will accept less documentation than they would under other circumstances. And you may be able to use a back door approach. Your mechanic provided oil change receipts that show the car mileage. The court may estimate the amount of gas used based on a prior year's documentation and use an average cost per gallon. Chances are the 80-20 rule will apply. You should be able to alternatively document 80% of the expenses fairly easily (though time consuming). The other 20% could be extremely difficult. The IRS and court may give you a significant part of the 20%. Talk to your accountant and tax advisor on other tips.
August 22, 2019
NewsThe IRS has reported that it will conduct its annual Labor Day power outage beginning Saturday, August 31, 2019, starting at 9:00 p.m. and ending Tuesday, September 3, 2019, at 7:00 a.m. The Modernized E-File Systems (both Production and ATS) will not be operational during this timeframe. Please refrain from accessing the MeF Systems to transmit business/individual/state tax returns, retrieve acknowledgements or submit any other service requests. You can get updates at Modernized eFile (MeF) Operational Status.
The IRS has announced that effective August 19, 2019, all individuals listed as a Principal or Responsible Official will be required to sign a new Terms of Agreement when adding individual(s) and/or Provider Option(s) to an e-file application. The Terms of Agreement include the Privacy Act and Paperwork Reduction Act Notice, and the FBI Privacy Act Statement. Your application status will change to Resubmission Required and must be submitted to complete the application process. Your EFIN will remain active during this process.
Tip of the DayAnswer that survey? . . . Be sure you know who it's from first. Both bogus and real surveys can gleam personal or business information that, either alone or combined with other info the requester has about you, can be enough be valuable to a scammer. In any event, even your email address can prove valuable to company if it knows another item as innocuous as your zip code. The zip code can give the company a clue to your wealth or income. Reveal as little as possible and consider opting out of allowing companies to release your information to third-party sources.
August 21, 2019
NewsIn Bianca Lavinia Gilmore (T.C. Memo. 2019-97) the taxpayer had unpaid tax liabilities for the years 2012 and 2015 and sought a collection due process hearing. The settlement officer (SO) spoke with the taxpayer's represented and wrote in the file record that the representative advised him, among other things, that the taxpayer: (1) sought either an installment agreement of $300 per month or an OIC, (2) did not dispute the underlying tax liabilities for 2012 and 2015, and (3) had closed her business and was now unemployed. The SO informed the representative that in order for petitioner to qualify for an installment agreement or OIC, he needed to receive a number of items no later than March 29, 2017, including: (1) documentation proving her compliance with, inter alia, her estimated tax payment obligations, (2) information regarding when her business closed, and (3) updated financial information reflecting her financial condition after the closure of her business. The SO received some, but not all, the information by the due date, but the taxpayer provided no documentation corroborating the date the business was closed, or showing compliance with her estimated tax requirements. The taxpayer attempt to challenge her liability at trial. However, the Court noted that it could not now consider such a challenge because the underlying tax liabilities were not challenged in the CDP hearing. The Court also held that the SO did not have to consider collection alternatives because the taxpayer was not current with her estimated tax liabilities.
Tip of the DaySpecific bequests in a will . . . Estates have a nasty way of creating rifts among the closest relatives. And often it's not the size of the bequest, but one or more items. Fred may not care that he got the larger share of the inheritance, he's upset he didn't get the lake property where he spent summers and proposed to his wife. Because of the way the will was written the property had to be sold and the proceeds divided. Often the best approach is to talk to the heirs and find out what they want and either put that as a specific bequest in the will or gift the property before you pass.
August 20, 2019
NewsDoing business as a C (regular) corporation now can be a big advantage. The tax rate is only 21 percent. But for many small businesses there's a potential trap. Dividends paid out by the corporation are again taxed to the shareholders, resulting in a double tax. The corporation doesn't necessarily have to declare a dividend for an amount to be a "constructive dividend". In Patrick Combs (T.C. Memo. 2019-96) the taxpayer was the sole shareholder in a corporation where the taxpayer performed comedy shows and was a motivational speaker. The taxpayer, as part of a tax avoidance scheme, paid many personal expenses out of the corporate account. The Court noted that Sections 301 and 316 govern the characterization, for Federal income tax purposes, of corporate distributions of property to shareholders. If the corporation making the distribution has sufficient earnings and profits (E&P) (similar to retained earnings), the distribution is a dividend that the shareholder must include in gross income. If the distribution exceeds the corporation's E&P, the excess generally represents a nontaxable return of capital to the extent of the shareholder's basis in the corporation, and any remaining amount is taxable to the shareholder as a gain from the sale or exchange of property. The Court also noted that the taxpayer's voluminous documentation, in which personal living expenses were not clearly distinguished from legitimate business expenses, provided no reasonable means of estimating or determining which if any of the expenditures in question were incurred as ordinary and necessary business expenses of the corporation. The Court sided with the IRS in holding that the taxpayer received and failed to report constructive dividends.
Tip of the DaySafeguarding business info . . . Some safeguards involve hi-tech methods such as firewalls, malware checks, encryption, etc. and you'll definitely have to go that route, but there are steps you can take while waiting for the IT guy to show up. For example, employees should be warned not to leave a company laptop in a car or public place unattended. One small company had a major breach of customer data (including social security numbers, addresses, age, etc.) when a company laptop was stolen from a car. Another had it's secured network breached when a list of logins and passwords was obtained from an employee's phone that was stolen. In one case customer information was obtained when a member of the outside cleaning crew when into files that were left unlocked. In another a cleaning crew member stole blank checks that weren't locked up. Outside workers including contractors working on projects have also been known to steal information. Limit access to information to those employees that really need it. Once they no longer need it, their access should be denied. Warn employees not to share passwords and other information, even long-time employees. Talk to your CPA about other steps you may take.
August 19, 2019
NewsThe IRS has updated the disaster notification for victims of the severe winter storm, straight-line winds, and flooding that took place on March 9, 2019 in Nebraska to include Dawson county. As a result, Individuals who reside or have a business in Antelope, Boone, Boyd, Buffalo, Butler, Burt, Cass, Colfax, Cuming, Custer, Dawson, Dodge, Douglas, Hall, Howard, Knox, Madison, Nance, Nemaha, Pierce, Platte, Richardson, Saline, Sarpy, Saunders, Stanton, Thurston, and Washington counties, and the Santee Sioux Nation may qualify for tax relief that includes both the postponement of certain deadlines and the ability to claim losses on either their 2018 or 2019 returns. For more information, go to IRS announces tax relief for Nebraska victims of severe winter storm, straight-line winds, and flooding
Tax cases often involve a number of different issues. In Hisham N. Ashkouri and Ann C. Draper (T.C. Memo. 2019-95) the Tax Court denied a number of meals, entertainment and travel expenses in part for lack of documentation and in part because the taxpayers did not provide evidence to indicate the business purpose of some of the expenses. On a second issue the Court noted that capitalization of some expenses are required. It allowed a current deduction for marketing and promotional expenses but noted that some of the expenses involved the cost of bidding on a contract. The latter is not a currently deductible expense under Regs. Sec. 1.263A-1(e)(3)(ii)(T). Third, capital assets sold at a gain may receive favorable tax treatment if held for more than a year. Assets that are stock in trade of the taxpayer that would properly be included in inventory or held for sale to customers don't qualify for special treatment. Here the Court ruled that the assets sold. did not qualify for capital gain treatment. Finally, deductions taken in one year only to be recovered in another (e.g., a refund of state income taxes) must be included in income in the year received.
Tip of the DayHR decisions . . . While some entrepreneurs have a number of skills, that is they're technically good, have business smarts, etc., many fall down in one area--HR (human resources). It rarely produces major cost savings and never generates revenue. But good people management is vital to most businesses. And many technically competent entrepreneurs don't have good people skills. Add to that the myriad of federal and state regulations governing that area that many businesses must contend with. The first step is to recognize your limitations. The second is to either hire a competent professional if your business can support one or find a firm that can provide consulting help on an hourly or daily fee schedule. Ideally you should have someone who understands your industry. There may be other options. But the worst choice is to try and blunder through on your own. Employee confrontations can produce some of the biggest lawsuits.
August 16, 2019
NewsThe IRS is reminding taxpayers with expiring individual taxpayer identification numbers should renew their number as soon as possible. There are nearly 2 million ITINs set to expire at the end of 2019. Taxpayers with an expiring number should renew before the end of this year. This will help avoid unnecessary delays related to their tax refunds next year. (ITINs are used by taxpayers required to file or pay taxes, but who aren�t eligible for a Social Security number.) ITINs not used on a federal tax return at least once in the last three consecutive years and those with numbers with middle digits 83, 84, 85, 86 or 87 not already renewed expire on December 31, 2019. ITINs with the middle digits 83, 84, 85 or 86, 87 need to be renewed, even if it was used it in the last three years. Taxpayers with expiring ITINs should receive a CP48 Notice explaining the steps to renew. ITINs with middle digits of 70 through 82 have previously expired. Taxpayers with these ITINs can still renew at any time, if they haven�t already. To renew an ITIN, a taxpayer must complete a Form W-7 and submit all required documentation. They don�t need to attach a tax return. However, taxpayers must note why they need an ITIN on the W-7. There are three ways taxpayers submit the renewal application:
The IRS is required by law to notify taxpayers of their rights when requesting an extension of the statute of limitations for assessing additional taxes and penalties. Taxpayers might be adversely affected if the IRS does not follow the requirements to notify both the taxpayers and their representatives of the taxpayers� rights related to assessment statute extensions. The Treasury Inspector General for Tax Administration (TIGTA) is required by law to annually determine whether the IRS complied with Code Section 6501(c)(4)(B), which requires that the IRS provide notice to taxpayers of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to a specific period of time or specific issues. TIGTA�s review of a statistical sample of 60 closed taxpayer audit files with assessment statute extensions found that the IRS was compliant with Internal Revenue Code Section 6501(c)(4)(B). However, 13 of the taxpayer audit files lacked documentation to support that employees followed the IRS�s internal procedures for further explaining the taxpayers� rights to the taxpayers. In addition, TIGTA�s review found instances in which the audit files lacked documentation to support that the IRS complied with procedures requiring the notification of a taxpayer�s representative when an authorization for third-party representation exists. Seven of the taxpayer audit files did not contain documentation to support that the taxpayers� representatives were provided with the required notifications. To read the complete report, go to www.treasury.gov/tigta/auditreports/2019reports/201930054fr.pdf.
Tip of the DayHeathcare mandate . . . Even if Obamacare (ACA) is repealed that doesn't mean they'll be no requirement to have health insurance in the U.S. Massachusetts had a mandate some years before Obamacare and the requirement continues unchanged. And, beginning in 2020, California will require residents to obtain some sort of healthcare coverage. In both states failure to have coverage can result in a penalty.
August 15, 2019
NewsRevenue Ruling 2019-19 (IRB 2019-36) provides guidance about an individual who receives a distribution check from a qualified plan and does not to cash the check. The revenue ruling concludes that the individual�s failure to cash the check does not permit the individual to exclude the amount of the designated distribution from gross income under Sec. 402(a) and does not alter the employer�s withholding obligations under Sec. 3405 or Form 1099-R reporting obligations under Sec. 6047(d).
Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. The Tax Cuts and Jobs Act of 2017 repealed the deduction for alimony as well as the requirement to report alimony payments received as income for any divorce or separation instrument executed after December 31, 2018. However, it did not repeal the deduction and income reporting requirement for individuals who pay or receive alimony in accordance with agreements executed prior to January 1, 2019. In Tax Year 2016, 569,978 tax returns claimed alimony deductions that totaled more than $12.9 billion. The Treasury Inspector General for Tax Administration (TIGTA) performed an audit to evaluate the IRS�s use of systemic processes to identify and address alimony income reporting discrepancies. An alimony income reporting discrepancy occurs when individuals claim deductions for alimony that they did not pay or individuals do not report alimony income they received. TIGTA found that apart from examining a small number of tax returns involving alimony, the IRS has yet to adequately address the substantial compliance gap that results from alimony income reporting discrepancies. TIGTA analyzed Tax Year 2016 tax returns with an alimony deduction processed as of February 8, 2018, and found that alimony income reporting discrepancies increased 38 percent from $2.3 billion in Tax Year 2010 to more than $3.2 billion in Tax Year 2016. Although the IRS identifies both electronically filed and paper tax returns with a missing or incomplete Taxpayer Identification Number (TIN), the processes still do not ensure that all individuals who claim an alimony deduction provide a valid TIN of the recipient as required. TIGTA's analysis of the 569,978 Tax Year 2016 tax returns with an alimony deduction claim identified 2,168 tax returns that claimed more than $38.5 million in alimony deductions in which the recipient TIN was invalid and the IRS allowed the deduction. In addition, penalties are not being assessed when valid recipient TINs are not provided. TIGTA's review of the 2,168 tax returns in which the recipient TIN was invalid found that the IRS assessed penalties on only 66 tax returns (3 percent) totaling $3,300. To see the full report, go to www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf.
Tip of the DayCustomer data protection . . . You've heard the stories about retailers, credit agencies, and just about every type of business having their data breached. Failure to take steps to prevent a breach in your organization could prove costly. It could be a loss of customers, suits by customers, or, in some cases, substantial fines. At least one state has passed legislation imposing fines for a breach of a customer's information. Exactly what steps you should take can depend on a number of factors. Unless you have an in-house expert, the first step should be outside advice. Make sure you have antivirius and antimalware in place. Use strong passwords and change them frequently (substantially, not by just changing a letter or two). Make sure you have a firewall. Password protect your computer and don't leave it unattended. On purchases of new machines, consider those with fingerprint or eye scanners. Avoid phishing schemes. Limit access to sensitive files only employees specifically assigned should be able to get in. Change passwords if an employee is no longer allowed access to certain files. Be particularly careful with independent contractors. Stay away from unfamiliar websites. Review the rules regularly with employees. This is one area where people drop their guard after a while.
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