News and Tip of the Day


Small Business Taxes & ManagementTM--Copyright 2019, A/N Group, Inc.

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February 18, 2020

News

The IRS has announced (IR-2020-32) that the Service and its Security Summit partners are calling on tax professionals and taxpayers to use the free, multi-factor authentication feature being offered on tax preparation software products. Already, nearly two dozen tax practitioner firms have reported data thefts to the IRS this year. Use of the multi-factor authentication feature is a free and easy way to protect clients and practitioners' offices from data thefts. Tax software providers also offer free multi-factor authentication protections on their Do-It-Yourself products for taxpayers. Multi-factor authentication means returning users must enter their username/password credentials plus another data point that only they know, such as a security code sent to their mobile phone. For example, thieves may steal passwords but will be unable to access the software accounts without the mobile phones to receive the security codes. The IRS also reminds tax professionals that they can track the number of returns filed with their Electronic Filing Identification Number (EFIN) on a weekly basis.

The IRS takes the deposit of employment taxes most seriously. That's because the amounts withheld from the employees never belonged to the taxpayer (they're called trust fund taxes). In Northside Carting, Inc. (T.C. Memo. 2020-18) the company owed a significant balance on its filed Forms 941 for three quarters. The taxpayer requested a collection due process (CDP) hearing with respect to a notice of federal tax lien. At first the taxpayer sought an installment agreement. The IRS settlement officer (SO) informed the taxpayer that it would need to provide certain financial information, a Form 656, Offer In Compromise or a proposal for an installment agreement, as well as signed copies of unfiled tax returns and proof of timely deposit of all federal employment taxes for the current quarter. Subsequently, the taxpayer indicated it wished an installment agreement. The SO requested additional financial data and signed quarterly tax returns. The taxpayer provided some, but not all, the requested information. The taxpayer then indicated it would pay in full and sought additional time to do so. The taxpayer then asked the IRS to consider collection alternatives and several months later the SO rejected an installment agreement that the taxpayer had not provided all the requested financial information and was not in compliance with its current filing and payment obligations. The taxpayer petitioned the Tax Court claiming, among other things, that the SO did not fully consider an offer in compromise, the taxpayer's request for penalty abatement, and that the IRS agreed to a settlement and then did not follow through. The Court noted that it has consistently held that it is not an abuse of discretion for an Appeals officer to reject collection alternatives and sustain collection action where the taxpayer has failed, after being given sufficient opportunities, to supply the necessary information. The Court also noted the requirement of current compliance as a condition of executing an installment agreement ensures that current taxes are paid and avoids the risk of pyramiding liability. The SO could have declined an installment agreement for that reason alone. The Court said the SO in this case worked constructively with petitioner and its representatives for more than six months in an effort to achieve a collection alternative. But an SO is not obligated to negotiate indefinitely. The Court found no abuse of discretion by the IRS.

Tip of the Day

State returns . . . If you're doing your own return and using tax preparation software, you should be aware that most items carry automatically to your state return. That's one of the advantages of computers. But, depending on the state, the software is unlikely to handle all the special items. Some require an entry on the state return. That's especially true for nonresident and part-year resident returns. Check the instructions for any lines that require a special entry. The special treatment varies by state. New York has an unusual number of modifications, Maryland, far less. And keep in mind that almost every state with an income tax has special credits and deductions.

 

February 14, 2020

News

The IRS is advising taxpayers (IR-2020-30) that the two weeks following the February 17 Presidents Day holiday is one of the busiest times and taxpayers should avoid this period of high telephone demand. The IRS is encouraging taxpayers to use online resources available at IRS.gov. IRS offers a variety of online tools to help taxpayers answer common tax questions. For example, taxpayers can search the Interactive Tax Assistant, Tax Topics, Frequently Asked Questions, and Tax Trails to get faster answers. Taxpayers should also check out Tax Tip 2020-19 for more resources.

A taxpayer does not recognize as income funds the taxpayer holds in trust for the benefit of another. Accordingly, when a lawyer reporting on a cash basis holds funds for the benefit of his clients in a trust account and complies with the requirements placed on trust accounts by the relevant rules of professional conduct, the funds are not income to the lawyer. Once the lawyer has performed work for the client and billed for his services against amounts held in the client trust account, however, the lawyer has earned that amount without substantial limitation on his right to the funds. Because the lawyer has constructively received the income, that amount represents income in the year earned. In Lon B. Isaacson (T.C. Memo. 2020-17) the taxpayer received a contingency fee for settling a case and deposited the funds in an investment account. The taxpayer argued that the fee was in dispute and did not report the amount as income in the year it went into the trust account. The IRS countered that the account was not a trust account under California law, the taxpayer did not abide by rules regarding lawyer's trust accounts because he commingled his funds with his clients' as a result of this and another violation he had access to the funds and, even if his right to the funds was limited, he should have included the amount in income, even if he would have to repay some portion. The Court reasoned that since the taxpayer refused to conform to the rules involving trust fund, he couldn't use the law as a shield. The Court also noted he took the opposite position with respect to the fee dispute in another court. The Tax Court said he can't have it both ways. The Court held he should have recognized the income in the year the IRS claimed.

Tip of the Day

Accounting for business assets . . . Whether you expense business assets under Sec. 179 or depreciate them over a number of years, if you're audited by the IRS there's a good chance you'll have to show the details surrounding the acquisition such as an invoice, costs to install (if appropriate), etc. You may also have to show details of any disposition or be able to show you still own the asset. The higher the asset's value, the greater the chance documentation may be requested. Ideally each asset of significance should be tracked and a file kept. That may also be required for accounting purposes. It's also a good way to check on assets from time to time to make sure they don't grow "legs".

 

February 13, 2020

News

The IRS looks for new ways to partner with external stakeholders and deliver services that are both convenient for taxpayers and cost-effective for the agency. In March 2016, the IRS introduced a new payment option that allows taxpayers to pay taxes with cash at non-IRS facilities. Through an external partnership established by the IRS, individual and business taxpayers can make a payment at more than 9,200 retail stores in 44 States. There is no cost to the IRS to provide this option, but taxpayers are charged a fee of $3.99 per payment. The Treasury Inspector General for Tax Admnistration (TIGTA) conducted a review to evaluate the effectiveness of the IRS’s policies and procedures for accepting cash payments at non-IRS facilities. According to the Federal Deposit Insurance Corporation, in Calendar Year 2017 there were 8.4 million households in the United States that had no checking or savings account. Some of these unbanked households may need to pay their taxes with cash. In addition, some taxpayers with a checking or savings account may prefer to pay with cash. Previously, taxpayers could only pay with cash at a limited number of Taxpayer Assistance Centers. TIGTA employees made cash payments at participating retailers and found that for the locations visited the payment option was user-friendly and efficient. The online application is straightforward and requires information readily available to the taxpayer, such as an address and date of birth. However, very few tax payments have been made with cash at participating retail stores. For example, less than 700 payments were made annually since the service was implemented. Although the number of taxpayers that would prefer to use this service is unknown, TIGTA found a number of reasons that could contribute to the low participation. First, the payment process requires taxpayers to scan a barcode at a participating retail store within seven calendar days of issuance. If not scanned within these seven days, the barcode expires and a new barcode needs to be issued for a payment to be made. In Calendar Year 2018, more than 80 percent of the barcodes that the IRS issued expired. Second, the IRS does not routinely advertise or promote this payment option. Therefore, many taxpayers are likely unaware that this option exists. Lastly, while the external partnership increased the number of locations where taxpayers can pay with cash, geographic coverage could be improved. For example, Mississippi has the highest percentage of unbanked households, but has no participating retailer that accepts cash for tax payments. To read the complete report, go to www.treasury.gov/tigta/iereports/2020reports/2020IER003fr.pdf.

Tip of the Day

Ready to file? . . . Don't be too quick. If you have a simple return--say a W-2, some bank interest and itemized deductions consisting of taxes, mortgage interest and some charitable contributions, you can go ahead and file. But if you've got a more complex return, it might be best to wait a bit. The IRS is still releasing some forms and publications, instructions for some haven't been released, and the 2019 version of Publication 17, Your Federal Income Tax, probably the most valuable guide for taxpayers, has not yet been published. Most of the delay reflects year-end tax law changes. If you're using tax software to prepare your return, those programs need updating. If you've got a really complex return, once you do file, you should revisit the return in April to make sure there haven't been any changes that affect your return.

 

February 12, 2020

News

The IRS has issued proposed regulations (REG-132741-17) updating the federal income tax withholding rules to reflect changes made by the Tax Cuts and Jobs Act (TCJA) and other legislation. In general, the proposed regulations are designed to accommodate the redesigned Form W-4, Employee's Withholding Certificate, to be used starting in 2020, and the related tables and computational procedures in Publication 15-T, Federal Income Tax Withholding Methods. The proposed regulations and related guidance do not require employees to furnish a new Form W-4 solely because of the redesign of the Form W-4. Employees who have a Form W-4 on file with their employer from years prior to 2020 generally will continue to have their withholding determined based on that form. To assist with computation of income tax withholding, the redesigned Form W-4 no longer uses an employee's marital status and withholding allowances, which were tied to the value of the personal exemption. Due to TCJA changes, employees can no longer claim personal exemptions. Instead, income tax withholding using the redesigned Form W-4 will generally be based on the employee's expected filing status and standard deduction for the year. The Form W-4 is also redesigned to make it easier for employees with more than one job at the same time or married employees who file jointly with their working spouses to withhold the proper amount of tax. In addition, employees can choose to have itemized deductions, the child tax credit, and other tax benefits reflected in their withholding for the year. As in the past, employees can choose to have an employer withhold a flat-dollar extra amount each pay period to cover, for example, income they receive from other sources that is not subject to withholding. Under the proposed regulations, employees now also have the option to request that employers withhold additional tax by reporting income from other sources not subject to withholding on the Form W-4. The proposed regulations also address a variety of other income tax withholding issues. For example, the proposed regulations provide flexibility in how employees who fail to furnish Forms W-4 should be treated. Starting in 2020, employers must treat new employees who fail to furnish a properly completed Form W-4 as single and withhold using the standard deduction and no other adjustments. In addition, the proposed regulations provide rules on when employees must furnish a new Form W-4 for changed circumstances, update the regulations for the lock-in letter program, and eliminate the combined income tax and FICA (Social Security and Medicare) tax withholding tables.

The IRS has released the 2019 version of Publication 4681, Canceled Debts, Foreclosrues, Repossessions, and Abandonments.

Tip of the Day

Death of a taxpayer . . . If your spouse died in 2019 and you didn't remarry in 2019, or if your spouse died in 2020 before filing a return for 2019, you can file a joint return. A joint return should show your spouse's 2019 income before death and your income for all of 2019. Enter “Filing as surviving spouse” in the area where you sign the return. If someone else is the personal representative, he or she also must sign.

 

February 11, 2020

News

Revenue Ruling 2020-05 (IRB 2020-9) modifies Rev. Rul. 2009-13 and Rev. Rul. 2009-14 to reflect Sec. 1016(a)(1)(B) of the Code, which was added by the 2017 Tax Cuts and Jobs Act. Under Sec. 1016(a)(1)(B), the adjusted basis of an insurance contract is not reduced by the cost of insurance. Section 1016(a)(1)(B) reversed the position in Rev. Rul. 2009-13 and Rev. Rul. 2009-14 that the basis of an insurance contract is reduced by the cost of insurance.

Tip of the Day

Unemployment insurance rates and bases . . . Each state has their own unemployment insurance rate and wage base. In New York State the wage base for 2020 is $11,600. The wage rate varies depending on the employer's experience. That is, an employer who has laid off few employees pays a lower rate. A number of states reset the wage base and redetermine an employer's wage rate annually. You should receive notification from the state, usually in early January, concerning your new rate and base. If you outsource your payroll function, you should pass on the info to your provider.

 

February 10, 2020

News

The IRS has issued corrections to the final regulations (T.D. 9884), which was published in the Federal Register for Tuesday, November 26, 2019. T.D. 9884 contained final regulations addressing the effect of recent legislative changes to the basic exclusion amount allowable in computing Federal gift and estate taxes. The final regulations affect donors of gifts made after 2017 and the estates of decedents dying after 2017.

Just because you set up an entity such as a corporation or LLC doesn't mean the IRS has to respect that entity. That is, even though the income may be payable to the entity doesn't mean the IRS can't claim the income is taxable to you directly. In Ugorji Timothy Wilson Onyeani (T.C. Memo. 2020-15) the Tax Court noted that in determining whether a corporation should be disregarded as a separate taxable entity, courts consider such facts as whether the corporation: (1) filed Federal and State income tax returns; (2) filed Federal employment tax returns; (3) elected officers and directors; (4) had a formal capital structure; (5) maintained books and records; (6) held meetings and kept minutes thereof; (7) had employees to whom it paid salaries; (8) had a separate business address and phone number; (9) was properly capitalized; and (10) distinguished between corporate and personal funds. The Court found all these factors were absent here.

Tip of the Day

Don't let your guard down . . . Tax professionals should continue to be vigilant about phishing, stolen passwords, and identity theft in general. It may not be as bad as it was at one point, but it's still out there and significant. It may be just news in the community until it happens to you. Make sure passwords are strong, changed frequently, and changed when someone leaves your employ.

 

February 7, 2020

News

The IRS has now updated for the third time the disaster notice for Victims of earthquakes that took place beginning on December 28, 2019 in parts of the Commonwealth of Puerto Rico. As a result, individuals and households who reside or have a business in the municipalities of Adjuntas, Arecibo, Cabo Rojo, Ciales, Corozal, Guanica, Guayanilla, Hormigueros, Jayuya, Juana Diaz, Lajas, Lares, Las Marías, Maricao, Mayaguez, Morovis, Orocovis, Penuelas, Ponce, San German, Sabana Grande, San Sebastian, Utuado, Villalba and Yauco may qualify for tax relief. For more information, go to IRS Announces Tax Relief for Victims of Earthquakes in Puerto Rico.

Tip of the Day

State returns . . . If you do business in other states you may have to file an individual return in those states. That's true if you do business as a sole proprietorship, partnership, or Scorporation. In the case of a partnership or S corporation, the entity files and the partners or shareholders file an individual return and pay the tax on their share of the income in that state. A number of states allow the entity--partnership, LLC, or S corporation--to file a composite return and it pays the tax. Some states require a composite return. Check the rules for the states you do business in and talk to your tax advisor. You most likely will have to make estimated tax payments for nonresident shareholders or partners.

 

February 6, 2020

News

The IRS has issued final regulations (T.D. 9893) regarding special 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 final regulations reflect changes made by the Tax Cuts and Jobs Act (TCJA). Because of the substantial increase in the fair market value of the maximum value of an auto available for an employee's personal use, the regulations provide guidance in switching methods for valuing personal use of an employer-provided vehicle.

The Free File Program is a private-public partnership between the IRS and Free File Inc. to provide online Federal tax preparation and electronic filing to economically disadvantaged and underserved populations at no cost to the individual or the Government. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit in response to concerns raised by Congress and other stakeholders. Their concerns relate to whether the Free File Program is operating as intended, and eligible taxpayers attempting to prepare and e-file their returns at no cost are diverted to tax return preparation services that are not free. TIGTA’s objective was to assess the IRS’s oversight of the Free File Program. TIGTA found the complexity, confusion, and lack of taxpayer awareness about the operation and requirements of the Free File Program are contributing reasons why many eligible taxpayers do not participate in the Program. During Processing Year 2019, only 2.5 million (2.4 percent) of the 104 million eligible taxpayers obtained a free return filing through the Program. In contrast, more than 34.5 million taxpayers, who met Free File Inc. members’ Free File Program criteria, used the members’ commercial software to file their tax return. TIGTA called a statistically valid sample of 200 taxpayers who met the Free File Program criteria but used a Free File Inc. members’ commercial software and was informed by 87 (43 percent) taxpayers that they were charged a fee to prepare and e-file their Federal tax return. Based on these results, TIGTA estimates that more than 14 million taxpayers met the Free File Program criteria and may have paid a fee to e-file their Federal tax return in the 2019 Filing Season. Sufficient actions have not been taken to educate taxpayers that the only way to participate in the Free File Program is through the IRS website. IRS and Free File Inc. management informed TIGTA that, to participate in the Program, taxpayers must access the IRS.gov Free File web page and select a link on this web page directing them to a Free File Inc. member’s website. However, this provision is not in the Memorandum of Understanding (MOU) between the IRS and Free File Inc., and most taxpayers are unaware of this requirement. In addition, the IRS does not provide adequate oversight to ensure that the Free File Program is operating as intended and in alignment with the MOU. Moreover, taxpayers are not made aware of protections in the MOU and do not have a process to report concerns. To see the complete report, go to www.treasury.gov/tigta/auditreports/2020reports/202040009fr.pdf.

Tip of the Day

File now and pay later . . . Can't pay what you owe with the return? You can still file and delay payment to April 18 (this year's due date). If you're paying by check, just mail the voucher and the check by the 18th. If you're paying electronically you can have the money withdrawn from your bank account at any time (but no later than the due date of the return). Filing now and paying later makes even more sense if you're getting a refund on either your state or federal return. You can get the refund on one before you have to pay the other.

 

February 5, 2020

News

Under current law you can't deduct employee business expenses on Schedule A. (That provision expires in 2026.) But that wasn't the law in Dean Lee Christensen (T.C. Memo. 2020-14). The taxpayer was a part-time professor at a community college. He taught at two different campuses some 24 miles apart. He traveled to one campus each work day irrespective of which campus he worked at, because he locked his class roster at that first campus. He returned to that campus in the evening to lock up the roster. He claimed mileage for those trips. While the Court challenged the records in part, the Court found that the taxpayer was not required to lock up the records at the campus each day. Thus, there was no reason for those trips and the Court disallowed the deduction for mileage. The Court also found discrepancies in his log for some of the entries and that the reason for some of his other claimed business trips was vague and were actually for personal purposes. A second issue was the purchase of certain items for the taxpayer's solely owned corporation. The taxpayer sought to deduct them as an employee business expense. Since he was a shareholder, but not an employee, the Court found the transaction was a contribution to the capital of the corporation and not deductible as an employee business expense.

Tip of the Day

Note as wages . . . If you're working for a startup you may receive a note instead of a check for part of your services. If the note is secured you've got to include the fair market value of the note (discounted by an amount that depends on the payment terms) in income. Later payments on the note will be partly nontaxable and partly taxable. On the other hand, if the note is unsecured and nonnegotiable, only when you receive payments on the note are they includible in income as compensation.

 

February 4, 2020

News

The Taxpayer Certainty and Disaster Tax Relief Act passed on December 20, 2019 made several changes that affect tax-exempt organizations. IR-2020-23 briefly describes the changes made by the new law. Two of the changes are retroactive.

The determination of the IRS is generally considered correct; the burden is on the taxpayer to show otherwise. In a fraud case, the burden shifts to the IRS to show by clear and convincing evidence, fraud exists. In Edward Anthony Purvis and Maureen Helena Purvis (T.C. Memo. 2020-13) the Court examined ten "badges of fraud". Each factor favored a finding of fraud save one which was neutral and one which indicated fraud for only two of the years at issue. The Court found the underpayment was due to fraud. While the taxpayer tried to claim reasonable cause in relying on professional advice. But the Court found that the taxpayers failed to provide the professional with complete information and knowingly misled him about their income and deductions for the years at issue and did not have reasonable cause for failing to avoid the penalties.

Tip of the Day

Earned income tax credit . . . It's designed for low-income taxpayers who work. The credit decreases on higher incomes and is complete gone if your income exceeds $55,952. The phaseout is much lower if you don't have any children. So there's a good chance you've never looked into it. But some busimess owners have highly variable incomes--easily breaking $100,000 some years; earning little in others. If that's your situation, you should keep the credit in mind, particularly if you have children. You may have employees or relatives who qualify. The IRS has found that a high percentage of taxpayers who qualify don't claim the credit. They include taxpayers without children, those living in non-traditional families, members of the armed forces, taxpayers with disabilities or who provide cre for a disabled dependent, as well as those with limited English language skills and those living in rural areas.

 

February 3, 2020

News

If you have neither the income nor the assets to pay your tax liability, the IRS can put you "currently not collectible" (CNC) status. The IRS won't take further action currently, but will review your situation in the future and will seek payment if your situation changes. In Moises A. Aviles (T.C. Memo. 2020-12) in response to IRS notices the taxpayer timely submitted separate Forms 12153, Request for a Collection Due Process or Equivalent Hearing. On both forms he stated that he could not pay the balance due and asked that the IRS provide him with “an accounting” of his payments for each year. On neither form did he indicate an intention to challenge his underlying tax liability for any period. The Court rejected the taxpayer's request for a review of the Court's holding in Giamelli. The Court also held the IRS settlement officer did not abuse her discretion in declining to consider an installment agreement. The Court noted the taxpayer did not propose one and the IRS was not obligated to do so for him. The settlement officer also found the taxpayer was not eligible for CNC status because he could not demonstrate that on the basis of his assets, equity, income and expenses that he had no ability to make payments on his outstanding liability.

Tip of the Day

Health care coverage shared responsibility payment . . . You're no longer penalized on your tax return if you fail to have minimum essential health care coverage so you won't have to check off whether or not you had coverage. However, if you got your health care coverage through the marketplace and got an advance premium health tax credit, you'll still have to use Form 8962 to reconcile the advance premium with your premium tax credit for the year.

 

January 31, 2020

News

The IRS has issued final regulations (T.D. 9892) that update the due dates and available extensions of time to file certain tax returns and information returns. The dates are updated to reflect the statutory requirements set by section 2006 of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 and section 201 of the Protecting Americans from Tax Hikes Act of 2015. Additionally, the regulations remove a provision for electing large partnerships that was made obsolete by section 1101(b)(1) of the Bipartisan Budget Act of 2015. These regulations affect taxpayers who file Form W-2 (series, except Form W-2G), Form W-3, Form 990 (series), Form 1099-MISC, Form 1041, Form 1041-A, Form 1065, Form 1065-B, Form 1120 (series), Form 4720, Form 5227, Form 6069, Form 8804, or Form 8870.

In David J. Chadwick (154 T.C. No. 5) the petitioner was the sole member of LLC1 and LLC2, each of which failed to pay employment taxes with respect to its employees' wages. Different revenue officers (ROs) were assigned to investigate. The ROs concluded that the petitioner was a “responsible person” of each LLC and was thus required to collect and pay over its employment taxes. Each RO completed a Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, recommending that trust fund recovery penalties (TFRPs) be assessed against the petitioner. Each RO's supervisor approved the recommendation in writing on the Form 4183. On the same days as the Forms 4183 were signed, the IRS issued Letters 1153, Trust Fund Recovery Penalty Letter, notifying the petitioner of the IRS's determinations to assess TFRPs and offering the petitioner the opportunity to appeal those determinations. He did not appeal, and the IRS assessed the TFRPs. The IRS mailed a levy notice in an effort to collect the unpaid TFRP liabilities, and the petitioner timely requested a collection due process hearing. At the hearing the petitioner's representative requested that his account be placed into currently not collectible (CNC) status. The settlement officer informed the petitioner's representative that, in order for his account to be considered for CNC status, he would need to file delinquent tax returns and submit pertinent financial information. He did not submit delinquent tax returns and or any financial information. The IRS issued a notice of determination sustaining the levy, and the petitioner timely petitioned the Tax Court. The Court held that a trust fund recovery penalty is a "penalty" within the meaning of Sec. 6751(b)(1). It is thus subject to the requirement that written supervisory approval be secured for the "initial determination of such assessment." The Court also held that the "initial determination" of each penalty assessment was embodied in the Letter 1153 formally communicating the IRS's definite decision to assert TFRPs. Finally, the Court held that the IRS satisfied the requirements of Sec. 6751(b)(1) because written supervisory approval of the TFRPs was secured on each Form 4183 on the same date the respective Letter 1153 was mailed to the petitioner and the SO did not abuse his discretion in declining to place the petitioner's account into CNC status.

Tip of the Day

Check your checkbook . . . When you're gathering information for your personal return, you'll probably shortchange yourself if you don't go through your checkbook, credit card statements, etc. Just bundling together your 1099s, your mortgage interest statement and property tax bills often isn't enough. You may have charitable contributions, medical expenses, investment expenses etc. paid by check or credit card. It's even more critical if you have a sole proprietorship. You may have made purchases using your credit card or personal account rather than on the business account. Take a home office deduction? You'll want to pick up repairs, house insurance, security system fees, etc.

 

January 30, 2020

News

Revenue Ruling 2020-04 (IRB 2020-8) clarifies the manner to properly compute the income limits applicable to the low-income housing credit under Sec. 42 of the Code. The Consolidated Appropriations Act of 2018 added a new minimum set-aside test, the average income test (Sec. 42(g)(1)(C)), to the existing minimum set-aside tests available to owners of a low-income housing project. This revenue ruling addresses the additional income limits available in the average income test.

You've got to show the business purpose of any expense to secure a deduction. In Daniel Alan Near and Denise Frances Mayhugh (T.C. Memo. 2020-10) the husband worked as an attorney for the state government and also had a private practice. He deducted certain travel and auto expenses on a Schedule C. Some of the travel expenses in question he incurred while working for the state. The Court noted an expense must be ordinary and necessary to be deductible. A taxpayer must show a bona fide business purpose for the expenditure; there must be a proximate relationship between the expenditure and his or her business. The Court found that while the expenses were fully documented, none of the documents provided enough information to ascertain a business purpose. There were no contacts with clients to substantiate the need for travel. The Court also noted that some of the expenses were for trips that included the taxpayers' family members, and the husband did not provide any evidence distinguishing which travel expenses were incurred for business and not personal purposes, if any. The Court held that the strict substantiation requirements of Sec. 274 with respect to travel expenses were not met and held the husband was not entitled to a deduction for his travel expenses. The Court held similarly for the taxpayers' auto expenses.

Tip of the Day

Late filing penalties for business returns . . . For individual returns filed late the most costly penalties are based on the amount of tax owed. But for S corporations and partnerships, there's usually no tax due. Here the penalty for late filing is $205 per month, per K-1 due. For example, during 2019 Fred owned 50 percent of Madison for the full year; Sue owned 50 percent for the first six months of the year but sold her shares to Sharon in early July. The penalty for filing one month late would be $615; three months late would be $1,845. There's also a good chance your state (or states if you do business in more than one state) will also impose a penalty.

 

January 29, 2020

News

In Glenn David Cuthbertson a.k.a. David Cuthbertson and Pamela Cuthbertson (T.C. Memo. 2020-9) the taxpayers were engaged in the development of a golf course and surrounding residential housing through several wholly owned entities. In 2009 and 2010, their wholly owned entities engaged in a series of real estate and financial transactions, involving a golf course, that purported to generate losses on the alleged transfer of the golf course property, on the alleged abandonment of the golf course's improvements, and on a sale of promissory notes. In 2009 and 2010, they also transferred parcels of real estate from a limited liability company (LLC), which was wholly owned by the husband and wife and was treated as a non-TEFRA partnership for U.S. income tax purposes, to another LLC that was wholly owned by the husband, via direct and indirect ownership, and that was also treated as a non-TEFRA partnership for income tax purposes. The taxpayers caused the seller LLC to use the installment method of accounting, under Sec. 453, so as to defer the recognition of gain on these transfers. These losses flowed through to the taxpayers, and they claimed deductions for these losses on their 2009 and 2010 Forms 1040. In 2009 the taxpayers also filed a Form 1045, “Application for Tentative Refund”, in an attempt to carry back some of these losses to their 2004, 2005, 2006, 2007, and 2008 tax years. The IRS issued a statutory notice of deficiency that, among other things, determined that the taxpayers were not entitled to certain loss deductions they claimed under Sec. 165 and determined that they incorrectly accounted for the income from the transfers of the real estate lots by causing the LLC to improperly use the installment method. The Tax Court held that the taxpayers were not entitled to deduct the losses arising out of the golf course transfer, property abandonment, and financial transactions and that the the seller LLC adopted an impermissible method of accounting for the transfers of real estate parcels between the LLCs (the installment method); therefore, the taxpayers were not allowed to defer the gain from the transferred property to future tax years. The Court also held the taxpayers did not have reasonable cause for their underpayments of income tax and therefore are liable for Sec. 6662 accuracy-related penalties.

Tip of the Day

Tax provisions extended . . . A number of tax provisions expired at the end of 2017, some of which have just recently been extended through 2019. They include:

 

January 28, 2020

News

Businesses and other payers must report backup withholding and any other federal income tax withheld from nonpayroll payments on Form 945. The deadline for filing Form 945 for tax year 2019 is Friday, January 31, 2020. However, if the payer made deposits on time and in full, the deadline is Monday, February 10, 2020. IRS Tax Tip 2020-08 has more information.

The >Treasury Inspector General for Tax Administration (TIGTA) has issued a report on the 2019 filing season. You can see the complete report at www.treasury.gov/tigta/auditreports/2020reports/202044007fr.pdf.

The IRS can reconstruct a taxpayer's income if it finds the taxpayer's books and records are inadequate. That's just what the Service did in Wilfredo E. Rivera and Maria T. Rivera (T.C. Memo. 2020-7) using the bank deposits method. The taxpayer challenged the analysis. The Tax Court noted that in the Court of Appeals for the Ninth Circuit the IRS's usual presumption of correctness does not attach in cases involving unreported income unless the IRS first establishes an evidentiary foundation linking the taxpayer to the alleged income-producing activity. The required evidentiary foundation is minimal and need not include direct evidence. Once the IRS produces evidence linking the taxpayer to an income-producing activity, the burden shifts to the taxpayer to rebut the presumption of correctness of . . . the IRS's deficiency determination by establishing by a preponderance of the evidence that the deficiency determination is arbitrary or erroneous. That's not an easy task. Here, the Tax Court held that, despite some errors made by the IRS which are unavoidable in such analysis, the taxpayer had unreported income.

Tip of the Day

Check the box . . . What you put on your return is more than just numbers. Many business owners may be making an election (e.g., depreciation), information such as the address of a rental property, or simply checking a box yes or no. You're signing the return attesting to all these items. For example, checking the "no" box on Schedule B for foreign bank accounts. Failure to check a required box can cause issues. This year there's a new question on the return dealing with virtual currency and it appears at the top of Schedule 1. If you're using tax software to do your return, the program should inform you before you file electronically if you haven't checked a box.

 

January 27, 2020

News

Under pre-amended law, by January 31st, the financial institutions would have had to notify IRA owners who turned 70-1/2 in 2020 about the required minimum distribution (RMD) which would have needed to be made for 2020. The SECURE Act changed the age triggering the RMD requirement from 70 and 1/2 to 72, so these notices are no longer due under the amended law. Notice 2020-06 (IRB 2020-7) proves that if a RMD statement is provided for 2020 to an IRA owner who will attain age 70-1/2 in 2020, the IRS will not consider such statement to be incorrect, provided that the financial institution notifies the IRA owner no later than April 15, 2020, that no RMD is due for 2020.

The IRS has updated its Tax Withholding Estimator FAQs page.

Timely mailing is generally considered timely filing for tax purposes. If you put the item in the U.S. Postal Service, the postmark date controls the date the item was mailed. (The IRS and states log the postmark date.) But if you simply deposit the item in a letter box, or even at the post office, there's a chance the stamp will not be cancelled. That was what happened in Michael J. Seely and Nancy B. Seely (T.C. Memo. 2020-6) the taxpayers mailed a petition to the Tax Court which had not postmark. The envelope was delivered one business day late, but the Fourth of July intervened. The Court deemed the article was timely mailed and, thus, timely filed. (The safest approach is mailing the item certified, return receipt requested followed by just certified, finally to insure a postmark take the item to the post office and ask the clerk to "hand cancel" the item.)

Tip of the Day

State returns . . . If you're doing your own return and using tax preparation software, you should be aware that most items carry automatically to your state return. That's one of the advantages of computers. But, depending on the state, the software may not handle all the special items. Some require an entry on the state return. That's especially true for nonresident and part-year resident returns. Check the instructions for any lines that require a special entry. For example, some states provide a special credit for volunteer firemen; some don't tax certain pensions.

 

January 24, 2020

News

The IRS has announced that victims of earthquakes that took place beginning on December 28, 2019 in additional areas of Puerto Rico may qualify for tax relief. The new municipalities include Adjuntas, Cabo Rojo, Corozal, Jayuya, Lajas, Lares, Maricao, San German, San Sebastian and Villalba.

Most times the penalty for failure to follow the law is just that, a monetary penalty. At other times the penalty can be much more severe. Problems with the form and the operation of a pension plan is one of those times. In Ed Thielking, Inc. (T.C. Memo. 2020-5) the IRS determined that an Employee Stock Ownership Plan (ESOP) had both operational and form failures. Operational failures included (1)allowing ineligible individuals to partcipate in the plan, (2) accepting contributions in excess of the limitations imposed by law, and (3) failing to have an independent appraiser value employer securities. It did not qualify in form because it failed to conform to certain statutory and regulatory requirements and the taxpayer did ot adopt timely amendments. The Court sided with the IRS in its determination to disqualify the plan.

If your records are inadequate, the IRS can reconstruct your income using one of several methods. In Jason Hommel (T.C. Memo. 2020-4) the IRS used the bank deposits method to arrive at a gross income amount for his coin dealership and mint business. The taxpayer challenged the IRS's reconstruction of income, but the Tax Court said it did not "see bad faith in the way the IRS conducted his bank-deposits analysis; and if it turns out not to have been as accurate as it possibly could have been, the fault lies with Mr. Hommel's failures at recordkeeping". The Court noted the burden of proof was on the taxpayer to show the IRS was wrong, and he failed to do so. The taxpayer also argued that his cost of goods sold were understated. The Court noted that as the IRS increased the taxpayer's income, it also increased it based upon outgoing wire transfers. Because the taxpayer kept no records of his cash transactions, he couldn't show a cost of goods sold more than that determined by the IRS.

Tip of the Day

Schedule D information . . . Much of the time reporting securities transactions is simply a job of entering dates and amounts on Form 8949. But you may run into special situations that aren't as easy to deal with. The basis provided by your broker may be incorrect because for several reasons, you may have received the proceeds as a nominee, etc. that could require an adjustment. In the case of bonds there may be accured market discount. You may have to specify if the property is an option that expired, is from an Employee Stock Purchase Plan, from a incentive or nonqualified stock option plan, etc. If you're claiming a nonbusiness bad debt you'll have to provide information on the debt and why it should be considered worthless.

 

January 23, 2020

News

In Laidlaw's Harley Davidson Sales, Inc. (154 T.C. No. 4) the IRS determined that the taxpayer, a C corporation, failed to timely disclose its participation in a listed transaction as required under Sec. 6011 when it filed a Form 1120, "U.S. Corporation Income Tax Return", for the tax year ending May 31, 2008. The revenue agent responsible for examining the taxpayer's return issued a 30-day letter to the corporation that proposed to assert a penalty under Sec. 6707A against it for failing to disclose reportable transaction information with that return and that gave the taxpayer the right to appeal that proposal to the IRS Office of Appeals. That 30-day letter was the first formal communication to the taxpayer of the determination to assess the Sec. 6707A penalty. Roughly three months after the 30-day letter was issued, the agent's immediate supervisor approved the penalty assertion and signed a Form 300, "Civil Penalty Approval Form". The taxpayer requested a conference with Appeals to contest the revenue agent's penalty proposal. Appeals sustained the penalty proposal, and the IRS assessed the penalty. After the IRS sent the taxpayer a levy notice to collect the penalty liability, the taxpayer requested a collection due process (CDP) hearing before Appeals. Thereafter, Appeals issued a notice of determination sustaining the levy action. The taxpayer timely filed in the Tax Court a petition challenging the notice of determination. The Tax Court issued an order on October 16, 2015, inter alia, remanding the case to Appeals for further development of certain arguments the taxpayer raised. After a supplemental CDP hearing, Appeals once again sustained the levy notice. The taxpayer then filed a motion for summary judgment asserting that the IRS failed to comply with Sec. 6751(b)(1) in determining the Sec. 6707A penalty. The Court held the written supervisory approval requirement of Sec. 6751(b)(1) applies to the assessable penalty imposed by Sec. 6707A for failure to disclose reportable transaction information and that the proposal of an assessable penalty under Sec. 6707A in the 30-day letter to the taxpayer embodied, as in Clay v. Commissioner, an "initial determination" for purposes of Sec. 6751(b)(1), which required written supervisory approval. The Court also held that Appeals abused its discretion by summarily determining that the IRS had met "any applicable law or administrative procedure" for purposes of Sec. 6330(c)(1), since the IRS had failed to comply with Sec. 6751(b)(1) because it obtained written supervisory approval for the Sec. 6707A penalty only after the revenue agent issued to the taxpayer the 30-day letter proposing to assert the penalty.

Tip of the Day

Itemized deductions . . . While there are only a few expenses that can still be deducted as miscellaneous itemized deductions on your Federal tax return, that's not true for all the states. Some states, such as Massachusetts, have never followed the Federal rules (e.g., taxes, mortgage interest have never been deductible); others have done so by simply taking the Federal amount. Others have started with the Federal amount and modified it. For example, if you're filing a New York or California state return, be careful. Nothing has really changed. But since there may be no place on your tax software to enter some of these expenses on your Federal return, you'll have to do so on the state return. (In the past the amounts probably carried over automatically.) It may be some extra work, but the dollar savings could be significant.

 

January 22, 2020

News

The IRS has issued final regulations (T.D. 9891) that provide guidance applicable to transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor. Specifically, when a U.S. person transfers appreciated property to a partnership with a foreign partner related to the transferor, the regulations override the general nonrecognition rule unless the partnership adopts the remedial allocation method and certain other requirements are satisfied. The regulations affect U.S. partners in domestic or foreign partnerships.

You can secure a charitable contribution deduction for a gift of property, but once the value of the gift exceeds $5,000 you'll need, among other things, a qualified appraisal and provide certain information with the return. In Chad Loube and Dana M. Loube (T.C. Memo. 2020-3) the Court found that the taxpayers failed to strictly comply with DEFRA (Deficit Reduction Act of 1984) and the regulations thereunder because they failed to provide, among other information, the basis and the acquisition date of the contributed property on the appraisal summary. The taxpayers also failed to attach to the appraisal summary an explanation of reasonable cause for their inability to provide the basis, acquisition date, or other information related to the contributed property. The Court also found the taxpayers failed to substantially comply with Sec. 1.170A-13 of the regulations because DEFRA specifically requires the donors provide sufficient information to evaluate their reported contributions and basis was an important factor.

Tip of the Day

New item J on S corporation K-1 . . . The K-1 contains new checkboxes if activities were aggregated for at-risk purposes or grouped for passive activity purposes. Checkboxes on lines 18 and 19 are used to alert shareholders to statements attached to provide information on more than one activity for at-risk or passive activity purposes.

 

January 21, 2020

News

The Joint Committee on Taxation has published a list of tax provisions expiring between 2020 and 2029 (JCX-1-20). Go to www.jct.gov/publications.html?func=startdown&id=5240 to download the complete list.

The IRS has updated the disaster notice for victims of the severe storms, tornadoes and flooding that began on September 9, 2019 in South Dakota to include Aurora County. As a result individuals and households who reside or have a business in Aurora, Brookings, Charles Mix, Davison, Hanson, Hutchinson, Lake, Lincoln, McCook, Minnehaha, Moody, and Yankton Counties and the Flandreau Santee Indian Reservation and the Yankton Indian Reservation may qualify for tax relief.

he IRS has made an important change to the Certifying Acceptance Agent (CAA) program. CAAs may no longer authenticate the foreign military identification card for an Individual Tax Identification Number (ITIN) application. See the ITIN Acceptance Agent Program Change page at IRS.gov for more details.

The IRS has announced that the agency has become aware of limited circumstances in which it may be appropriate to provide relief from double taxation resulting from application of the repatriation tax under Section 965, as amended by the Tax Cuts and Jobs Act (TCJA). The IRS has determined that in unique circumstances, such as where a corporation paid an unusual dividend for business reasons, not because of the enactment of TCJA, it may be appropriate to provide relief from double taxation. When the same earnings and profits of foreign corporations are taxed both as dividends and under section 965, double taxation could result. Taxpayers who have fact patterns that may fit these limited circumstances may raise them with the IRS by contacting the Office of Associate Chief Counsel (International) at 202-317-3800.

Tip of the Day

Less schedules for Form 1040 . . . You'll find less schedules in this years' return. Schedules 1 through 6 for Form 1040 have been combined into just three--Schedules 1, 2, and 3. They each have two parts and the entries are similar, but the reduced number of schedules should make it easier to review and work with the return.

 

January 17, 2020

News

The IRS has announced it has updated the Modernized eFile (MeF) system to allow for certain recent extender legislation. The tax forms listed below for Tax Years 2018 and 2019 with extender-related credits are now available to file through MeF:

Form 6478 - Biofuel Producer Credit
Form 6627 - Environmental Taxes
Form 8844 - Empowerment Zone Employment Credit
Form 8864 - Biodiesel and Renewable Diesel Fuels Credit
Form 8900 - Qualified Railroad Track Maintenance Credit
Form 8910 - Alternative Motor Vehicle Credit

If you incur a net operating loss for a tax year, you can carry that loss forward to a subsequent year to offset income in that year. The loss can be carried forward until fully utilized. In Clark J. Gebman and Rebeca Gebman (T.C. Memo. 2020-1) the taxpayer claimed a substantial net operating loss (NOL). The Tax Court noted that a taxpayer claiming an NOL deduction must file with his return a concise statement setting forth the amount of the . . . (NOL) deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the . . . (NOL) deduction. The taxpayers bears the burden of proof of establishing both the existence of the NOLs for prior years and the NOL amounts that may properly be carried forward to the years at issue. The Court went on to say the taxpayers satisfied none of these requirements. They did not attach to any of their returns a concise statement including material and relevant facts or a detailed schedule showing computation of the NOL amount. The NOL deduction petitioners claimed for 2007 allegedly represented the carryforward of losses petitioners had incurred in 2003. They offered no evidence that they had sustained bona fide losses during 2003, apart from submitting copies of the tax returns on which they reported those losses. Merely reporting a loss on a tax return does not substantiate it. The Court sided with the IRS in disallowing the loss.

Tip of the Day

Tell your accountant about all asset dispositions . . . When doing your business return your accountant may uncover sales of business assets if you've shown the revenue separately in your records. But he probably won't find them if you disposed of them in other ways such as scrapping them. Assets that have been sold may produce a gain or a loss, but if an asset is scrapped there's a good chance you'll have a deductible loss. If the assets are located in a state with a personal property tax, they might be included on the rolls and continue to be taxed if they're not taken off the books.

 

January 16, 2020

News

The IRS has released Revenue Procedure 2020-11 that establishes a safe harbor extending relief to additional taxpayers who took out federal or private student loans to finance attendance at a nonprofit or for-profit school. Relief is also extended to any creditor that would otherwise be required to file information returns and furnish payee statements for the discharge of any indebtedness within the scope of this revenue procedure. The Treasury Department and the IRS have determined that it is appropriate to extend the relief provided in Rev. Proc. 2015-57, Rev. Proc. 2017-24 and Rev. Proc. 2018-39 to taxpayers who took out federal and private student loans to finance attendance at nonprofit or other for-profit schools not owned by Corinthian College, Inc. or American Career Institutes, Inc. The Revenue Procedure provides relief when the federal loans are discharged by the Department of Education under the Closed School or Defense to Repayment discharge process, or where the private loans are discharged based on settlements of certain types of legal causes of action against nonprofit or other for-profit schools and certain private lenders. Taxpayers within the scope of this revenue procedure will not recognize gross income as a result of the discharge, and the taxpayer should not report the amount of the discharged loan in gross income on his or her federal income tax return. Additionally, the IRS will not assert that a creditor must file information returns and furnish payee statements for the discharge of any indebtedness within the scope of this revenue procedure. To avoid confusion, the IRS strongly recommends that these creditors not furnish students nor the IRS with a Form 1099-C.

Notice 2020-08 (IRB 2020-7) provides the rules that claimants must follow to make a one-time claim for the credits and payments for biodiesel (including renewable diesel) mixtures and alternative fuels sold or used during calendar years 2018 and 2019. The notice also provides instructions for how a claimant may offset its taxable fuel liability with the alternative fuel mixture credit for 2018 and 2019, and provides instructions for how a claimant may make certain income tax claims for biodiesel, second generation biofuel, and alternative fuel. The credits had expired on December 31, 2017, but were retroactively reinstated as part of the Further Consolidated Appropriations Act of 2020.

Tip of the Day

Forms 1099 arriving now . . . Banks, brokers, mutual funds, etc. have begun to send out 1099s. You may have even received some at the end of last year with a dividend check. You don't want to misplace them. No formal filing system? If so, just put them in a box as they come in and either sort through them when you do your return or get ready for the appointment with your tax preparer. Another point. Open the envelopes. Tax preparers have found checks, mortgage coupons, and other important documents along with the 1099s.
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

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