News and Tip of the Day


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

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November 14, 2019

News

A conservation easement can generate a substantial tax deduction, often without significantly diminishing the value of the property. In Coal Property Holdings, LLC, Coal Land Manager, LLC, Tax Matters Partner (153 T.C. No. 7) the petitioner donated a conservation easement to a qualified organization. The easement deed provided that, if the property were sold following judicial extinguishment of the easement, the donee organization would receive a share of the proceeds, after the satisfaction of prior claims, determined by a formula. Under the formula, the donee's share was equal to the property's fair market value (FMV) at the time of sale, minus any increase in value after the date of the grant attributable to improvements, multiplied by a fraction specified in Reg. Sec. 1.170A-14(g)(6)(ii). Alternatively, if this formula produced a result different from that required by the regulation, the deed provided that the donee would receive a share of the proceeds as determined by the regulation. The Tax Court held the easement did not satisfy Reg. Sec. 1.170A-14(g)(6), because the portion of the proceeds to which the donee is entitled is improperly reduced by (a) amounts paid in satisfaction of prior claims against the petitioner and (b) amounts inuring to the petitioner that are attributable to (i) appreciation in the value of improvements existing when the easement was granted plus (ii) the FMV of any improvements the petitioner subsequently made to the property. The Court also held that the alternative calculation of proceeds specified in the deed, which is applicable only if the deed's formula is determined to be different from that required by the regulation, constitutes a condition subsequent saving clause that will not be judicially enforced. Finally, the Court held that the IRS properly disallowed in its entirety the charitable contribution deduction claimed by the petitioner because the conservation purpose of the easement was not protected in perpetuity as required by Sec. 170(h)(5)(A).

Tip of the Day

Use caution with competitors . . . Your company is still tiny but making a name for itself. You've got a great idea that is spot on. You're approached by Mega Inc. about a potential deal. Flattered, and thinking they might want to buy you out so you and your partner can retire at 25, you discuss some of your methods and ideas. A few months later you find you've just created your biggest competitor. It's happened--and more than once. If they're serious about a buyout or investment, get it in writing. You'll need an attorney qualified in the field to draft the documents and advise you. This is not the time to go online for a DIY approach. And make sure all employees who have inside knowledge sign nondisclosure and noncompete agreements.

 

November 13, 2019

News

The IRS has announced (IR-2019-182) a significant increase in enforcement actions for syndicated conservation easement transactions, a priority compliance area for the agency. Coordinated examinations are being conducted across the IRS in the Small Business and Self-Employed Division, Large Business and International Division and Tax Exempt and Government Entities Division. Separately, investigations have been initiated by the IRS’ Criminal Investigation division. These audits and investigations cover billions of dollars of potentially inflated deductions as well as hundreds of partnerships and thousands of investors. In December 2016, the IRS issued Notice 2017-10, which designated certain syndicated conservation easements as listed transactions. Specifically, the Notice listed transactions where investors in pass-through entities receive promotional material offering the possibility of a charitable contribution deduction worth at least two and half times their investment. In many transactions, the deduction taken is significantly higher than 250 percent of the investment. Syndicated conservation easements are included on the IRS’s 2019 “Dirty Dozen” list of tax scams to avoid. Taxpayers may avoid the imposition of penalties relating to improper contribution deductions if they fully remove the improper contribution and related tax benefits from their returns by timely filing a qualified amended return or timely administrative adjustment request. The IRS’s comprehensive compliance efforts are focused on the abusive syndicated conservation easement transactions described in Notice 2017-10, recognizing that there are many legitimate conservation easement transactions. The IRS is committing significant examination and investigative resources to vigorously audit the entities and individuals involved in this scheme, including those who failed to properly disclose their participation as required. Additionally, the IRS is also litigating cases where necessary, with more than 80 currently docketed cases in the Tax Court. In addition to grossly overstating the value of the easement that is purportedly donated to charity, these transactions often fail to comply with the basic requirements for claiming a charitable deduction for a donated easement. The IRS has prevailed in many cases involving these basic requirements and has now established a body of law that the IRS believes supports disallowance of the deduction in a significant number of pending conservation easement cases. In addition to auditing participants, the IRS is pursuing investigations of promoters, appraisers, tax return preparers and others. Further, the IRS is evaluating numerous referrals of practitioners to the IRS Office of Professional Responsibility.

Tip of the Day

Key man insurance . . . It might be your financial guru, your lead engineer, the shop manager or any one (or several) employees who are critical to your business. Replacing them would be costly, from a number of standpoints. Having key man life insurance policies where the company pays the premium and is the beneficiary on one or more of them could ease the pain of finding a replacement if they pass away. Costs vary based on age and health, but a 10-year, $250,000 term policy might only run $700 a year for a 50-year old employee. The big question is how much coverage to secure. If you're strapped for cash, anything is better than nothing, but ideally you'd like to replace a significant part of any profits that would be lost. Get good advice from your insurance agent.

 

November 12, 2019

News

Revenue Procedure 2019-43 provides the List of Automatic Changes to which the automatic change procedures in Rev. Proc. 2015-13, as clarified and modified by Rev. Proc. 2015-33, and as modified by Rev. Proc. 2017-59, and by section 17.02(b) and (c) of Rev. Proc. 2016-1, apply. Note. This revenue procedure is some 377 pages and affects over 50 Code sections and even more regulation sections.

In Eaton Corporation and Subsidiaries (153 T.C. No. 6) the taxpayer and the IRS entered into two advance pricing agreements (APAs) establishing a transfer pricing methodology for covered transactions between the taxpayer and its subsidiaries. Following the Tax Court's previous opinion holding that the IRS's determination to cancel the APAs for tax years 2005 and 2006 was an abuse of discretion, the parties were required to submit computations for entry of decision under Tax Court Rule 155. The parties have not reached agreement. The IRS's position is that the computations should include 40% penalties pursuant to Sec. 6662(h). The taxpayer's position is there were no adjustments pursuant to Sec. 482. The Tax Court held no adjustments were made pursuant to Sec. 482 and that the taxpayer was not liable for penalties pursuant to Sec. 6662(a), (b)(3), (e), and (h) for tax years 2005 and 2006.

Tip of the Day

Be prepared to negotiate . . . Throw a price or terms out to some vendors, customers, etc. and they'll accept what's offered. And many others will just consider your offer a starting point. Both approaches have their merits and demerits. But if you want to do a deal, more often than not you've got to be ready to negotiate. In fact, many people love the action surrounding negotiations. If you're not comfortable in such situations, get a trusted employee or outside professional such as a CPA or attorney to be in on the negotiations.

 

November 8, 2019

News

Some mistakes in documents can be ignored as "drafting errors". But not all. In U.S. Auto Sales, Inc. (153 T.C. No. 5) the IRS issued to the petitioner an 11-page document purporting to be a notice of deficiency, dated May 15, 2012 (May notice), for the petitioner's taxable years ending June 30, 2003 and 2007, where the IRS purportedly determined deficiencies of $24,480 and $30,668, respectively. The first four pages of the May notice identify the petitioner as the taxpayer, while the last seven pages identify a separate corporation, related to the petitioner, as the taxpayer. On Aug. 10, 2012, the petitioner timely petitioned the Tax Court with respect to the May notice. The IRS issued to the petitioner a second notice of deficiency, dated Aug. 2, 2012 (August notice), for TYE June 30, 2007 and 2008, where the IRS determined income tax deficiencies of $3,371,690 and $2,995,911, respectively, and penalties under Sec. 6662. On Sept. 13, 2012, the petitioner timely petitioned the Tax Court with respect to the August notice. The IRS moved to dismiss this case for lack of jurisdiction. The IRS contended that the May notice failed to identify a particular taxpayer as responsible for the deficiencies determined therein. The petitioner objected, stating that the May notice made a deficiency determination and identified years and amounts at issue and thus is valid to confer jurisdiction on the Court. The Tax Court held that under its Opinion in Dees v. Commissioner, 148 T.C. 1 (2017), the May notice is ambiguous on its face because it identifies two taxpayers as potentially liable for the deficiencies determined therein. The Court also held that under Dees the petitioner must prove that the May notice reflects a determination as to the petitioner. The petitioner failed to prove that the May notice reflects a determination as to the petitioner; and copies of the petitioner's returns introduced by the IRS establish that the May notice does not reflect a determination as to the petitioner. Finally, the Court held that the May notice is invalid because it does not reflect a deficiency determination as to the petitioner.

Tip of the Day

Take a break . . . Do you know the rules on breaks for employees? For federal purposes, short breaks, such as a 15 minute coffee break in the morning and after noon are compensable (you can't deduct the time). On the other hand, a lunch break can reduce the employee's total time for the day. That's important for overtime purposes. But state rules are also important. You may or may not have to provide a lunch break (it could depend on the number of hours worked), and you may or may not have to provide morning and afternoon breaks. Check the rules in your state. This is often a touchy area for employees and getting it wrong could prove costly.

 

November 7, 2019

News

The IRS has announced (Rev. Proc. 2019-44) the tax year 2020 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. Revenue Procedure 2019-44 provides details about these annual adjustments. The tax year 2020 adjustments generally are used on tax returns filed in 2021. Here are a few of the changes:

The IRS has also announced (Notice 2019-59 the contribution and other limits on pension plans, IRAs, etc. for 2020. Among other changes, the contribution limit for 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan has increased from $19,000 to $19,500 and the catch-up contribution for employees aged 50 or older will increas to $6,500. The limitation on SIMPLE plans rises to $13,500 from $13,500. The phase-out for a Roth IRA will begin at $124,000 for singles and heads of household and $196,000 for married couples filing jointly.

The IRS has released an updated version of Publication 3112 IRS e-file Application and Participation. This edition of Publication 3112 replaces the previous edition revised July 2018. This publication provides important information for Tax Professionals and Authorized IRS e-file Providers regarding applying and participating in IRS e-file.

Tip of the Day

New nexus rules for sales tax . . . Following the U.S. Supreme Court ruling in South Dakota v. Wayfair many states are changing their rules with respect to nexus for sales tax purposes. No longer is a physical presence in the state required for requiring vendors to collect sales tax. The changing rules vary from state to state, but the advisory just issued by New York is typical. Under the new rules an out-of-state vendor will have to collect and remit sales taxes on New York sales if they have tangible personal property delivered into the state of more than $500,000 and make more than 100 sales in New York during the year. Check the current rules in the states where you have sales.

 

November 6, 2019

News

The IRS has released a notice of proposed rulemaking (REG-131071-18; NPRM REG-131071-18) providing rules regarding the definition of an eligible terminated S corporation (ETSC). In addition, these proposed regulations provide rules relating to distributions of money by an ETSC after the post-termination transition period (PTTP). Finally, these proposed regulations revise current regulations to extend the treatment of distributions of money during the PTTP to all shareholders of the corporation and to update and clarify the allocation of current earnings and profits to distributions of money and other property. In order to secure these benefits, the shareholdings in the C corporation must be identical to those in the former S corporation during the two-year period beginning on December 22, 2017.

Saturday, November 16 may be the last chance you'll get to file 2016 individual returns electronically. After that, returns for that year will only be able to be filed using paper. The shutdown date for business returns will be December 26.

Tip of the Day

IRS Statistics of Income . . . If you're looking for income data on individuals or businesses, one of the first places you should try is the IRS. While the information is not always the freshest, it's free and often broken down fine enough to be of real value. Go to irs.gov/statistics for a starting point.

 

November 5, 2019

News

Good recordkeeping is critical not only to insure you get all the deductions you're entitled to. In Seyed-Jalil Ghadiri-Asli and Mojdeh Najile-Rahim (T.C. Memo. 2019-142) the IRS found the taxpayers' records inadequate and recontructed their income using the bank deposits method. The IRS also used information from a billing company the wife used for her medical practice. The taxpayers claimed the gross income should be reduced by overpayments refunded, but they could not substantiate the amounts claimed. The IRS further corroborated the income by matching the 1099-MISC forms received with the billing company's reported income. The Court sustained the IRS's imposition of a civil fraud penalty. The Court noted that over the three years at issue taxpayers consistently and substantially understated their income and overstated expenses. Significantly, the understatements of gross receipts grew each year. The gap between the income received and that reported on taxpayers' return each year is too substantial for them to have overlooked when they signed the returns. In addition, their records were inadequate, they concealed income from their tax preparer and were uncooperative in their contacts with the IRS.

Tip of the Day

Refinance your home mortgage? . . . Rates are again low and refinancing may make sense, depending on the dollar amount of the costs to do so. Your analysis should center on how long it will take the interest savings to equal the closing costs and then consider if you'll be in the home that long. While the average time an individual owns the same home has increased to some 13 years from seven not so long ago, you may not be average. Does your job force you to relocate frequently? Is a lifestyle change (e.g., another child) going to require you to move? You don't have to be spot on with your analysis, but you should take some time to work through the numbers.

 

November 4, 2019

News

The IRS has updated the disaster area notice for victims of Tropical Storm Imelda that took place from September 17-23, 2019 in Texas to include San Jacinto County. This means that now individuals who reside or have a business in Chambers, Harris, Jefferson, Liberty, Montgomery, Orange and San Jacinto counties. may qualify for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Sept. 17, 2019 and before Jan. 31, 2020 are granted additional time to file through Jan. 31, 2020. This includes taxpayers who had an extension to file their 2018 return to October 15, 2019. In addition, penalties on payroll and excise tax deposits due on or after Sept. 17, 2019 and before Oct. 2, 2019, will be abated as long as the deposits were made by Oct. 2, 2019. For more details, go to IRS announces tax relief for Texas victims of Tropical Storm Imelda.

If you dispute an award you receive from the IRS for assisting in the recovery of taxes from a taxpayer you generally take the action to Tax Court. In Vincent J. Apruzzese (T.C. Memo. 2019-141) the petitioner receved such an award because he significantly contributed to the recovery of additional taxes. While the taxpayer was already under examination, the whistleblower alerted the IRS to issues whereupon the Service expanded the scope of the audit. The petitioner received an award of some $43,000, the usual percentage of the amount recovered. The petitioner argued that the award should be higher because the tax deficieny should have been higher. The Court noted the petitioner was asking the Court to redress this grievance by ordering respondent to re-examine the target. The Court held it did not have the authority to do so and, as a result, could not adjust the reward.

Tip of the Day

Plan ahead . . . Sounds like obvious advice? Then why are so many business owners and managers not doing it? Every day we see people sending documents or checks by overnight express when they knew about the deadline weeks earlier. Or ordering product at the last minute and paying an expedite fee or upcharge. Asking for a rush job is almost always more expensive, often by a significant factor. And even if there's no cost, you know your vendor isn't happy and may not respond as well in the future. The same is true for employees. Many will put in the extra time when there's a true emergency, but will soon tire of having to always put in overtime to extinguish fires. Not planning ahead can be costly.

 

November 1, 2019

News

The IRS has announced it will not acquiesce to the holding by the Tax Court in Greenteam Materials Recovery Facility PN, et al. (T.C. Memo. 2017-122). In that case the Tax Court held that the sale of assets by the company which included contracts to provide waste collection and disposal, landfill, and recycling services to certain municipalities resulted in capital gain under Sec. 1253(a). While the Court found the contracts met the definition of a franchise, certain aspects of the ruling could be challenged.

Some business expenses need no explanation; they're clearly ordinary and necessary business expenses. But not all. In Plano Holding LLC (T.C. Memo. 2019-140) the taxpayer enlisted the aid of a financial advisor in the sale of his business. The taxpayer did not prove that it received benefits for the payments made. In addition, the taxpayer did not prove that the expense was an ordinary and necessary one. In addition, the taxpayer did not show that not incurring the fee would have resulted in negative consequences. The Court denied a deduction for the fee.

Tip of the Day

Doing a catalog? . . . Or a website advertising a number of products? Consider leading with your best seller. First-time buyers are more likely to return to purchase if they're satisfied. Some years ago a company had a series of similar products with different ones to be sold monthly. They tried several several products in test mailings. When they found the best seller, that became the lead product in the series. The products weren't particularly good, but the marketing was and the company had very attractive profits on the line.

 

October 31, 2019

News

The U.S. Department of Labor has proposed a new electronic disclosure rule. The proposal offers a safe harbor for employers who want to make retirement plan disclosures accessible on a website. Plan participants would b notified that information is available online, including instructions for how to access the disclosures and their right to receive paper copies of disclosures.

In Northern California Small Business Assistants Inc. (153 T.C. No. 4) the taxpayer was a California corporation that operates a medical marijuana dispensary legally under California law. The IRS argued that the taxpayer is subject to the limitations of Sec. 280E, which disallows all deductions for a business that consists of trafficking in a controlled substance. The taxpayer argued that Sec. 280E imposes a gross receipts tax as a penalty in violation of U.S. Const. amend. VIII. Further, the taxpayer argued, even if Sec. 280E is constitutional, it only bars ordinary and necessary business deductions under Sec. 162 and does not apply to other distinct sections of the Code. Finally, the taxpayer argued that it is not subject to Sec. 280E because its business, legally operated under California law, does not consist of “trafficking” in a controlled substance. The Tax Court held that Sec. 280E is not a penalty provision and therefore does not violate the prohibition on excessive fines in U.S. Const. amend. VIII. The Court also held that Sec. 280E is not limited to deductions claimed under Sec. 162 but applies to bar all deductions claimed by the taxpayer. Finally the Court held that the taxpayer provided no compelling argument to overrule the Tax Court's precedent holding that Sec. 280E applies to businesses operating legally under State law, notwithstanding its use of the word "trafficking".

Tip of the Day

Value of warranty varies . . . Before you assume you've got nothing to worry about because the product or service comes with a warranty, read the fine print. Parts and labor may be covered for the first 90 days, then parts only for the next two years. That may not mean much if labor usually makes up 80% of the cost of repairs. Or there may be so many exclusions, most failures aren't covered under the warranty. In some cases only a small portion of the unit may be excluded, but it's the one most prone to breakdowns--and the most expensive to fix. In some cases your only recourse is to receive a comparable, rebuilt unit. Or, for some items subject to wear, such as tires, prorated credit toward the same make and model. Finally, the warranty won't have much value if you leave the product in the garage until it's mostly expired.

 

October 30, 2019

News

If a taxpayer seeks equitable relief under Sec. 6015(f) (innocent spouse relief) and meets certain threshold conditions, he or she can seek relief under the factors enumerated in Rev. Proc. 2013-34. The factors are a nonexclusive list; no one factor or a majority of factors necessarily determines the outcome. The degree of importance of each factor varies depending on the requesting spouse's facts and circumstances. In Lori D. Sleeth, Petitioner and David T. Sleeth, Intervenor (T.C. Memo. 2019-138) the Court found a number of factors favored relief. However, the Court noted a review of the returns would have told her that intervenor had not paid estimated tax for the years at issue. She also knew that the intervenor had been unable to timely pay the 2005 income tax. She also knew that intervenor had been trying for several years to sell a house and the house was subject to a large mortgage. Under these circumstances, when she signed the returns, petitioner had a duty to do more than assume intervenor would pay the tax owed. Although intervenor did not tell petitioner that he was unable to pay the tax liabilities, he also did not tell her that he was able to pay them. Her assumption that intervenor would pay the tax was unreasonable, and her alleged belief that intervenor would pay the tax was not credible. The Court refused to grant relief and held that petitioner's unwillingness to confront the financial problems she and intervenor faced weighed strongly against relief. She cooperated in intervenor's over three-year practice of simply not paying tax.

Tip of the Day

Questionable documents . . . Usually a birth certificate is enough to document your age. In a recent Tax Court Summary decision the taxpayer took a distribution from his IRA. When asked to prove he was 59-1/2 to avoid an early distribution penalty, the taxpayer secured a birth certificate from his birthplace, Kenya. While the record is silent on the reason, the IRS decided to check other sources. They found his driver's license, Form I-687, Application for Status as a Temporary Resident, FBI fingerprint card, Application for Naturalizaton, petition for a name change filed with the U.S. District Court and a number of other sources showed his age as 2 years younger. The Court held he hadn't proved his age and, as a result the IRS's presumption of correctness held.

 

October 29, 2019

News

The IRS has issued final regulations (T.D. 9879) providing guidance on new information reporting obligations under section 6050Y related to reportable policy sales of life insurance contracts and payments of reportable death benefits. The final regulations also provide guidance on the amount of death benefits excluded from gross income under section 101 following a reportable policy sale.

If you want to raise the issue of innocent spouse relief in a CDP hearing you'll have to submit Form 8857, Request for Innocent Spouse Relief or provide the Settlement Officer with any other information supporting a basis for innocent spouse relief. The Court noted an issue is not properly raised if the taxpayer fails to present the Appeals Office with any evidence with respect to that issue after being given reasonable opportunity to present such evidence. In addition, the taxpayer did not pursue innocnet spouse relief in the proceeding. The Court held it was not an issue in the case. Charles Schuman T.C. Memo. 2019-137.

Tip of the Day

Living costs in retirement . . . Many financial advisors use a rule of thumb to estimate living costs in retirement. You have to analyze your own situation. Are you going to take all those trips you put off or just stay home and tend to your garden and puruse your woodworking hobby? Going to sell your home and move into a condo or smaller home? For some retirement costs will be higher than pre-retirement living; for some much lower. Have chronic health issues going into retirement? Medical care could become much more expensive. The addition--or deletion--of a vacation home or boat can also have a material effect. Your house could become more of a burden. Replacement of aging mechanicals, as well as routine maintenance could become more expensive. There's no way you'll predict your expenses to the dollar, but using a rule of thumb is not a good approach.

 

October 28, 2019

News

Many businesses employ family members. In some cases it's an older child or a parent, in some it's a son or daughter under 18. Sometimes it's a spouse working for the business, in some cases the spouse is a co-owner. There are different tax treatments for each of these different situations. The IRS has released a new fact sheet Tax treatment for family members working in the family business that simple explanations of the tax treatments of the situations most businesses will fall into.

Tip of the Day

Recovering lost records . . . One of the biggest problems for any individual or small business is reconstructing records for tax purposes. They may be destroyed as a result of flood, fire, tornado, or other natural disaster, or they may simply be lost. Businesses should have backup of all material, especially data stored on a computer. Reconstructing business data is difficult. Lost or destroyed records for individuals is generally easier to deal with. Most financial institutions keep records for a number of years. Usually the first 18 months, and sometimes much more, is free online. There can be a charge for earlier records. You can also get information from the IRS. The IRS can provide a tax return transcript (shows most line items from your original individual income tax return); a tax account transcript (shows basic data such as return type, adjusted gross income, taxable income, and the changes you made after filing the return), record of account transcript (combines the first two transcripts), and wage and income transcript. The last one shows data from information returns we receive such as Forms W-2, 1099, 1098 and Form 5498, IRA Contribution Information. Current tax year information may not be complete until July. You can get more information with links to forms, other information, etc. at Transcript Types and Ways to Order Them.

 

October 25, 2019

News

You can exclude up to $105,900 (2019 amount; indexed for inflation) in foreign earned income, but you've got to meet a residency requirement in the foreign country. In Joseph S. Bellwood and Jacqueline E. Bellwood (T.C. Memo. 2019-135) the taxpayer flew helicopters in Saudi Arabia for a U.S. company on a 28 days on, 28 days off schedule. On his 28 days off duty he traveled back to the U.S. and resided in his own home with his wife and a son. He retained his driver's license, voter registration, bank account, and healthcare in the United States. The Court looked at his housing and social activities in Saudi Arabia, his retained connections to the U.S. and time spent in both locations. The Court held that the taxpayer was not a qualified individual for purposes of the foreign earned income exclusion because he failed to show that his abode was not within the U.S. and that he was a bona fide resident of Saudi Arabia.

Tip of the Day

Monitor payroll service provider . . . Embezzling payroll tax deposits can quickly amount to a significant sum. You need only 20 employees paid $50,000 a year to result in a $1 million payroll. The federal taxes alone on that could easily add up to $300,000 in a year. And the IRS doesn't accept any excuses for not making the deposits. If you're doing your own payroll, you should check to make sure deposits are being made by checking your EFTPS. Putting in a PIN and password will allow you to look at recent deposits. You may have a good guess at what they should be. But that's the bare minimum. You should check the deposits to the Form 941 filings by quarter. What if you use a payroll service provider? Employers who use payroll service providers can verify that payments are made by using EFTPS online. The EFTPS webpage has information for employers who use payroll service providers. Employers who have not been issued Inquiry PINs and who do not have their own EFTPS enrollment should register on the EFTPS system to get their own PIN and use this PIN to periodically verify payments. A red flag should go up the first time a service provider misses or makes a late payment. You should take action immediately. For more information on go to IRS reminds employers about the benefits of EFTPS at irs.gov.

 

October 24, 2019

News

The IRS and the courts don't take kindly to frivolous arguments. In Michael James Wells and Lynn Anita Kirchner-Wells (T.C. Memo. 2019-134) the taxpayers reported zero wages and claimed a refund of the full amount of the taxew withheld from their paychecks. The taxpayers attached Froms 4852, Substitute for Form W-2. The taxpayers included a statement claiming they were not "employees" and worked with a private-sector company, not a federal employer and that they did not engage in a trade or business as defined in SEc. 7701. The IRS did not treat their Form 1040 as valid, froze the refund, and assessed a frivolous return penalty of $5,000 against each petitioner. This wasn't the first time the taxpayers were in Tax Court and they were previously warned about frivolous arguments. The Court imposed a $10,000 penalty against the taxpayers.

Tip of the Day

Borrow on your stocks? . . . It can be a risky maneuver if you're not careful. Borrowing on existing holdings is different than a margin account. On the other hand, if your business needs cash for new equipment, you need a bridge loan on a new home, etc. borrowing on your stocks can make sense if you're sitting on a big gain and cashing in would result in a substantial tax bite. But keep in mind that if you can't make the payments on the loan or your portfolio declines below a certain point, those stocks could be sold to cover the loan. And you could find yourself in a bad tax position where you have no options. In a worst case scenario where you're highly leveraged and a big drop in your collateral you could owe more in taxes than you net proceeds on the sale of the stock. And, the deductibility of the interest on the loan would depend on the use of the funds. Discuss the option with your financial advisor before proceeding.

 

October 23, 2019

News

The IRS is advising business owners to file employment tax Forms 940, 941, 943, 944, or 945 using electronic filing, or e-filing. E-filing is the most accurate method to file returns. Those who e-file receive missing information alerts. Electronically filed returns have fewer errors, which reduces a taxpayer's chance of receiving an IRS notice. E-filing may also save time by performing certain calculations automatically. There are two options for electronically filing payroll returns. You can self-file, but you'll need IRS-approved software. The IRS has a list of approved providers. There may be a fee to electronically file. Alternatively, you can use an authorized IRS e-file provider. The IRS maintains a database of providers that can be searched by zip code. For more information, go to E-File Employment Tax Forms Page.

Tip of the Day

Profits vs. growth . . . Lately many startups have been emphasizing growth. That can work if you've got a steady cash flow and/or a source of funds to finance the business. But at some point just about every business has to pay the piper. Even venture capitalists won't finance a business indefinitely. The day of reckoning depends on your cash supply. The smart move is to always keep your eye on profits. When is the business going to be self-sufficient? And, prehaps more importantly, when will you run out of cash? Cash flow forecasts are always important, but particularly so if the business has negative cash flow.

 

October 22, 2019

News

The 2019 Calendar Year Projections of Individual Returns by Major Processing Categories (Publication 6187) is now available on SOI's Tax Stats Web page. This publication presents multi-year projections of the number of individual Form 1040 series returns to be filed with the IRS by categories important to IRS planning operations, including filing medium (paper versus electronic); and other characteristics, such as refund returns. Forecasts are shown at the national level and selected portions are shown by State and IRS Processing Campus locations. This publication is updated annually and incorporates the latest changes in legal, regulatory, administrative, and recent filing experiences.

Tip of the Day

Related party transactions . . . Sold property to your daughter? Rented property to your business? Loaned money to your parents? Did one company provide services to another company where both companies have the same owners? These are all related party transactions. This isn't an area that follows simple rules. Even the definition of a related party depends on the Code section involved. And the tax consequences of related party transactions varies, but many have negative implications. There can also be different issues for state purposes. Best advice? If you're about to engage in a transaction between related parties, talk to your tax advisor before committing.

 

October 21, 2019

News

If you meet the requirements, you can exclude up to $105,900 (2019 amount; indexed for inflation) in foreign earned income. To qualify for the exclusion, the taxpayer must satisfy a three-part test: (1) the taxpayer must be a United States citizen who is a bona fide resident of a foreign country for an entire taxable year or physically present in a foreign country during at least 330 days out of a 12-month period, (2) the taxpayer must have earned income from personal services rendered in a foreign country, and (3)the taxpayer's tax home for the period must be outside the United States. But in order to claim the exclusion you must make an election to do so. Elections must generally be made on timely filed returns (usually including extensions). The taxpayers did not file the returns seeking the foreign earned income exclusion on time and did not qualify for one of the exceptions to filing the election with a timely return. The Tax Court denied the taxpayers the foreign earned income exclusion. Elena Lea Morgan Weschenfelder and Frederick Burkhart Weschenfelder, T.C. Memo. 2019-133.

Tip of the Day

Work Opportunity Tax Credit . . . This credit has been around for some time. Basically it provides for a credit of 40% of qualifying wages of a new employee who is in one of the targeted groups (e.g., qualified veteran, SSI recipient, long-term family assistant recipient, etc. The general limit is the first $6,000 of wages, but it can be much higher for some targeted groups. The credit is set to expire at the end of this year, but could be extended. For more information, see IRS Form 5884 and the accompanying instructions and About Form 5884, Work Opportunity Credit at irs.gov.

 

October 18, 2019

News

To help support fairness and integrity in the tax system, the IRS has made a change in how it handles passport certifications for people with significant tax debt. In July, following a request from the Taxpayer Advocate Service (TAS) for a review of the certification procedures, the IRS temporarily suspended passport certification procedures on passports for anyone who had a case open with TAS. Excluding cases from certification solely on the basis that the taxpayer is seeking assistance from TAS could allow a "won't pay" taxpayer to circumvent the intent of the legislation to obtain or renew a passport. Following the review of relevant considerations regarding these procedures, the IRS has determined that a blanket, systemic exception for anyone with an open TAS case is overly broad and could undermine the effectiveness of the statute enacted by Congress in the FAST Act to collect a seriously delinquent tax debt. To get more information, go to Update on Passport Certifications and Taxpayer Advocate Service.

Tip of the Day

Dividends contructively received . . . You can't delay the receipt of income by just not cashing a check. It's called constructive receipt of income. But that rule applies in a number of situations. In a letter ruling a corporation declared several dividends. The first was paid in the year declared; the others weren't paid until a later year. The corporation was solvent and had sufficient assets to pay the dividends and there was sufficient earnings and profits. The IRS ruled that the dividends were income in the year they were declared, not when paid in a later year. Note. Letter rulings can't be cited as precedent, except by the taxpayer who taxpayer requesting it.

 

October 17, 2019

News

The IRS has announced that PTIN registration for the 2020 tax season is now open and is reminding preparers that annual registration is mandatory. All PTINs expire on December 31. Registration is free. For more information, go to PTIN Requirements for Tax Return Preparers.

If the IRS denies your installment agreement, offer-in-compromise, etc. you may be able to get some relief if you convince the court the IRS abused it's discretion. But you'll need a strong case. In Wind Surf and Sail Pools, Inc. (T.C. Memo. 2019-130) the IRS Appeals officer sustained the filing of a notice of federal tax lien denying the taxpayer collection alternatives. The taxpayer argued abuse of discretion. The IRS had noted the company was not current on its Form 941 filings and required deposits. The Court noted that the IRS settlement officer had given the taxpayer ample time to submit the documentation showing comliance before closing the case.

Tip of the Day

Early distributions from SIMPLE plans . . . SIMPLE plans are just that--simple. They allow employees to defer up to $12,500 (2018 amount) to a special IRA. The amount deferred escapes current income tax (but not FICA or medicare taxes). Employees age 50 and older may make annual "catch-up" contributions of $3,000 (2019 amount). And Most of the IRA rules apply. Thus, unlike a 401(k) plan you can't borrow from a SIMPLE. Distributions before age 59-1/2 are subject to a 10% penalty, unless one of the exceptions applies. There's a trap here. Unlike a regular IRA distributions during the first two years of participation in a SIMPLE plan are subject to a 25% (instead of 10%) penalty. That includes rollovers from a SIMPLE IRA to a non-SIMPLE IRA.

 

October 16, 2019

News

The IRS has released an updated draft copy of Form 1040 Schedule 1 asking whether or not you received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currecy during 2019. The new form also asks the date of original divorce or separation agreement. In the new part two of the form, the IRS is asking for the date of original divorce agreement with respect to alimony paid. The IRS has also released a number of other draft forms for individuals. You can find them at Draft Tax Forms at irs.gov.

Tip of the Day

Paying off loans? . . . You've got a mix of debt--student loans, credit cards, home mortgage, etc. You also want to put away money for retirement. How should you allocate your income? The first move is generally easy. Pay off credit card debt. There are few investments that will give you a return that's higher than credit card debt. It's harder to choose amongst the other options. If your student loans are high, you should pay them down to a reasonable level, even if the interest rate is low. Getting credit for a home, business financing, etc. could prove more difficult if your student loans are high. Plus, you don't want to be paying them off when you're older. Car loans, particularly new cars, are generally at a low rate, but you should keep the loan to five years or less. (A car loan can actually improve your credit score) The younger you are the more time you'll have to put money away for retirement, so you can afford to delay for a while. One thing you should do is enroll in your employer's 401(k) or set up an IRA for yourself. Making at least minimum contributions will get you hooked on a good habit. Try harder to make contributions to your employer's plan if there's a match program. When it comes to saving for retirement, there's nothing like starting early. If cash is tight, start small and vow to increase your contribution each year.

 

October 15, 2019

News

The Social Security Administration has announced the cost-of-living adjustments (COLA) for social security benefits for 2020. The increase is 1.6 percent. That translates into an average for all retired workers of $1,503 per month versus the 2019 amount of $1,479. The maximum social security benefit for a worker retiring at full retirement age is $3,011 per month versus $2,861 for 2019. The maximum earnings subject to social security tax (OASDI portion only) will increase to $137,700 from $132,900. (There's no limit on the Medicare portion.) The amount for a quarter of coverage increases to $1,410. For a listing of all the COLA adjusted amounts go to Fact Sheet at ssa.gov.

In 2016 the IRS published a notice of proposed rulemaking (REG-130314-16) by cross-reference to the temporary regulations which include Secs. 1.385-3T and 1.385-4T. The temporary regulations expire on October 13, 2019. The IRS has issued Notice 2019-58 which provides that, following the expiration of the temporary regulations under Section 385, taxpayers may rely on the notice of proposed rulemaking cross-referencing the temporary regulations.

The IRS has issued final regulations (T.D. 9878) relating to to the election to accelerate the timing of a loss sustained by a taxpayer attributable to a federally declared disaster. The final regulations adopt the proposed regulations substantially without change and this document removes the temporary regulation. The election to take the loss in the preceding year is made on an original return for the preceding year or an amended return for the preceding year. The deadline for making the election is six months after the due date for filing a return for the disaster year (determined without regard to any extension of time to file).

In Coleman Moore (T.C. Memo. 2019-129) the petitioner claimed an abuse of discretion by an IRS settlement officer (SO) when his offer-in-compromise (OIC) was terminated for noncompliance, arguing that the IRS did not follow the required administrative procedures for doing so. (Failure to meet any of the terms and conditions of the OIC could result in default on the offer reinstatement of the original liabilities.) The petitioner argued that an OIC potential default letter was not sent, and, after examining the administrative record, the Court agreed. The Court found the IRS did not follow administrative procedures before terminating the OIC. The Court also found neither Notice CP 2000 nor the notice of deficiency warns that a 2010 income tax deficiency would result in the OIC's termination. Neither notice informs petitioner of an opportunity to cure the default or set a deadline to cure the default. Neither notice was sufficient under the administrative procedures for a potential default letter. A potential default letter provides an opportunity to cure. Neither Notice CP 2000 nor the notice of deficiency mentioned such an opportunity or the OIC.

Tip of the Day

Returns due today! . . . More than a few taxpayers (and professionals) are having trouble dealing with the changes in the tax law. But the 15th is absolutely the last day to file if you need to make an election on your return. Few elections can be made on a late filed return. Some can be made on an amended return. There are other reasons for getting your return in on time. Missing some information? Not sure of how to handle an issue? That's not a reason not to file. Go with the best information you have. You can file an amended return to correct an error.

 

October 11, 2019

News

The IRS has issued proposed regulations (REG-128246-18) which allows a State (or its agency or instrumentality) to establish and maintain a tax-advantaged savings program under which contributions may be made to an ABLE account for the purpose of paying for the qualified disability expenses of the designated beneficiary of the account. The affected Code section was amended by the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act allows certain designated beneficiaries to contribute a limited amount of compensation income to their own ABLE accounts. The regulations also deal with the definition of poverty line for additional contributions and the return of excess contributions.

The IRS is reminding taxpayers with expiring Individual Taxpayer Identification Numbers (ITINs) can get their ITINs renewed more quickly and avoid refund delays next year by submitting their renewal application soon. An ITIN is a tax ID number used by taxpayers who don't qualify to get a Social Security number. Any ITIN with middle digits 83, 84, 85, 86 or 87 will expire at the end of this year. In addition, any ITIN not used on a tax return in the past three years will expire. As a reminder, ITINs with middle digits 70 through 82 that expired in 2016, 2017 or 2018 can also be renewed. For more information, see IR-2019-168 at IRS.gov.

Fail to file a return and you could lose the chance to elect to itemize your deductions. In Claude Tate George (T.C. Memo. 2019-128) the taxpayer was incarcerated and did not file a return. The IRS filed a substitute return, taking the standard deduction and one exemption. The Court held that incarceration was not an excuse for not filing and noted the taxpayer did not file an extension. Finally, the Court held that a taxpayer can only itemize by electing so on a return.

Tip of the Day

Buying based on financing . . . When you're buying a car or house you've got to consider how much you can pay monthly on the loan. But just because you can afford to pay more doesn't mean you should automatically buy a more expensive car or bigger home. That's a separate decision. Don't buy more than you need or want. Much the same goes for financing other purchases. You may be able to pay of that new refrigerator in 12 equal installments. Or even defer payment for a year interest free. But do you need the new refrigerator? Buying just because there's a sale or cheap financing isn't smart. Financing smaller purchases make even less sense. Of course, if you need a new suit for work and you don't have the cash, there may be no other option. Just don't let the deal dictate the purchase.

 

October 10, 2019

News

As part of a wider effort to assist taxpayers and to enforce the tax laws in a rapidly changing area, the IRS has issued two new pieces of guidance for taxpayers who engage in transactions involving virtual currency. Expanding on guidance from 2014, the IRS is issuing additional detailed guidance to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency. The new guidance includes Revenue Ruling 2019-24 and frequently asked questions (FAQs).Rev. Rul. 2019-24 (IRB 2019-44) addresses the tax treatment of hard forks of cryptocurrency in which no new cryptocurrency is received by the owner of the original cryptocurrency from an airdrop following the hard fork, as well as the tax treatment of cryptocurrency hard forks that are followed by an airdrop of units of a new cryptocurrency to owners of the original cryptocurrency. Rev. Rul. 2019-24 provides that a hard fork not followed by an airdrop of units of a new cryptocurrency does not result in gross income to owners of the original cryptocurrency. Rev. Rul. 2019-24 further provides that a hard fork followed by an airdrop of units of a new cryptocurrency results in gross income to the recipients of units of new cryptocurrency from the airdrop.

The IRS has released its 2019-2020 Priority Guidance Plan. The 2019-2020 Priority Guidance Plan sets forth guidance priorities for the Department of the Treasury and the IRS. This plan continues to prioritize implementation of the Tax Cuts and Jobs Act, enacted on December 22, 2017. The 2019-2020 Priority Guidance Plan contains guidance projects that will be the focus of efforts during the twelve-month period from July 1, 2019, through June 30, 2020 (the plan year).

The IRS has issued proposed regulations (REG-118784-18) that provide guidance on the tax consequences of the transition to the use of reference rates other than interbank offered rates (IBORs) in debt instruments and non-debt contracts. The proposed regulations are necessary to address the possibility that an alteration of the terms of a debt instrument or a modification of the terms of other types of contracts to replace an IBOR to which the terms of the debt instrument or other contract refers with a new reference rate could result in the realization of income, deduction, gain, or loss for Federal income tax purposes or could result in other tax consequences. The proposed regulations will affect parties to debt instruments and other contracts that reference an IBOR.

Tip of the Day

Deals cut in a recession fare the best . . . If you're buying a business, real estate, etc. or negotiating a long-term contract to purchase goods, on average you'll get the best deal when the economy is doing poorly. If you think about it, the reason is obvious. Business valuations are low because the target business's earnings are down and the seller may discount the price from there because there are few takers or he needs the cash. That's why as the economy is going down you should stockpile cash or line up financing to do deals when few are. It's easier said than done, but by watching your cash outflow you can do it.

 

October 9, 2019

News

Victims of Tropical Storm Imelda that took place from Sept. 17-23, 2019 in Texas may qualify for tax relief from the IRS. The President has declared that a major disaster occurred in several Texas counties. Following the recent disaster declaration for individual assistance issued by the FEMA, the IRS announced today that individuals who reside or have a business in Chambers, Harris, Jefferson, Liberty, Montgomery, and Orange counties may qualify for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Sept. 17, 2019 and before Jan. 31, 2020 are granted additional time to file through Jan. 31, 2020. This includes taxpayers who had an extension to file their 2018 return to October 15, 2019. In addition, penalties on payroll and excise tax deposits due on or after Sept. 17, 2019 and before Oct. 2, 2019, will be abated as long as the deposits were made by Oct. 2, 2019. For more information, go to IRS announces tax relief for Texas victims of Tropical Storm Imelda.

The Tax Court may show some deference as to procedures if you represent yourself. In Neil L. Whitesell and Tracy L. Whitesell (T.C. Memo. 2019-126) the taxpayers timely filed a petition with the Tax Court for redetermination of the deficiencies and addition to tax. They also filed an amended petition. In the current case the taxpayers filed a motion for leave to file an amendment to the amended petition premised on the theory that if the disputed amount is includable in an S corporation's income (and, since they were the 100 percent owners, includable in their income), it is includable only for the 2013 tax year, beyond the three-year period for assessing tax. The taxpayers argued that they did not seek to plead this theory earlier because they were unrepresented. The Court noted that while technically that was true, they had legal and accounting professionals behind the scenes. The Court found their was no excuse for their delay in raising the new argument. The Court also noted the IRS was unfairly surprised by the new argument. The Court denied the taxpayer's motion to file their amendment to the amended petition.

Tip of the Day

Cybercriminals prey on small firms . . . Think you're immune from cyber threats because your business is small? In fact, a high percentage of small firms have been targeted. And for good reason. They usually don't have the security of larger companies and employees may be too busy to exercise sufficent cautions. The attacks are usually in the form of emails with a link or attachment that, if clicked on, downloads malware to the computer. While malware and virus protection can help, they shouldn't be your only line of defense. Warn employees not to click on links or attachments without double checking to make sure they're from legitimate sources. Since the cybercriminals are generally after customer, client, or patient data, don't put that on computers used outside the office unless absolutely necessary. Keep in mind that tablets and smartphones are also vulnerable, often more so.

 

October 8, 2019

News

The IRS has issued final regulations (T.D. 9877) addressing when certain obligations to restore a deficit balance in a partner's capital account are disregarded under Section 704 of the Code, when partnership liabilities are treated as recourse liabilities under Section 752, and how bottom dollar payment obligations are treated under section 752. These final regulations provide guidance necessary for a partnership to allocate its liabilities among its partners.

The IRS has issued final regulations (T.D. 9876) concerning how partnership liabilities are allocated for disguised sale purposes. The regulations replace existing temporary regulations with final regulations that were in effect prior to the temporary regulations.

In William Elias Rosenberg (T.C. Memo. 2019-124) the taxpayer's former spouse transferred retirement funds to him. Instead of withdrawing the funds from her retirement account at a broker and making a cash payment to him, she arranged for those funds to be transferred from her retirement account to an IRA that the taxpayer opened at the same broker. Within seven days of this transfer he withdrew the funds and closed the account. The taxpayer argued that the transfer from his former spouse's retirement account to his IRA and the withdrawal should disregarded the the transaction treated in substance as a cash payment from his former spouse to him as prescribed in the Property Order. The Court said that it could not ignore the language of Sec. 72 (the distribution rules) and held the transaction was taxable and subject to the 10 percent penalty.

Tip of the Day

Basis for amortization/depreciation deductions . . . Before taking an amortization or depreciation deduction, you've got to be able to show you've got a basis in the asset. For example, you may be able to amortize start-up expenses, developed intangibles, etc. or physical assets such as purchased or constructed equipment or buildings. If you purchased the asset you've got a receipt or bill of sale. But what if you self-constructed it? The IRS will not just accept that you expended $20,000 in constructing a special machine to use in your business. You've got to have receipts and canceled checks and show that you didn't deduct those expenditures elsewhere. If you had your own employees working on the project you want to be able to reconcile total payroll with currently deducted and capitalized expenditures. The amounts involved can be substantial and may not be challenged immediately. For example, you used in-house labor to construct a building. Seven years later the IRS challenges your depreciation deduction. Do you still have the documentation to prove your basis?

 

October 7, 2019

News

The IRS is expanding the opt-in Identity Protection Personal Identification Number (IP PIN) program to taxpayers in an additional 10 states for the 2020 filing season. This brings the availability of IP PINs to taxpayers in a total of 19 states and the District of Columbia. The opt-in program is designed for taxpayers who are not victims of identity theft or refund fraud. For 2020, IP PINs will be available to taxpayers who previously filed in Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Georgia, Florida, Illinois, Maryland, Michigan, Nevada, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Texas and Washington.

The IRS will issue a CP2100 or CP2100A Notice if the payee’s name and Taxpayer Identification Number (TIN) on the information return filed does not match IRS records. This notice informs payers they may be responsible for beginning backup withholding, if they haven’t already done so. Publication 1281, Backup Withholding on Missing and Incorrect Name/TIN(s) (PDF), contains all the information payers need to comply with backup withholding requirements.

In Raymond Chico and Ruby Chico (T.C. Memo. 2019-123) the Tax Court sided with the IRS in finding the taxpayers had unreported income from their marijuana cigarette container business. The taxpayers did not provide books and records so the IRS used the bank deposits method to reconstruct their income. Because of a lack of records the Court sustained the IRS's disallowance of supplies, vehicle, travel, and othe expenses. The Tax Court also found the taxpayers had unreported income in the form of constructive dividends from a C corporation. Finally, the IRS was able to show fraudulent intent related to the underpayment of taxes and the Tax Court sustained the fraud penalty.

Tip of the Day

Rent out property? . . . Or rent property for your business? Either way you should have a lease. That may be especially true if the lessee or lessor is a related party. Besides having a lease for your protection, if the IRS audits you, that lease could become a very important document. Unless you're well versed in real estate, you should get an attorney. At least to draft a master lease that you can modify if you have more than one tenant.

 

October 4, 2019

News

It's all about the details. In Seaview Trading, LLC, AGK Investments, LLC, Tax Matters Partner (T.C. Memo. 2019-122) the taxpayer argued that a notice of final partnership administrative adjustment (FPAA) was issued after the period of limitations had expired. Generally, the period for assessing any income tax attributable to partnership items for a partnership taxable year will not expire before the later of a date which is three years after (1) the partnership files its return for the taxable year in question or (2) the last day for filing such return for such year (without extensions). However, the IRS may assess tax attributable to a partnership or affected item at any time if the partnership does not file a return. The taxpayer contended the return was filed when it faxed a copy of the return to an IRS Revenue Agent and again when the taxpayer's attorney faxed a copy to the IRS's counsel. The IRS argued it did not file a return because it failed to submit the return at the proper place of filing. The Tax Court agreed. The designated place for filing is the service center prescribed in the relevant IRS revenue procedure, publication, form, or instructions to the form. In this case the Ogden Utah service center. The Court held no return was ever filed and the period of limitations had not expired.

Tip of the Day

Caution on scam websites . . . It wasn't too long ago that scam sites were easy to spot--bad spelling and grammar, etc. Not so anymore. In addition there are sites that look official, but charge for services that are free from the government. A few years ago sites would offer to get your business a taxpayer identification number online. You could (and still can) do the same thing from the IRS for free and using the IRS site wasn't any more difficult. Plus you weren't revealing any sensitive data. The scam is still around for some other government sites. Search for the DMV in one state to renew your car registration and at the top of the list is a site that will do it for you--for a fee. Again, the state site is just as easy. And again, without revealing personal data. The private site has a warning and a link that you can go to the state site and do it for free, but you'll miss that if you're in a rush.

 

October 3, 2019

News

You've heard the ads about settling your outstanding tax liability for pennies on the dollar. And that's certainly possible, but it's not as easy as many think it is. In Michael D. Brown (T.C. Memo. 2019-121) the taxpayer claimed the settlement officer abuse her discretion in keeping a 20 percent Tax Increase Prevention and Reconciliation Act (TIPRA) payment when the taxpayer's offer in compromise was denied by the IRS. The offer was denied because there was open Abusive Tax Avoidance Transaction (ATAT) investigation. When making the offer in compromise the taxpayer acknowledged that the 20 percent payment (totaling $80,000 in this case) required when the total number of installments to be made is five or less was nonrefundable. The Court found the settlement officer did not abuse her discretion.

Just because the business is in partnership or S corporation doesn't mean the IRS can't challenge it as a not-for-profit activity ("hobby loss"). In WLP Realty, LP, Olympia Realty, Inc., Tax Matters Partners (T.C. Memo. 2019-120) the Court examined seven factors usually used to ascertain whether the taxpayer had an intention to make a profit from the activity and determined that the taxpayer had engaged in the activity with a profit objective, despite a number of years of substantial. The Court noted the taxpayer was experienced in real estate and golf courses and spent considerable time on the activity. The Court did find that it did not appear that the taxpayer would benefit from the golf course's assets. The Court noted there was considerable planning involved in improving the course and the taxpayer invested considerable capital.

Tip of the Day

Got delinquent customers? . . . Almost every business that doesn't get payment at the time of purchase or providing service has at least one. There are a number of different ways to "encourage" payment. One of the old standbys is to stop shipping goods or providing services until at least some payments are made. But what if the customer stops ordering? That leverage is gone. One option is to cajole him to pay at least a part of the amount due. In doing so the customer acknowledges the debt making it more difficult to dispute later and a customer making partial payments, even if it's a fraction of what he owes, is more likely to continue making payments.

 

October 2, 2019

News

The IRS has issued proposed regulations (REG-136401-18) to clarify the application of the employer shared responsibility provisions and certain nondiscrimination rules under the Code to health reimbursement arrangements (HRAs) and other account-based group health plans integrated with individual health insurance coverage or Medicare (individual coverage HRAs), and to provide certain safe harbors with respect to the application of those provisions to individual coverage HRAs. The proposed regulations are intended to facilitate the adoption of individual coverage HRAs by employers, and taxpayers generally are permitted to rely on the proposed regulations. The proposed regulations would affect employers, employees and their family members, and plan sponsors.

The IRS has issued Revenue Procedure 2019-40 and proposed regulations (REG-104223-18) that provides relief to certain U.S. persons that own stock in certain foreign corporations. The Revenue Procedure limits the inquiries required by U.S. persons to determine whether certain foreign corporations are controlled foreign corporations (CFCs). The Revenue Procedure also allows certain unrelated minority U.S. shareholders to rely on specified financial statement information to calculate their subpart F and GILTI inclusions and satisfy reporting requirements with respect to certain CFCs if more detailed tax information is not available. It also provides penalty relief to taxpayers in the specified circumstances. Finally, the Revenue Procedure announces that the IRS intends to amend the instructions for Form 5471 to reduce the amount of information that certain unrelated minority U.S. shareholders of the CFC are required to provide. It will also limit the filing requirements of U.S. shareholders who only constructively own stock of the CFC solely due to downward attribution from another person.

The IRS conducts a Tax Gap study periodically to determine the nature and extent of taxpayer noncompliance to assist in formulating tax administration strategies. The last study, completed in April 2016, estimated the amount of tax liability not paid voluntarily and timely was $458 billion annually for Tax Years 2008 through 2010. The nonfiling portion of the Tax Gap is estimated to be $32 billion annually, while the underreporting portion is $387 billion annually, and the underpayment portion is $39 billion annually. The Tax Gap study also found that noncompliance varies with the amount of information reporting by third parties (e.g., employers, banks, partnerships). Items subject to substantial information reporting and withholding (e.g., wages) have a misreporting rate of 1 percent for the individual income tax, while the misreporting rate for items subject to lesser degrees of information reporting are considerably higher. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether the IRS uses Schedule K-1 data effectively to identify taxpayers not submitting tax returns or taxpayers underreporting tax while also minimizing unnecessary notices to taxpayers. Schedules K-1 are used by flow-through entities to report recipients' allocated share of income, deductions, credits, and other amounts. Unlike other information returns, Schedules K-1 are not submitted directly to the IRS, but are attachments to flow-through returns submitted on paper or by electronic filing. Schedules K-1 will limit the IRS's ability to identify potential noncompliance, resulting in the loss of tax revenue and inequitable treatment of taxpayers as well as potentially creating unnecessary work and increasing taxpayer burden. TIGTA found that improvements are needed with the IRS’s process design and collection of Schedule K-1 data to strengthen efforts to address the noncompliance of nonfilers and underreporters. Specifically, TIGTA found that the IRS: 1) annually accepts flow-through returns with approximately 3 million Schedules K-1; 2) did not identify approximately 4,000 nonfilers who received $25,000 or more of Schedule K-1 income; and 3) could improve identification of underreporter noncompliance. For the full report, go to www.treasury.gov/tigta/auditreports/2019reports/201930078fr.pdf.

Scan it . . . Now that you've done your taxes (or even if you're on extension) consider scanning your documentation. Doing so solves two problems--one, you've got a copy in case you lose the paper in a fire, flood, etc. or just misplace it. The IRS and courts don't accept excuses, no matter how good they are. You may be able to get a portion of the original deduction for many items, but auto mileage, T&E, etc. are not entitled to any leeway. Two, while you should still keep paper for three years for several reasons, after that you can send much of the material to the shredder. Individuals and many small business owners can scan the documents on a multifunction copier/printer/scanner. Keep in mind that cash register receipts and similar documentation are printed on heat sensitive paper. These often don't last three years; in a warm environment it can be less than a year. Most of the material can be loaded 25 to 50 sheets at a time. Nonstandard documents (e.g. cash register receipts) will take a little more work, but it'll be worth it. Devices have become cheap and reliable. And don't forget to scan the hard copy of your tax return.

 

 

October 1, 2019

News

Farmers and ranchers who were forced to sell livestock due to drought may have an additional year to replace the livestock and defer tax on any gains from the forced sales. The farmer or rancher must be in an applicable region. This is a county designated as eligible for federal assistance plus counties contiguous to that county. The relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, or poultry, are not eligible. To qualify, the sales must be solely due to drought, flooding or other severe weather causing the region to be designated as eligible for federal assistance. Livestock generally must be replaced within a four-year period, instead of the usual two-year period. The IRS is also authorized to further extend this replacement period if the drought continues. The one-year extension gives eligible farmers and ranchers until the end of the tax year after the first drought-free year to replace the sold livestock. Details, including an example of how this provision works, can be found in Notice 2019-82.

Revenue Procedure 2019-39 sets forth a system of recurring remedial amendment periods for correcting form defects in a Sec. 403(b) plan (both for Sec. 403(b) individually designed plans and Sec. 403(b) pre-approved plans) first occurring after March 31, 2020 (the ending date for the initial remedial amendment period under Rev. Proc. 2013-22 ends. It also provides a limited extension of the initial remedial amendment period for certain form defects.

Tip of the Day

Get financing first . . . That's what most financial advisors recommend when purchasing a home. It's just as important when looking for a car. It's a rare stop at the financing desk at an auto dealership where you'll get the best deal. They want to help you finance in part to sell the car, but also to make money on the financing. Check your (and other) banks for rates. If you belong to a credit union, be sure to check there. They often can do better than a regular bank.
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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