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August 15, 2018
NewsThe IRS is warning tax professionals that savvy cybercriminals target IRS-issued identification numbers to help impersonate practitioners as well as taxpayers. To help protect against this threat used on the Dark Web, the IRS, state tax agencies and the tax industry reminded practitioners that they must maintain, monitor and protect their Electronic Filing Identification Numbers (EFINs) as well as keep tabs on their Preparer Tax Identification Numbers (PTINs) and Centralized Authorization File (CAF) numbers. For more information about monitoring EFINs, PTINs and CAFs, go to IR-2018-164.
The IRS is reminding anyone who registers a heavy highway motor vehicle in their name with a gross weight of 55,000 pounds or more must file Form 2290, Heavy Highway Vehicle Use Tax Return. For many, the filing deadline is August 31. A taxpayer who uses a heavy highway motor vehicle on a public highway beginning in July 2018 must file Form 2290 and pay any tax due for the vehicle by August 31, 2018. If a taxpayer uses an additional heavy highway motor vehicle on a public highway after July 2018, the taxpayer must file a Form 2290 by the last day of the month following the month of first use of the additional vehicle. IRS.gov has a table of when Form 2290 taxes are due. Taxpayers may now use a credit or debit card, electronic funds withdrawal or through EFTPS as well as with a check. For more information see Fact Sheet 2018-13. You can also file electronically through special e-file providers.
How much the IRS will try to extract from you if you haven't fully paid your taxes will depend on a number of factors and your reasonable collection potential (RCP) in the case of an offer in compromise or your monthly income and expenses for an installment agreement. In Marilyn Letitia Randall (T.C. Memo. 2018-123) the taxpayer argued that the settlement officer failed to take into account her $1,000 monthly legal services payment and her $315 monthly personal loan obligation in the calculation of the proposed installment agreement. The Court sided with the IRS in finding that those payments weren't necessary and excluded them from her expenses. The Court held that there was no abuse of discretion by the settlement officer.
Tip of the DaySell a high profile product . . . For small retailers it's tough to compete with big box stores and internet sites, but you may have an option. More than a few local stores, service providers, etc. sell a high-profile product that's not available elsewhere. For example, Madison Powertools sells only through authorized dealers who also service their products. They're not available in big box stores. There are two advantages here. First, if the product has a recognizable name and they're known for quality you'll be able to draw in customers, even if they don't buy the product. It'll enhance the prestige of your business. Second, Madison will almost surely provide you with co-op advertising. That could be a big sign, magazine, tv, and other media ads listing you as a dealer, etc. Third, you may get repair business, be able to sell parts and accessories, etc. There's often an excellent margin in replacement parts. Since you don't have to compete with big box stores, your margins on these products should be higher. There may be some downsides, but it's definitely worth consideration.
August 14, 2018
NewsYou don't have to be an employee or owner of a business in order to be liable for the trust fund recovery penalty (TFRP) if employment taxes aren't paid. Virtually any person who has signatory authority over a bank account can be a responsible person. In Joanna Kane (T.C. Memo. 2018-122) the petitioner was a co-owner and employee of a bookkeeping service that did the bookkeeping for client's business. Because the owner of the client business frequently travelled, the petitioner had the authority to sign the client's checks. The business became deliquent in its employment tax obligations. Because the petitioner could sign checks for the client business the IRS assessed the trust fund recovery penalty. The Court held the petitioner could not contest the penalties in Tax Court because she had an opportunity to do so at Appeals and in a collection due process hearing, petitioner could only raise the issue of an abuse of discretion by the settlement officer. The Court found no such abuse.
Failure to report a foreign bank account carries hefty penalties. In Mindy P. Norman (U.S. Court of Federal Claims) the IRS assessed an FBAR penalty of 50 percent of the balance of the petitioner's unreported account, a penalty of $803,530. The petitioner sued to recover in the Court of Federal Claims. In order to assess the 50-percent penalty, the violation must be willful. The Court noted that the petitioner's inability to remember details of her financial transactions and tax preparation materials--other than the few details which help her case--strained credulity. The Court went on to say that even though in addition to concealing her financial information, the petitioner also failed to pursue knowledge of her reporting requirements. She claimed that she did not know of any details of the account, but the evidence clearly shows met and spoke with her Swiss banker, took substantial funds from the account, and executed management agreements. The Court finds that the petitioner acted to conceal her income and financial information, and also that she either recklessly or consciously avoided learning of her reporting requirements.
Tip of the DaySales and use tax nexus . . . All the talk has been about the Wayfair case where the Supreme Court held that states could force out-of-state retailers who did business via the internet to collect tax in a state even if the only connection to the state was their web page and a customer. But you may have to collect sales tax even if you have no web presence. The rules very from state-to-state, but actively attending a trade show in a state or having representatives (they need not be employees) can require you to collect sales tax. There's often some threshold to breach before the requirement kicks in. Check with your accountant if you have customers in another state.
August 13, 2018
NewsYa Global Investments, LP f.k.a. Cornell Capital Partners, LP, Yorkville Advisors, GP LLC, Tax Matters Partner, and Ya Global Investments, LP f.k.a. Cornell Capital Partners, LP, Yorkville Advisors, LLC, Tax Matters Partner (151 T.C. No. 2) the IRS issued FPAAs with respect to the partnership. The IRS determined that the taxpayer was liable for withholding taxes under Sec. 1446 and made adjustments in the FPAAs to reflect the withholding tax liabilities as well as related additions to tax and penalties. The tax matters partner (TMP) filed a petition for readjustment of partnership items under Sec.ec. 6226(a). The TMP also filed a motion to dismiss for lack of jurisdiction as to nonpartnership items. In that motion the TMP argues that the issue of liability under Sec. 1446 should be dismissed for lack of jurisdiction because that liability is not a partnership item and thus is beyond our jurisdiction under Sec. 6226(f). The Court held that under Sec. 1461 any party required to withhold tax under ch. 3 of the Internal Revenue Code is liable for the tax required to be withheld and that Sec. 1446 imposes a tax withholding requirement on partnerships with respect to effectively connected taxable income allocated to foreign partners, giving rise to a partnership liability. The Court also held that under Sec. 6226(f) the Tax Court has jurisdiction to determine partnership items including partnership liabilities and that a partnership's liability for withholding tax under Sec. 1446 is a partnership item and properly before the Court in a partnership-level proceeding. Finally, the Court denied the motion to dismiss for lack of jurisdiction as to nonpartnership items.
Definitions can be critical. The IRS calls the 10 percent penalty on early withdrawals from IRAs and qualified plans a tax but it's really a penalty. But in In re Thomas E. Daley and Nicole Daley, Debtors (U.S. District Court, D. Massachusetts) the petitioners and the IRS disagreed as to whether the liability imposed by an early withdrawal from a qualified retirement plan is 1) a tax, 2) compensation for actual pecuniary loss or 3) compensation for non-pecuniary loss. The Court sided with the petitioners in finding the amounts were not a tax or compensation to the government for an actual pecuniary loss but compensation for a non-pecuniary loss. Thus, the IRS's claim should not be a priority claim but one subject to a general unsecured claim.
Tip of the DayRobust economy may have a side effect . . . You may find suppliers out of some items. That could be result of demand coupled with tight inventory or it could be the result of shipping problems. Trucks and drivers are in short supply in more than a few areas. You might want to reconsider that just-in-time inventory approach that many companies have been using. Another side effect. Shipping rates have been going up. You may save money by planning ahead and looking for other shipping options.
August 10, 2018
NewsThe IRS has released a short FAQ with basic questions and answers to the new 20-percent deduction for pass-through business income. This Section, 199A, was part of the Tax Cuts and Jobs Act passed in December, 2017. The FAQ discusses the rules for the specified service trade or business (SSTB) as well as REIT (real estate investment trust) dividends and publicly traded partnership income. You can find the FAQ at Deduction for Qualified Business Income FAQs .
Victims of wildfires and high winds that began July 23, 2018 in parts of California may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of California. Following the recent disaster declaration for individual assistance issued by the FEMA, the IRS announced that affected taxpayers who reside or have a business in Shasta County 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 July 23, 2018 and before Nov. 30, 2018, are granted additional time to file through Nov. 30, 2018. For more information, go to Tax Relief for Victims of Wildfires and High Winds in North California.
Taxpayers with income below a certain level may be eligible for an advance premium tax credit (APTC) when purchasing insurance coverage. In Terry Jay Grant and Twila Rose Grant (T.C. Memo. 2018-119) the taxpayers did not include all their income in the insurance application and received the advance credit. The IRS claimed their actual income exceeded the 400 percent of the federal poverty level, making them ineligible for any credit. The taxpayers argued the insurance agent advised them they were not required to include the missing income and should not have to repay the credit. The Tax Court denied the taxpayers equitable relief. The Court noted the law provides no relief based on taxpayer error.
If you are a whistleblower you may be able to secure anonymity when pursuing an award. But in order to do so you must be able to show that the risk of harm to you will result in the risk of retaliation, physical harm, social and professional stigma, and economic duress, harms that go beyond mere embarrassment and annoyance and outweighs the public's right to know. In Whistleblower 7208-17W (T.C. Memo. 2018-118) the petitioner was unable to meet that burden.
Tip of the DaySafe donating for disaster help . . . Contributing to help disaster victims is a strong urge for many individuals. But it also brings out the scammers and con artists. The Federal Trade Commission has just posted a page How to donate wisely after a disaster with a number of tips on how to avoid the scams. Not mentioned was checking out the charity at the IRS website Tax Exempt Organization Search .
August 9, 2018
NewsThe IRS has issued proposed regulations (REG-107892-18) today for a new provision (Sec. 199A deduction) allowing many owners of sole proprietorships, partnerships, trusts and S corporations to deduct 20 percent of their qualified business income. The new deduction (Section 199A deduction or the deduction for qualified business income) was created by the Tax Cuts and Jobs Act. The deduction is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year. The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers. It’s generally equal to the lesser of 20 percent of their qualified business income plus 20 percent of their qualified real estate investment trust dividends and qualified publicly traded partnership income or 20 percent of taxable income minus net capital gains. Deductions for taxpayers above the $157,500/$315,000 taxable income thresholds may be limited. Those limitations are fully described in the proposed regulations. Qualified business income includes domestic income from a trade or business. Employee wages, capital gain, interest and dividend income are excluded. In addition, Notice 2018-64 provides methods for calculating Form W-2 wages for purposes of the limitations on this deduction. More information may be found at www.IRS.gov. Taxpayers may rely on the rules in these proposed regulations until final regulations are published in the Federal Register.
Notice 2018-64 (IRB 2018-35) proposes a revenue procedure that provides guidance on methods for calculating W-2 wages for purposes of section 199A of the Code and proposed Secs. 1.199A-1 through -6 of the Regulations which are being published contemporaneously. Specifically, this notice provides methods for calculating W-2 wages (1) for purposes of Section 199A(b)(2) which, for certain taxpayers, provides a limitation, based on W-2 wages, to the amount of the deduction qualified business income under Section 199A; and (2) for purposes of Section 199A(b)(7), which, for certain specified agricultural and horticultural cooperative patrons, provides a reduction to the Section 199A(a) deduction based on W-2 wages.
. Want access to your personal tax account? The IRS published a new page Taxpayers Can Monitor Their IRS Information Online providing more details on what's available and links to access your info.
The IRS has updated its webpage on Tax Help for California Wildfire Victims. (Based on the current situation concerning the fires in California there are likely to be additional updates. You should monitor this page.)
The rules for cash contributions are fairly simple. For noncash donations, they can get complicated quickly. In Estelle C. Grainger (T.C. Memo. 2018-117) the taxpayer reported substantial contributions of clothing. The items were mostly new, but purchased at a substantial discount (as much as 90%) from the original list price. The discount was achieved using "points" the taxpayer received as a loyal customer. The challenged the deduction on three grounds. The first was failure to get an appraisal of the items contributed--a requirement if the aggregate value of similar items exceeds $5,000. The second was that she did not establish that the fair market value was higher than her purchase price. The IRS allowed a deduction for her cash outlay. The Court agreed, noting that the items had been marked down several times before sale. The Court also noted the Forms 8283 were not signed by an officer of the charity, a requirement for large contributions. The Court allowed a deduction for no more than that allowed by the IRS.
Tip of the DayRent to a relative? . . . Thinking of renting a house, condo, or vacation home to a relative? You can, but don't be surprised if the transaction gets close scrutiny if you're audited. The rental will pass muster and you'll be allowed any losses (subject to the usual rules), but the terms must be the same as an unrelated party would get in the market. Most importantly, that means a fair market rent. This is not a time to go cheap. Get at least one, preferably two appraisals of the fair rent for the property. Fortunately, that's usually a lot easier than getting a valuation of the property for sale. Accurate recordkeeping for expenses will also be critical. The same advice applies to commercial property, e.g., renting office space to a relative.
August 8, 2018
NewsThe IRS has issued final regulations (T.D. 9839) regarding the designation and authority of the partnership representative under the centralized partnership audit regime, which was enacted into law on November 2, 2015 by section 1101 of the Bipartisan Budget Act of 2015 (BBA). These final regulations affect partnerships for taxable years beginning after December 31, 2017. This document also contains final regulations and removes temporary regulations regarding the election to apply the centralized partnership audit regime to partnership taxable years beginning after November 2, 2015 and before January 1, 2018 under section 1101(g)(4) of the BBA. These final regulations affect partnerships for taxable years beginning after November 2, 2015 and before January 1, 2018. The regulations provide guidance on when the partnership can change representatives and who may act as a representative among other changes.
In Kimberly S. Nix (T.C. Memo. 2018-116) the taxpayer was a "Mary Kay" consultant. Her activities were unprofitable, sustaining losses of $18,142 in 2012, $45,395 in 2013, and $22,353 in 2014. In 2013, her best year for sales, her revenue was on $1,904. The IRS challenged her intent in operating the activity. It disallowed her cost of goods sold to the extent they exceeded her revenue. The Court noted that her deductions included 27 separate trips. Twenty of these trips were to volleyball tournaments in which her daughter participated; two trips involved vacations with her daughter to Europe and Disney World; and another two trips involved meetings of her college sorority. Her travel expenses alone, aggregating almost $28,000, exceeded by more than 600% the gross receipts she earned from her Mary Kay activity. The Court looked at the nine factors normally examined to determine whether an activity is entered into with a profit motive. The Court found none of the nine factors weighed in favor of the taxpayer. The Court found the activity was not engaged in for profit. In addition, the Court sustained the IRS's accuracy-related penalty.
Tip of the DaySales tax changes . . . Will states where you do business but don't collect tax because you don't have a physical presence subject you to tax in the near future? Each state will approach the change in the law somewhat differently. Some will have a threshold below which you may not have to collect and report sales tax. Some may craft their law requiring a certain connection with the state to require collection. And it could be the products or services you provide to consumers in the state are not taxable. But there are steps you can take now to be prepared. You should be able to track sales by zip code, if you're not doing so already. Some states have a single tax rate for the entire state. Some have a few special rates. In New York, each county can have a different rate (there's a local and a statewide rate). You should also be aware that not all products are taxable. For example, food and medical supplies are generally exempt. Of course, if all you sell is electronics, this may not be an issue. The better your ability to track sales, the easier it will be to deal with the issue should you have to.
August 7, 2018
NewsThe IRS has issued guidance Revenue Procedure 2018-40 on new tax law changes that allow small business taxpayers with average annual gross earnings of $25 million or less in the prior three-year period to use the cash method of accounting. The Revenue Procedure outlines the process that eligible small business taxpayers may obtain automatic consent to change accounting methods that are now permitted under the Tax Cuts and Jobs Act, or TCJA. The TCJA, enacted in December 2017, expands the number of small business taxpayers eligible to use the cash method of accounting and exempts these small businesses from certain accounting rules for inventories, cost capitalization and long-term contracts. As a result, more small business taxpayers will be allowed to change to cash method accounting starting after Dec. 31, 2017.
The IRS has issued proposed regulations (REG-104397-18) that provide guidance regarding the additional first year depreciation deduction under Section 168(k). These proposed regulations reflect changes made by the Tax Cuts and Jobs Act of 2017. These proposed regulations affect taxpayers who deduct depreciation for qualified property acquired and placed in service after September 27, 2017. The Act made several amendments to the allowance for additional first year depreciation deduction in Section 168(k). For example, the additional first year depreciation deduction percentage is increased from 50 to 100 percent; the property eligible for the additional first year depreciation deduction is expanded to include certain used depreciable property and certain film, television, or live theatrical productions; the placed-in-service date is extended from before January 1, 2020, to before January 1, 2027 (from before January 1, 2021, to before January 1, 2028, for longer production period property or certain aircraft property described in Section 168(k)(2)(B) or (C)); and the date on which a specified plant is planted or grafted by the taxpayer is extended from before January 1, 2020, to before January 1, 2027.
The IRS is advising professionals that if you have an active e-file application on file and have made changes such as adding a provider option, principal or responsible official and it has not been resubmitted it will be deleted in 90 days. If the application is not resubmitted and the 90 days has not elapsed since the changes were made, the application can be resubmitted by an authorized individual. If 90 days has elapsed and your application has been deleted, contact the e-help Desk at 866-255-0654 for assistance with resubmitting your application.
Tip of the DayNew Medicare cards . . . The Social Security Administration is issuing new Medicare identification cards. They've started mailing them out and, if you haven't gotten one, you should be soon. The big change? Your social security number is not on the card. Instead there's an alpha-numberic code that's intended to reduce identity theft.
August 6, 2018
NewsNotice 2018-63 (IRB 2018-34) extends the application of the HFA Hardest Hit Fund safe harbor to homeowners who may be affected by the new $10,000 limitation on deductible property taxes. Under the modified safe harbor, participating homeowners may allocate mortgage payments actually made first to deductible mortgage interest, and thereafter use any reasonable method to allocate the remaining balance of payments made to real property taxes, mortgage insurance premiums, home insurance premiums and principal.
Notice 2018-62 (IRB 2018-34) announces that the Treasury Department and the IRS intend to issue proposed regulations providing clarification regarding the new rules increasing the contribution limits to ABLE accounts from certain designated beneficiaries. In addition to the annual gift tax exclusion, a designated beneficiary who works may also contribute up to the lesser of these amounts: (1) the designated beneficiary’s compensation for the tax year, or (2) the poverty line for a one-person household in the state in which the designated beneficiary lives. An employed designated beneficiary is not eligible for the increased contribution limit for the taxable year if any contribution is made on behalf of the employee to a 401(a) defined contribution plan or 403(a) annuity contract, a 403(b) annuity contract, or a 457(b) eligible deferred compensation plan.
In Mindy P. Norman (U.S. Court of Federal Claims) the plaintiff was assessed a penalty under the Bank Secrecy Act by the IRS in the amount of $803,530.00. This penalty was assessed for a willful failure to file a Report of Foreign Bank and Financial Account (“FBAR”) in connection to a Swiss bank account she had in 2007. On January 21, 2014, the plaintiff contested the assessment with the IRS, and on July 6, 2015, the IRS office of appeals affirmed the penalty, finding that Ms. Norman willfully failed to file an FBAR. The plaintiff paid the penalty and filed a Complaint with the Claims Court. The plaintiff argued that she did not willfully fail to file the report. (If the failure was not willful, the penalty would be reduced from 50% of the amount in the account to 20%.) The Court found that the plaintiff's repeated and admitted lack of care in (1) filing inaccurate official tax documents without any review, (2) signing foreign banking documents without any review, and (3) later providing false sworn statements both to the IRS and to the Claims Court, both with and without review, reaches the standard of reckless disregard for the law required to constitute a willful violation of Sec. 5314.
Tip of the DayCheck your insurance policy . . . Your home may be underinsured in light of the seemingly more violent natural disasters. Insurance companies are putting higher deductibles on damage associated with some natural disasters. You may not be able to do anything about the coverage, but you can plan ahead for potential losses. And you may be able to reduce your premium if you take certain steps to protect your home. Check with your agent. And keep in mind that casualty losses are no longer deductible unless they're related to a presidentially declared disaster. Make sure you've got adequate coverage for your contents. At the same time, check to make sure you're not paying for coverage you don't need.
August 3, 2018
NewsThe IRS has released draft copies of Form 1040, Schedules R, F, 1, 2, 3, 4, 5, and 6 that are dated July 30 and 31. You view or download the draft PDF forms at Draft Tax Forms.
A spouse may be able to avoid the other spouse's liability on a joint return under certain circumstances. In Rick E. Jacobsen (T.C. Memo. 2018-115) sought innocent spouse relief for the liability for tax on money his wife had embezzled. The Court granted relief for the first year as the tax return was filed before the taxpayer's wife was arrested for the embezzlement. The couple did not maintain a lavish lifestyle and there was no change in their expenditure pattern after the embezzlement began. The Court found the taxpayer did not have knowledge of the underreported income and there was nothing that would put him on notice that there was a possible understatement. However, the Court did not grant relief for the second year as the taxpayer's spouse had been arrested and convicted of the embezzlement. The Court found the taxpayer had knowledge of the embezzled income and found the taxpayer reponsible for the tax on the income.
The IRS can ask you to extend the statute of limitations by signing Form 872-I. In Inman Partners, RCB Investments, LLC, Tax Matters Partner (T.C. Memo. 2018-114) the taxpayers agreed to extend the statute for any income tax due on any return made by or for them for the period ended December 31, 2000. Each of the taxpayers wa also a partner in a partnership that had a tax year that ended on December 19, 2000. The question before the Court was does an extension for individual returns for a year that ends on December 31 include any partnership items from partnerships whose tax years ended less than a month before? In an earlier case involving the same issue, the Tax Court held that it did. The taxpayers here asked the Court to reconsider their earlier opinion. The Court held their original opinion stood and clarified that Form 872-I doesn't extend the statute for the return but for the assessment of tax.
Tip of the DayAsk for recommendations . . . Keep your customers happy and ask for recommendations. Not only is it a cheap way to get new customers, the new customers tend to be less picky than "walk-ins". They may take the recommendation at face value and not bother to shop price or the timing of a job or delivery. And even if they do shop price, you will probably have an edge.
August 2, 2018
NewsYou can't change your mind more than once. Well, you can, but you're going to have to present good evidence. In Wayne D. Ramsay (U.S. Court of Appeals, Fifth Circuit) the taxpayer excluded some income on his original return. He then filed an amended return reporting the missing income after receiving a deficiency notice. He subsequently filed an additional amended return excluding some income reported on the original return. The IRS did not process the second amended return. The Appeals court sided with the Tax Court in holding that the taxpayer changed his reporting position after the IRS sent the notice of deficiency. The Tax Court had held the income reported on the original return "constituted an admission that must be overcome by cogent evidence” and that the taxayer had not overcome the presumption.
Filing a joint return is an election that generally can't be revoked. In Alice J. Coggin (U.S. District Court, M.D. North Carolina) the taxpayer attempted to file separate returns for six years after filing joint returns, claiming the original returns were invalid. There is a limited exception to the rule requiring both signatures on a joint return for it to be valid: when only one spouse signs a joint return, the return is valid if the non-signing spouse intended to file jointly. In this case the husband forged his wife's signature on the returns. The intent to file jointly may be inferred from the acquiescence of the nonsigning spouse. Thus, where a husband files a joint return without objection of the wife, who fails to file a separate return, it will be presumed the joint return was filed with the tacit consent of the wife. The Court noted that the innocent spouse exception acts to relieve a spouse of tax liability, not to entitle a spouse to a refund. Here, the taxpayer's claim was for a refund. The Court held the taxpayer could not replace the joint returns with separate ones.
Tip of the DayEconomy booming? . . . Or are the second quarter numbers just a fluke? There's no sure answer. A good guess would be the economy is humming, but there's a good chance the results for future quarters won't be as good. The housing market appears to be slowing and some of the GDP could be purchases of durable goods and other consequences of the new tax law. And that could run out of steam. Interest rates will assuredly rise and a trade war could take its toll. On the other hand, there is momentum and confidence is high. Best advice? Assume the economy will continue to expand, possibly at a slower pace. But be alert to signs that could indicate a turn.
August 1, 2018
NewsCode Section 6103(e)(8) requires the IRS to disclose efforts to collect delinquent taxes on joint tax liabilities when requested by taxpayers who are no longer married or no longer reside in the same household. If the IRS does not provide employees sufficient guidance for handling those requests, taxpayer rights could potentially be violated. In an audit the Treasury Inspector General for Tax Administration (TIGTA) found IRS employees are not required to record or monitor joint filer requests for information on collection activities, systems have not been designed to specifically capture such information, and there is no legal requirement for the IRS to do so. While TIGTA does not recommend the creation of a separate tracking system, it determined that improvements can be made to the Internal Revenue Manual (IRM) sections and training materials regarding what the law requires and allows when receiving requests for disclosure of collection information pursuant to either Section 6103(e)(7) or Sec. 6103(e)(8). TIGTA reviewed a sample of IRS system case history files and interviewed employees from the Accounts Management function, Taxpayer Assistance Centers, and the Taxpayer Advocate Service to determine how employees responded or would respond to taxpayer requests for information from a jointly filed return if the individuals filing the return are no longer married or no longer reside in the same household. Both the sampled case reviews and interviews showed that employees are not always aware of the disclosure requirements for joint filer taxpayer contacts. Inconsistent guidance and the lack of training on the appropriate response to these inquiries are contributing to employee misunderstanding. Instead of having several sources for employees to research to determine the correct response to joint filer requests, there should be one source with detailed guidance so employees can consistently provide the correct response. To see the full report, go to www.treasury.gov/tigta/auditreports/2018reports/201830053fr.pdf.
Paid tax return preparers serve an important role in the U.S. tax system as they prepare approximately 60 percent of all tax returns filed. Because the IRS’s effort to regulate preparers was invalidated as a result of litigation, tax return preparers are generally unregulated, and they can prepare returns without possessing training or education. In addition, there is extensive evidence that some of them prey upon innocent taxpayers. The Treasury Inspector General for Tax Administration (TIGTA) initiated to determine how effectively the IRS uses its tools to protect taxpayers from such preparers. The Small Business/Self-Employed (SB/SE) Division has been designated to serve as the IRS’s lead function to address preparer misconduct; however, TIGTA found no evidence of a coordinated strategy in the IRS to address preparer misconduct. Only a relatively small number of civil examinations are pursued against preparers each year relative to complaints about tax preparers. For example, during Fiscal Year 2016, the IRS investigated just 140 (15 percent) of 951 misconduct referrals. Additionally, the SB/SE Division does not establish goals addressing preparer misconduct or track them in any meaningful way. Collection of tax preparer penalties is not effectively prioritized or worked given that only about 15 percent of assessed penalties are being collected. The Return Preparer Office, which was originally established to lead the now defunct regulatory effort, is still in existence but now primarily focuses its efforts on tax professionals and those few tax return preparers who volunteer to be subject to certain annual training. The Return Preparer Office checks tax compliance for tax professionals but not for most unregulated preparers. More than 26,000 Preparer Tax Identification Number recipients acknowledged being tax noncompliant. Additionally, while preparing tax returns without a Preparer Tax Identification Number is subject to a penalty, the penalties are assessed on a limited ad hoc basis. In Processing Year 2016, the IRS failed to assess $121,175,195 in Preparer Tax Identification Number penalties. Despite the availability of significant information about possible preparer misconduct, the IRS has not taken full advantage of the capabilities. For example, TIGTA identified suspicious behavior by more than 10,000 preparers who each filed at least 25 returns annually with refund claims on 100 percent of the returns they filed. The IRS could conduct similar analyses to identify additional possible unscrupulous preparers. To see the full report, go to www.treasury.gov/tigta/auditreports/2018reports/201830042fr.pdf.
Tip of the DayInflation adjusted capital gains coming? . . . Maybe, but not by executive order. President Trump has said he'll cut the capital gains tax by having gains adjusted for inflation. While that's a possibility and has been mentioned in the past, it's something that has to go through Congress. In fact, technically only the House can initiate a tax bill. (Of course, the 1986 Tax Reform Act was a Senate amendment tacked on to a relatively obscure House bill so any thing's possible.) While it does make sense, the mechanics of computing the gain could be daunting in many cases. It's certainly a possibility, but don't plan on it yet.
July 31, 2018
NewsTHe IRS has issued final regulations (T.D. 9836) that provide guidance concerning substantiation and reporting requirements for cash and noncash charitable contributions. The final regulations reflect the enactment of provisions of the American Jobs Creation Act of 2004 and the Pension Protection Act of 2006. These regulations provide guidance to individuals, partnerships, and corporations that make charitable contributions.
Revenue Procedure 2018-39 (IRB 2018-34) provides relief to taxpayers who took out private student loans to finance attendance at a school owned by Corinthian College, Inc. (CCI) or American Career Institutes, Inc. (ACI). It amplifies Rev. Proc. 2015-57 and Rev. Proc. 2017-24, which had provided relief to those students who had taken out Federal student loans to finance attendance at CCI and ACI, respectively. Under Rev. Proc. 2018-39, a taxpayer will be able to exclude from gross income the discharged amount of a private student loan taken out to finance attendance at ACI or CCI. Taxpayers also will not be required to increase taxes owed in the year of discharge for prior claimed credits or deductions attributable to payments made on these private student loans. Finally, the IRS will not require a creditor to file returns and furnish payee statements for the discharged indebtedness.
Notice 2018-58 (IRB 2018-33) announces that Treasury and the IRS intend to issue regulations providing clarification regarding (1) the special rules for contributions of refunded qualified higher education expenses to a qualified tuition program; (2) the new rules permitting a rollover from a qualified tuition program to an ABLE account under IRC Sec. 529A: and (3) the new rules treating certain elementary or secondary school expenses as qualified higher education expenses.
Tip of the DayCash that check . . . Taxpayers often give their tax preparers far more paperwork than necessary. A good preparer can sort through it very quickly. But you should check your incoming mail carefully. Preparers often find tax refund checks, dividend checks, correspondence requiring a reply (e.g. an IRS notice), invoices requiring payment, etc. in with a taxpayer's W-2s and 1099s. The items are frequently past their cash by or respond by date. Sometimes the amounts are nominal, but it's not uncommon to see checks for a significant amount or important correspondence. If you're unsure of how to handle it, ask your tax or financial advisor or CPA.
July 30, 2018
NewsYou can't avoid paying creditors by simply transferring assets. In Norma L. Slone, Transferee, Petitioner-Appellee et al. (U.S. Court of Appeals, Ninth Circuit) Slone Broadcasting Co. sold its assets to Citadel Broadcasting Co. and its shares to Berlinetta, Inc. The stock sale to Berlinetta involved the payment of funds obtained through a loan, plus the assumption of a tax liability generated by the asset sale. Slone Broadcasting and Berlinetta then merged into a company called Arizona Media Holdings, Inc. After paying off the loan used to buy the stock, Arizona Media had no assets with which to pay the tax liability from the asset sale. The IIRS then sent notices of tax liability to petitioners, the former shareholders of Slone Broadcasting, claiming that they were liable as “transferees” for taxes owed on the asset sale, under Sec. 6901. In an earlier appeal, the Appeals Court considered the Tax Court's original ruling in favor of petitioners, and remanded to the Tax Court because it had not applied the correct test to determine whether petitioners were transferees under Sec. 6901. On remand, the Tax Court again ruled for the petitioners. In this appeal, applying Arizona's Uniform Fraudulent Transfer Act, the Court held that the transaction was constructively fraudulent as to the creditor (the IRS) because the debtor (Slone Broadcasting) did not receive a reasonably equivalent value in exchange for the transfer to the shareholders and was left unable to satisfy its tax obligation. The Court explained that the sale to Berlinetta was a cash-for-cash exchange lacking independent economic substance beyond tax avoidance, and that reasonable actors in petitioners' position would have been on notice that Berlinetta never intended to pay Slone Broadcasting's tax obligation. Because the transaction lacked independent economic substance apart from tax avoidance, and because petitioners were liable for the tax obligation under applicable state law, the Court held petitioners liable for Slone Broadcasting's federal tax obligation as “transferees” under Sec. 6901.
Tip of the DayLook behind the numbers . . . Often the numbers speak the truth. Your sales are up 20% year over year as a result of a new product that's cheaper and better. Or you've introduced a new service boosting revenue and traffic. But before taking the numbers at face value, ask yourself if they make sense. Is it the new product that generated the sales or the fact that your competitor was shut down for three months because of a storm damage. If it's the former, you should take steps to take advantage of the new product. If it's the latter, you may still be able to take advantage of the situation, but in a much different way.
July 27, 2018
NewsThe IRS has announced (IR-2018-155) its Office of Professional Responsibility (OPR) reached a settlement agreement including a monetary penalty with a tax practitioner for violating professional rules of conduct set forth in Circular 230. His firm also accepted responsibility for knowing the practitioner engaged in misconduct in attracting clients with outstanding collection issues. The practitioner created false advertising designed to mislead potential clients to believe the firm successfully helped thousands of taxpayers and employed multiple attorneys, enrolled agents, CPAs and former IRS employees. In fact, the practitioner is an enrolled agent and the only Circular 230 practitioner at the firm. The practitioner agreed to five years of probation and a 12-month suspension of practice before the IRS if the probation is violated. The firm agreed to a monetary penalty based on a percentage of the gross income from the misconduct. “Monetary penalties are generally not part of Circular 230 cases but in this situation, we concluded it provided a way to limit the practitioner's ability to profit from his misconduct,” said Stephen Whitlock, Director of OPR.
In Daniel A. Colon (T.C. Memo. 2018-113) the petitioner was the CEO of two related entities, SCPS and SCH. The IRS investigated the petitioner (as a responsible person for paying the employment taxes) for trust fund recovery penalties (TFRP) for both entities and issued a Letter 1153 of its intent to assess the penalties. The petitioner appealed both penalties. The Office of Appeals issued petitioner a letter relieving the petitioner of the penalties for SCH. The petitioner requested a collection due process hearing for the SCPS penalties and argued he should be relieved of those also. The IRS did not agree. Unfortunately, due to a mistake in the paperwork it was not clear if the petitioner was relieved of the penalties for SCPS. The Court found the weight of the evidence showed the letter relieved the penalty only for SCH. The Court also found that the IRS settlement officer was impartial, notwithstanding her supervisor's prior involvement with the case. The Court found the IRS complied with the verification requirements of Sec. 6330(c)(1).
Tip of the DayNo buy-sell agreement? No restrictions on the sale of an interest? . . . Most business owners don't have a buy-sell agreement with their co-owners. That's even more true for younger owners. But a buy-sell isn't just in case one owner dies or becomes ill. The buy-sell or any restrictions on a sale can come into play when a partner just wants out, is selling his interest to raise cash, has to sell because of a divorce, etc. It's not unusual for a partner who thinks he's been slighted to sell his interest to a hostile party. Talk to your attorney to make sure you're protected.
July 26, 2018
NewsFiling a fraudulently incorrect Form 1099 proved costly to the defendants in Dr. Nicholas Angelopoulos, Plaintiff v. Keystone Orthopedic Specialists, S.C., Wachn, LLC, and Martin R. Hall, M.D., Defendants (District Court, N.D. Illinois). The defendants filed a Form 1099 with the IRS that showed the plaintiff earned a substantial amount of income during the year, but the 1099 was deemed to be fraudulent. The Court granted the plaintiff a substantial award to compensate him for a portion of his legal, accounting and other professional fees.
There are a number of tax consequences of having a dependent. The most obvious is the dependent exemption (under prior law), but the child tax credit, the dependent care credit, the earned income credit, and even your filing status depends on having a qualified dependent. In Miguel A. Jusino and Elizabeth H. Ezcurra (T.C. Memo. 2018-112) the taxpayers claimed the child credit, the earned income credit (based on having a dependent) and the dependent exemption despite the fact the their two biological children did not live with them during the year. The parent rights of the taxpayers had been terminated by a court order and the children were adopted by their maternal aunt. The fact that the parents spent some weekends and the summer with them, did not alter the fact they were not dependents. The aunt provided the primary financial support for the children.
Tip of the DayHome sales slowing? . . . They are in portions of California. Should you be worried? You should be probably be concerned, but not worried. It's too early to tell if this is a nation-wide trend. More than a few areas of California have been hot for several years and some cooling shouldn't be entirely unexpected. Real estate trends can be local--or national. Higher prices and higher interest rates as well as other factors can affect the entire country, but there are still a number of factors that are local in nature. And the impact can depend on your situation. If you're a speculator or looking for rental property, you've got to be more concerned than if you intend to live in the home. Could this be an indication the market is topping? It's too early to tell. But prices have recovered strongly from their recent lows so it is possible there may not be much steam left in the market.
July 25, 2018
NewsVictims of severe a winter storm and snowstorm in certain counties of New Jersey during March 6 and 7, 2018 may deduct losses on their 2018 or 2017 tax returns. The affected counties are Bergen, Essex, Morris, Passaic and Somerset.
The more an expenditure could be considered personal rather than business, the more important documentation becomes. In Darrell Archer (T.C. Memo. 2018-111) the taxpayer operated a marketing business as a sole proprietorship. He did not produce any third-party invoices, canceled checks, or contemporaneous logs to substantiate the business purpose of the amounts reported. He produced no corroborating witnesses. His evidence consisted of annotated copies of credit card statements, a few bank statements, receipts signed by his son, and his own handwritten notes. He testified that he went over his credit card statements and added up charges that he determined were related to his business. He presented no evidence that he was entitled to deduct expenses relating to the use of his home in compliance with Section 280A(c)(1) or (2), which allows a deduction for a home office. He merely asserted that he had deducted two-thirds of the utilities as his estimate for use of the property for business. The Court went on to say the taxpayer's testimony and the handwritten and typed notes that were stipulated exhibits were merely his contentions, and his assertions that the large amounts claimed as deductions related to an amorphous business activity are improbable, implausible, and unreliable. The amounts he claimed as deductions were reconstructed estimates, disproportionate in amount to his reported income, and questionable as to purpose. The Court also noted there was no time log to substantiate the hours worked be his son or grandson or the services they performed. The Court went on to say where a family relationship is involved, close scrutiny is applied to determine whether payments to or on behalf of a taxpayer's children are on account of an employment relationship or the family relationship and whether the amounts paid are reasonable for the work performed. The Court sided with the IRS in disallowing most of the claimed expenses. The Court also sustained the IRS's disallowance of cash and noncash charitable contributions noting the lack of proper documentation.
Tip of the DayExcess contribution penalty . . . If you exceed the $5,500 ($6,500 if you're age 50 or older) contribution to your IRA, you're subject to a 6% excess contribution penalty. While that's the most common example, there can be other reasons for an excess contribution. If you took money out of an IRA and deposited it another IRA after the 60-day rollover time limit or did more than one non-trustee to trustee rollover in a year, the money deposited in the IRA is an excess contribution. So is depositing dissimilar property. For example, taking $30,000 in Madison Inc. stock out of one IRA and putting $30,000 cash into the second IRA. If you take out property other than cash you must deposit identical property in the new account. If the dollars are significant talk to your broker or tax advisor.
July 24, 2018
NewsThe IRS has released draft forms of Form 1040 Schedules SE, B, E, C, and A and Schedule 8812, Additional Child Tax Credit. You view or download the draft PDF forms at Draft Tax Forms at irs.gov.
Victims of a severe winter storm and straight-line winds in Nebraska that occurred during the period of April 13 to 18, 2018 may deduct the losses on their 2018 or 2017 return. The affected counties are Antelope, Blaine, Boone, Boyd, Cheyenne, Clay, Custer, Deuel, Fillmore, Garfield, Gosper, Greeley, Hall, Hamilton, Holt, Howard, Keith, Knox, Logan, Loup, Madison, Merrick Nance, Nuckolls, Pierce, Platte, Rock, Sherman, Valley, Webster and Wheeler.
The IRS recently released a revision to its Audit Technique Guide on Conservation Easements. The guide, intended for IRS agents, can be a valuable aid for tax professionals and taxpayers to insure compliance with the law. You can download the guide at Conservation Easement Audit Techniques Guide at IRS.gov.
Tip of the DayRequired minimum distribution . . . If you have an IRA (other than a Roth) you must take required minimum distribution (RMD) beginning in the year you reach 70-1/2. You can delay receipt of the first RMD until April 1, of the following year, but, if you do, you'll be required to take two distributions in the same year. We won't go into the reasons for the RMD, but failure to take the distribution can result in a 50% penalty. How much do you need to take? That depends on whether you're married or not and who the beneficiary is. In the typical situation, you're unmarried or your spouse isn't more than 10 years younger, your first RMD will be about 3.65% of the balance in your account at the end of the prior year. That percentage increases gradually every year. You can take more than the minimum in any year, but any excess distribution can't be used to reduce a following years' RMD. For example, in 2019 you're required to take $10,000 from the account. You take $15,000. You can't reduce your 2020 distribution by the excess $5,000. You can do whatever you want with the money but you can't rollover the funds into another IRA. You can take the distribution monthly, quarterly or sporadically during the year. Almost all banks, brokers or other financial institutions will warn you to take the distribution. You have the option of having state and/or federal taxes withheld. Unless you're already paying estimated taxes regularly, withholdings are a good idea.
Copyright 2018 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