News and Tip of the Day


Small Business Taxes & ManagementTM--Copyright 2017, A/N Group, Inc.

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October 19, 2017

News

The IRS, state tax agencies and private-sector industry leaders today detailed their continued progress against tax-related identity theft and prepared additional safeguards for the 2018 filing season to curb refund fraud. The latest IRS data continued to show significant improvements as fewer identity theft returns entered the tax system, fewer fraudulent refunds were issued and fewer taxpayers were reporting themselves as victims of identity theft. The progress also underscored that the Security Summit partnership created in March 2015 has led to stronger federal and state tax systems than just a few years ago with important new protections for taxpayers--which take on even greater importance given recent high-profile data breaches.  For more details, go to IR-2017-176, Security Summit Partners Mark Progress in Identity Theft Battle; Prepare for 2018 Tax Season.

Due to resource considerations, the IRS has significantly curtailed the Automated Substitute for Return Program (ASFR), which it uses to address taxpayers who have failed to file a tax return, according to an audit report that the Treasury Inspector General for Tax Administration (TIGTA) issued. From June 2010 through July 2011, the ASFR program collected over $3 billion, whereas from June 2015 through July 2016 the program’s collections were down to approximately $430 million. IRS management has mainly used the ASFR program to focus on “Refund Hold” cases where the IRS holds a refund on one tax year to secure an unfiled return in another year. When a taxpayer who has a tax filing requirement fails to file a tax return, the IRS is authorized to use third-party information to determine and assess a tax liability. The IRS handles these cases primarily through the ASFR Program, which enforces filing compliance on taxpayers who have not filed individual income tax returns but appear to owe a significant tax liability. TIGTA initiated this review to evaluate the effect of the ASFR Program on enforcement yield and nonfiler compliance and determine whether the program effectively processed its workload. Refund Hold inventory includes income tax refunds that are withheld from taxpayers to cover any potential tax liability on an unfiled return. Refund Hold cases are considered the highest priority work for the ASFR Program, because refunds are held for only six months. High net tax due cases in the ASFR Program are those in which the potential tax liability from an unfiled return is $100,000 or more. TIGTA’s analysis of 21,533 Refund Hold cases worked in the ASFR Program between June 2011 and November 2016 identified 12,872 cases (60 percent) that were not resolved within six months, and a refund was released to the taxpayer in 8,115 cases. If the IRS held these refunds until the ASFR process was completed, it could have potentially applied $45 million to the taxpayers’ accounts. To see the complete report, go to www.treasury.gov/tigta/auditreports/2017reports/201730078fr.pdf.

In James M. Galloway et ux. (149 T.C. No. 19) the taxpayers claimed a $7,500 credit under Sec. 25A for expenses related to their children's postsecondary education. The taxpayers failed to carry from Form 8863 to Form 1040 the $4,500 nonrefundable portion of the credit, claiming on Form 1040 only the $3,000 refundable portion, which reduced the tax shown on the return from $6,984 to $3,984. In processing the taxpayers' return, the IRS0 adjusted their tax liability to take into account the $4,500 nonrefundable portion of the credit and refunded to the taxpayers $4,500 more than the amount they had requested. After examination the IRS disallowed the taxpayers' claimed $7,500 credit in full, and the taxpayers then conceded that they are not entitled to any credit under Sec. 25A for 2011. The Tax Court held when the Commissioner makes a rebate to a taxpayer for a year in excess of the amount of tax shown on the taxpayer's return for the year, that excess increases the taxpayer's “deficiency”, within the meaning of Sec. 6211(a); thus the taxpayers' deficiency for the year was $7,500 ($6,984 – ($3,984 – $4,500)).

Tip of the Day

Look beyond the numbers . . . Often we focus solely on the numbers when analyzing a business. While that's the best starting point, you should always look at the physical plant, talk to employees, customers, vendors, etc. if possible. The income statement and balance sheet show where the company has been. But those numbers can be out of date, by as much as a year in some cases if you're looking at annual statements. One company sent a salesmen to visit a prospective customer who was thinking of switching vendors. The financials looked great, but the salesmen told his boss of empty desks and a carpet that was in desperate need of replacement. The boss spoke to accounts receivable and told them to advance credit sparingly. Sure enough, the customer quickly became a slow pay even on the limited credit and it wasn't long before they were out of business. It later surfaced that the financials had been doctored.

 

October 18, 2017

News

The IRS is reminding (IR-2017-175) tax professionals that they can earn continuing education credits online through seminars filmed at the 2017 IRS Nationwide Tax Forums. The 17 self-study seminars are now available on the IRS Nationwide Tax Forums Online (NTFO). Self-study seminars provide information to participants using interactive videos, PowerPoint slides and transcripts. The online forums are registered with the IRS Return Preparer Office and the National Association of State Boards of Accountancy (NASBA) as a qualified sponsor of continuing education. For a fee, CPAs, Enrolled Agents and Annual Filing Season Program participants taking NTFO seminars can earn continuing education credits.

In Palmolive Building Investors, LLC, DK Palmolive Building Investors Participants, LLC, Tax Matters Partner (149 T.C. No. 18) the partnership PB transferred a facade easement by executing an easement deed in favor of a qualified organization. The easement deed places restrictions on PB and its successors with respect to the facade easement and the building. PB's building was subject to two mortgages, but before executing the easement deed, PB obtained ostensible mortgage subordination agreements from its mortgagee banks. However, the easement deed provides that in the event the facade easement is extinguished through a judicial proceeding, the mortgagee banks will have claims prior to that of the donee organization to any proceeds received from the condemnation proceedings, until the mortgage is satisfied. PB claimed a charitable contribution deduction for the facade easement contribution. In a notice of final partnership administrative adjustment issued to PB, the IRS disallowed PB's claimed charitable contribution deduction for the donation of the facade easement and also determined that PB is liable for a gross valuation misstatement penalty under Sec. 6662(h) and (a) or alternatively for a substantial understatement of income tax, negligence or disregard of rules or regulations, or a substantial valuation misstatement penalty under Sec. 6662(a) and (b)(1), (2), or (3). The IRS argues that the easement deed does not satisfy the perpetuity requirements of Sec. 170 because it provides the mortgagees with prior claims to extinguishment proceeds in preference to the donee. The taxpayer argued to the contrary. Alternatively, PB argues that if the easement deed does otherwise violate the perpetuity requirement of Sec. 170 and the regulation, the easement deed contains a saving clause that will retroactively reform the deed to comply with the perpetuity requirements of Sec. 1.170A-14(g)(6)(ii). The Tax Court held it was not bound by the U.S. Court of Appeals for the First Circuit in Kaufman v. Shulman. It also held that the taxpayer's easement deed fails to satisfy the “in perpetuity” requirement of Sec. 170(h)(5) because, first, the mortgages on the building were not fully subordinated to the easement as required by Reg. Sec. 1.170A-14(g)(2), and, second, because the donee was not guaranteed to receive the share of proceeds mandated by Sec. 1.170A-14(g)(6)(ii) in the event that the easement was extinguished and the donor subsequently conveyed the property and received proceeds for it. Thus, the facade easement contribution was not a qualified conservation contribution under Dec. 170(h). Finally, the Court held that the defects in the easement deed are not cured by a provision that purports to retroactively amend the deed, because the requirements of Sec. 170 must be satisfied at the time of the gift.

Tip of the Day

Employee expense reports . . . Some companies are diligent about reviewing them, some not so. This has been a area of abuse for many years and it's unlikely to change. You should require receipts for any items above a threshold, even if they're not required by the IRS. There should be a list of people at the meeting, dinner, ball game, etc. or met with and a business purpose. Was the salesman trying to make a sale or just prospecting? Look for excessive mileage charges--even at current IRS rates, the dollars can add up quickly. The more detail you require the harder it is to pad the report and not create a suspicious trail. If employees know you're not reviewing the reports carefully, they're likely to take more liberties. T & E is an area heaviy scrutinized by the IRS, so expect to be asked for the details if you're audited.

 

October 17, 2017

News

In another phishing scam, the IRS is warning (IR-2017-173) taxpayers about emails containing a bogus link to a phony website that looks like either the IRS or a program closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS). The fake websites look legitimate but contain phony login pages. Often the emails are sent out from a hacked email account report under another name. Taxpayers with overdue accounts should also be aware that the IRS has begun sending out their accounts are being assigned to one of four private collection agencies.

The IRS has announced that for the 2018 filing season, electronically filed returns that do not indicate the taxpayer's status on health coverage requirements under the Affordable Care Act will not be accepted. Paper returns may not be processed until additional information is received concerning health care coverage.

The IRS is offering two webinars in response to the recent natural disasters. The webinars are intended for tax professionals and tax preparers will receive a certificate of completion. The topics covered include special rules for disaster areas, calculating and reporting disaster area losses and tax issues related to Hurricanes Harvey, Irma, and Maria. For more information, go to IRS Offers Web Conference on Tax Relief for Disaster Victims.

In Creditguard of America, Inc. (149 T.C. No. 17) the IRS revoked the petitioner's tax-exempt status retroactively to Jan. 1, 2002. In a subsequent deficiency proceeding the petitioner executed a stipulated decision document, agreeing to assessment of a deficiency for its 2002 tax year and of underpayment interest on that deficiency “as provided by law.” The IRS accrued and assessed interest on the deficiency from the date on which the petitioner's 2002 corporate tax return would have been due. When that amount remained unpaid, the IRS began collection action. In a collection due process proceeding, the petitioner disputed its underlying liability, arguing that interest can begin accruing no earlier than the date on which the IRS issued the final determination revoking the petitioner's tax-exempt status, notwithstanding the retroactive character of that revocation. The Court held that the etroactive revocation of the petitioner's tax-exempt status requires restoring the the government to the position it would have occupied if the petitioner had never enjoyed tax-exempt status during its 2002 tax year. The Court also held that the petitioner was liable for interest beginning on the date its 2002 corporate tax return would have been due and that the IRS Settlement Officer did not abuse his discretion in sustaining the proposed collection action.

Tip of the Day

Buying new production equipment? . . . Make sure you've got the people to run it. Some equipment has become so sophisticated you may have trouble finding workers to operate it. Training courses may be available from the seller either for free or for a fee. But there are other costs such as operator downtime. Factor that in to the costs of the new equipment.

 

October 16, 2017

News

The Social Security Administration has announced the cost-of-living adjustments for 2018. The maximum taxable earnings for Social Security purposes will increase from $127,200 to $128,700. Benefits will increase by 2%, beginning in January, 2018. For a fact sheet on the COLA go to www.ssa.gov/news/press/factsheets/colafacts2017.pdf

Just because the IRS loses a case doesn't mean that's the end of it. The IRS can disagree with the outcome and issue an "Action on Decision". Actions on Decisions shall be relied upon within the Service only as conclusions applying the law to the facts in the particular case at the time the Action on Decision was issued. “Non-acquiescence” signifies that, although no further review was sought, the Service does not agree with the holding of the court and, generally, will not follow the decision in disposing of cases involving other taxpayers. The IRS has announced (Action On Decision 2017-07; IRB 2017-42) that it will not acquiesce in Carol A. and Roy E. Stanley (District Court, W.D. Ark), where the court held the taxpayer was a real estate professional for the passive activity rules because he owned at least 5 percent of the outstanding stock of a property management company. The nonacquiescence relates to the mere possession of a stock certificate qualified him as an owner and with respect to where the qualifying work is performed.

Tip of the Day

Check your bills . . . Some banks have added charges for discretionary items you didn't request or for fees that, while they may have informed you of, you missed in the small print. Vendors may add charges for items or services they used to provide for free. Got a bill from a medical provider? If you have a comprehensive medical plan your insurer will review the bill and deny unnecessary charges, but if you aren't covered for some reason, you're on your own. Check the bill and ask about charges you don't understand. Or it could be as simple as a vendor charging a higher than agreed-on price. Make sure bills from professionals, consultants, etc. are reviewed, particularly those on an open contract. Only a little addition every month can be a signficant number by the end of the year.

 

October 13, 2017

News

The IRS has updated the list of counties in Texas where individuals who reside or have a business qualify for Hurricane Harvey relief. The additional counties are Caldwell, Comal, Guadalupe, Jim Wells, Milam, and San Augustine. The complete list of counties (as of this date) includes Aransas, Austin, Bastrop, Bee, Bexar, Brazoria, Burleson, Caldwell, Calhoun, Chambers, Colorado, Comal, Dallas, De Witt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Guadalupe, Hardin, Harris, Jackson, Jasper, Jefferson, Jim Wells, Karnes, Kleberg, Lavaca, Lee, Liberty, Madison, Matagorda, Milam, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Augustine, San Jacinto, San Patricio, Tarrant, Travis, Tyler, Victoria, Walker, Waller, Washington, and Wharto. For more information
Help for Victims of Hurricane Harvey at IRS.gov.

The IRS is alerting tax professionals and their clients to a fake insurance tax form scam that is being used to access annuity and life insurance accounts. Cybercriminals currently are combining several tactics to create a complex scheme through which both tax professionals and taxpayers have been victimized. There may be variations but here’s how one scam works: The cybercriminal, impersonating a legitimate cloud-based storage provider, entices a tax professional with a phishing email. The tax professional, thinking they are interacting with the legitimate cloud-based storage provider, provides their email credentials including username and password. With access to the tax professional’s account, the cybercriminal steals client email addresses. The cybercriminal then impersonates the tax professional and sends emails to their clients, attaching a fake IRS insurance form and requesting that the form be completed and returned. The cybercriminal receives replies by fax and/or by an email very similar to the tax professional’s email--using a different email service provider or a slight variation to the tax pro’s address. The subject line varies but may be “urgent information” or a similar request. The awkwardly worded text of the email states:

Dear Life Insurance Policy Owner,
Kindly fill the form attached for your Life insurance or Annuity contract details and fax back to us for processing in order to avoid multiple (sic) tax bill (sic).
The cybercriminal, using data from the completed form, impersonates the client and contacts the individual’s insurance company. The cybercriminal then attempts to obtain a loan or make a withdrawal from those accounts.

Tax professionals can go to Date Theft Information for Tax Professionals for more information. Individuals who receive the insurance tax form scam email should delete it. Individuals who completed and returned the fake tax form should contact their insurance carrier for assistance.

Section 754 provides that if a partnership files an election, in accordance with regulations prescribed by the Secretary, the basis of partnership property shall be adjusted, in the case of a distribution of property, in the manner provided in Section 734 and, in the case of a transfer of a partnership interest, in the manner provided in Section 743. The current regulation providesthat the method to make the election shall be by written statement filed with the partnership return. A partnership that has made an unsigned election has not made a valid election. The IRS has issued proposed regulations (REG-116256-17) that would eliminate the signature requirement and sets forth the name and address of the partnership making the election and contains a declaration that the partnership elects under Sec. 754 to apply the provisions of Secs. 734(b) and 743(b).

In spite of the popularity of electronic payments and credit cards, getting paid in cash is not unusual for many businesses. But if the IRS suspects some or all of that cash is not being reported, it can reconstruct your income using one of several methods. In Nersonn D. Justine et ux. (T.C. Memo. 2017-198) the taxpayer was a taxicab and Uber driver and received most of his income in cash. The IRS used the bank deposits method to find unreported income. The Tax Court agreed with the IRS's findings. At the same time the taxpayer paid many of his expenses in cash and did not have records to support the deductions he took. The Court sided with the IRS with respect to the disallowance.

Tip of the Day

State tax rules . . . States often take their cue from the federal rulings and procedures. While you can't assume the state will do the same (e.g., some states don't recognize some of the federal holidays; some add their own), if the IRS takes a stand on something, you should check to see if your state will do likewise. For example, the IRS has granted filing extensions for taxpayers affected by hurricanes, tornadoes, severe winter storms, etc. Many states do likewise. And many states may grant relief to taxpayers affected by disasters in the state that are not recognized by the IRS. Those are unlikely to be as publicized, so check with your state or your tax advisor.

 

October 12, 2017

News

You can only deduct traveling expenses when you're away from your tax home. Your tax home is generally where you have your principal place of business. If your work away from your tax home is permanent or indefinite, your tax home can change, even if your domicile doesn't. In John S. Barrett and Maria T. Barrett (T.C. Memo. 2017-195) the taxpayer spent a significant amount of time away from his Las Vegas home. The IRS argued that because of the time spent in D.C., that became his tax home. The Tax Court did not agree. The taxpayer testified that 75% of his time was spent outside of D.C., on location and performing work at his Las Vegas residence. The Tax Court found that Las Vegas was his tax home. Unfortunately, he failed to adequate document his travel expenses under the strict requirements of Sec. 274 and disallowed most of the expenses on those grounds.

You can't petition the courts if your business is no longer recognized by the state. A similar situation can occur when there is no person who can legally act for the entity. In Cambridge Partners, L.P., Kenneth I. Nowak, State of New Jersey Appointed Receiver, et al. (T.C. Memo. 2017-194) the Tax Court dismissed the petition for lack of jurisdiction. Here the partnerships' tax matters partner had pled guilty to a felony and a receiver was appointed. The receivership was terminated by the state and with the termination of the receivership there remained no representative of the limited partnerships to maintain and prosecute these cases. Further, neither the Tax Court petitions nor the underlying refund claims, Forms 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), were filed by the tax matters partner (TMP) as required by Section 6228 and Tax Court Rules 240 and 241.

If you gamble significant amounts, being classified as a professional gambler can have tax advantages including deducting nonwagering expenses and deducting wagering expenses without the limits imposed on nonprofessional gamblers. But convincing the IRS that you're a professional is not easy. In James Bonepart, Jr. (T.C. Memo. 2017-193) the taxpayer had a full-time job but engaged in significant gambling activities in his home state of New Jersey. To determine if the taxpayer was in the trade or business of gambling, the Court looked at the nine factors generally used to determine if the taxpayer has a profit motive in pursuing the activity. The Court found none of the factors weighed were in the taxpayer's favor and held the taxpayer was not a professional gambler.

Tip of the Day

Drop asking rent? . . . Unless the market around you is decreasing, dropping the asking rent for space you want to lease out can be risky. You could alienate current tenants. But empty space is costly. You're paying taxes and maintenance without any income. Consider this, dropping the rent on space by 10% to get it leased immediately is similar in cost to having the space vacant for six months if leases run for five years. If the space is vacant longer than that, the percentage rent drop increases. A smarter approach can be to give a month's free rent every year for five years while keeping the base rent the same. There are some other options that can create a lower effective rent while keeping the asking rent the same. How much you give in concessions will depend on how long it would take to get the space rented without them.

 

October 11, 2017

News

The IRS has announced that the migration of e-Services to a new platform is taking longer than anticipated. They are working to get this technology upgrade in place and hope to have applications back online within the next two weeks. The Service whil provide weekly updates until they are ready to launch. Meanwhile, TDS, TIN Matching, SOR and Registration are functional.

The IRS is warning all e-Services users to beware a new phishing scam that tries to trick tax professionals into “signing” a new e-Services user agreement. The phishing scam seeks to steal passwords and data. All tax professionals should be aware that as e-Services begins its move later this month to Secure Access authentication and its two-factor protections, cybercriminals likely will make last-ditch efforts to steal passwords and data prior to the transition. The scam email claims to be from “e-Services Registration” and uses “Important Update about Your e-Services Account” in the subject line. It states, in part, “We are rolling out a new user agreement and all registered users must accept its revised terms to have access to e-Services and its products.” It asks you to review and accept the agreement but takes you to a fake site instead. If you have clicked onto this link, you should perform a deep scan with your security software, contact your office’s IT/cybersecurity personnel and contact the IRS e-Help Desk.

The latest estimate of the Tax Gap released by the IRS was $458 billion. The Tax Gap is the amount of taxes that are not paid voluntarily and timely. The IRS reported that a significant portion ($125 billion, or 27 percent) of the Tax Gap was attributed to underreporting of business income earned by entities other than corporations. The IRS also concluded that compliance with income reporting is higher when the income is subject to third-party reporting or withholding. Congress enacted legislation in July 2008 requiring payment settlement entities to report payments made to merchants in settlement of payment card transactions. In response, the IRS developed Form 1099-K, Payment Card and Third Party Network Transactions, for submission by payment settlement entities starting in Calendar Year 2012. This information reporting was intended to assist the IRS in matching income from gross receipts to income reported on tax returns in an effort to reduce the Tax Gap. The Department of the Treasury estimated that enactment of this law would result in the collection of additional tax revenue of almost $10 billion over 10 years. The IRS established the Payment Card Program in Calendar Year 2012 and developed the Payment Mix Methodology algorithm to compare Form 1099-K data to tax return data based on the assumption that similar businesses will have a comparable blend of cash and payment card purchases. The Treasury Inspector General for Tax Administration (TIGTA) initiated to determine whether the IRS is using merchant card third-party reporting (Form 1099-K) information in an effective manner for the assignment of productive audits. TIGTA found that the Payment Mix Methodology test (pilot) of the Payment Card Program was designed to select tax returns for audit based on Form 1099-K data. Although the IRS is considering discontinuing the pilot, it appears that the pilot was effective for certain types of tax returns. Additionally, the IRS appears to have missed opportunities to audit tax returns with large discrepancies between payments reported on Forms 1099-K and income reported on taxpayers’ tax returns. TIGTA reviewed a subset of taxpayers with one Form 1099-K and found a total of 20,881 taxpayers with discrepancies of more than $10,000 between income reported on their tax returns and their Form 1099-K amounts (and reporting less than 90 percent of the amount on the Form 1099-K). The tax accounts for these taxpayers had no indication of any audit activity. To see the complete report go to www.treasury.gov/tigta/auditreports/2017reports/201730083fr.pdf

In George Schussel, Transferee of Driftwood Massachusetts Business Trust, f.k.a. Digital Consulting, Inc. (149 T.C. No. 16) the taxpayer petitioned the Court for redetermination of his liability as a transferee under Sec. 6901(a), but then moved that the Court dismiss his petition with prejudice. The Tax Court held that because a taxpayer's liability as a transferee is “assessed, paid, and collected in the same manner and subject to the same provisions and limitations” as a deficiency in tax, Sec. 6901(a), a dismissal of a petition for redetermination of transferee liability, just like a dismissal of a petition for redetermination of a deficiency, for any reason other than lack of jurisdiction requires that the Court enter a decision as to the amount of the liability. The Court also held it would deny the taxpayer's motion to dismiss, ordering the parties to submit an agreed stipulated decision document.

Tip of the Day

Trading work hours . . . Whenever a wage and hours question pops up, it's best to get advice from your state labor department or a labor law professional. One employer gave nonexempt workers paid time off to deal with a snowstorm. He later asked them to work an equal amount of time for free to make up for the time off. The state said the employer had to pay the employees for any time worked. The paid time off couldn't be used to offset time worked.

 

October 10, 2017

News

In Notice 2017-62 the IRS announced the availability of a leave-based donation program to aid victims of Hurricane and Tropical Storm Maria. The notice provides that, similar to that announced for Hurricanes Harvey and Irma, the IRS will not assert that cash payments by an employer to a qualified charitable organization in exchange for vacation, sick, or personal leave that its employees elect to forgo constitute gross income or wages of the employees if the payments are made to the qualifying charitable organization for the relief of Hurricane and Tropical Storm Maria victims before January 1, 2019.

In Zipora Klein; Samuel Klein (149 T.C. No. 15) a married couple, had plead guilty to violating Sec. 7206(1) by filing a false return for 2006. The taxpayers agreed to make full restitution for the losses caused by their underreporting of income for 2003-2006. At the sentencing the Government presented a Federal tax-loss calculation of $562,179 for those years. Adopting it, the District Court ordered the taxpayers to pay that sum as restitution to the IRS. They eventually paid the full amount of restitution, along with all applicable title 18 statutory additions, and the Government released the title 18 lien that had accompanied the restitution order. Relying on Sec. 6201(a)(4), the IRS later assessed against the taxpayers not only the $562,179 of restitution they had been ordered to pay, but also underpayment interest under Sec. 6601(a) and additions to tax under Sec. 6651(a)(3). When the taxpayers did not pay the latter amounts, the IRS began collection action, filing notices of Federal tax lien. Following a CDP hearing, the taxpayers petitioned the Tax Court. The IRS contended that it could assess and collect interest and additions to tax on the restitution amount under Sec. 6201(a)(4), which authorizes him to assess and collect restitution “as if such amount were such tax.” The Tax Court disagreed, holding that Sec. 6201(a)(4) does not authorize the IRS to add underpayment interest or failure-to-pay additions to tax to a title 18 restitution award, and the IRS may not assess or collect from the taxpayers' underpayment interest or additions to tax without first determining their civil tax liabilities.

When a noncitizen has income in the U.S., the tax treaty between the U.S. and the individual's country of citizenship can govern the taxability.In Pei Fang Guo (149 T.C. No. 14) the taxpayer was a Canadian citizen who entered the United States in 2010 to work as a post-doctoral fellow at a university. She resided in the United States until November 2011 when her employment contract with the university ended. After unsuccessfully attempting to find other employment in the United States, she returned to Canada. Sometime in 2012 she applied for and received unemployment compensation from the State of Ohio. For 2012 she timely filed a Federal income tax return on which she treated her unemployment compensation as exempt from tax under the Convention Between the United States of America and Canada With Respect to Taxes on Income and on Capital (treaty). The taxpayer was a nonresident alien during 2012. The taxpayer contended that her unemployment compensation was exempt from U.S. income tax under article XV of the treaty, which covers “Dependent Personal Services.” The IRS countered that article XV does not apply and that article XXII, which covers “Other Income,” applies and allows the United States to tax her unemployment compensation. The Tax Court held that article XV of the treaty does not exempt the taxpayer's unemployment compensation from U.S. income tax and that article XXII of the treaty governs the tax treatment of her unemployment compensation and permits the United States to tax it.

Tip of the Day

Sales debriefing . . . If your company has worked on a proposal to a major customer and lost the job or sale, you probably want to just forget the experience. That's the wrong approach. You should find out why you didn't make the cut. Was your price too high? The equipment didn't perform as well as a competitor's? Was there something wrong with the proposal content? By knowing why you lost the sale, you'll have an advantage on the next proposal, either for the same customer or another one. Sometimes the customer may tell you why you lost; more often not. If not, there may be hints. If more than one employee worked on the proposal, you may be able to arrive at a probable reason by pooling your information in a debriefing session. If you won the job or made the sale you should do the same thing. Celebrate first, then find out why. Did you have the best price? Give the customer more than your competitor? If the decision was close, you'll want to know that, and why you won. Your competitors might try to outdo you the next time. If it's because you gave away too much, you may be able to increase your price and profit the next time.

 

October 6, 2017

News

The Treasury and the IRS have announced that they are removing or modifying eight recently issued regulations. Of particular interest are:

--Proposed Sec. 2704 regulations which would have restricted valuation discounts for estate and gift tax purposes.
--The regulations under Sec. 385 requiring increased documentation for debt instruments. The regulations are expected to be streamlined and the effective date delayed.
--Sec. 752 regulations (T.D. 9778) relating to partnership recourse liabilities. These regulations would be revoked and restated.
--Sec. 367 regulations (T.D. 9803) relating to transfers of specified property to foreign corporations.

A settlement for damages for physical injury or sickness is generally excludable from income. Settlements for other reasons are generally not. In Laura Stepp and Kaleb Stepp (T.C. Memo. 2017-191) the Court concluded that the settlement proceeds compensated the taxpayer for damages she suffered on account of disability-based discrimination, reprisal for engaging in protected Equal Employment Opportunity (EEO) activity, and an improper medical inquiry; no portion of the settlement proceeds represented damages on account of personal injury or physical sickness. The taxpayer received an on-the-job injury, but she was compensated for it through worker's compensation. The Court held the taxpayers could not exclude from income any of the award.

Distributions from an S corporation (in which a shareholder still has basis) are usually not taxable. That's not true for a C corporation. Distributions from the corporation are taxable dividends if the corporation has sufficient earnings and profits (a tax term, similar to retained earnings in accounting parlance). In Western Property Restoration, Inc.; Michael B. Sprague (T.C. Memo. 2017-190) the taxpayer argued that distributions he received from his corporation were a return of capital, not a dividend. The Court noted that the corporation had sufficient earnings and profits to cover the distribution and met the definition of a dividend. The Court rejected the taxpayer's argument that a large part of the distribution was intended to be a return of capital and was recorded on the books as such. The intention of the distributions was irrelevant.

Tip of the Day

Recordkeeping has double benefits . . . Many times we've written about cases and recordkeeping. There's no question that contemporaneous recordkeeping and good documentation can ensure that you won't lose a deduction if you or your business is audited. But it can also ensure that you take a deduction. Often taxpayers miss a deduction because they didn't keep adequate records. The car mileage you forgot to record. The business purchases with cash or your personal credit card that never got recorded. On a small business it's likely the percentage of missed expenses is higher than on a large business. With apps for tablets and cell phones it's easier than ever to track expenses.

 

October 5, 2017

News

If your individual return is on extension, the deadline of October 16 (the 15th is a Sunday) is fast approaching. You should also be aware that your adjusted gross income (AGI) amount from your 2015 return may be needed to electronically file your 2016 tax return. That's not true if you use a paid preparer. Taxpayers who have a valid extension and are in or affected by a federally declared disaster area may be allowed more time to file. Currently, taxpayers impacted by Hurricanes Harvey, Irma and Maria as well as people in parts of Michigan and West Virginia qualify for this relief. Extension filers should plan ahead if they are using a software product for the first time. They should have kept a copy of their 2015 tax return or if not, will need to order a tax transcript, a process that may take five to 10 calendar days. The AGI is clearly labeled on both the tax return and the transcript.

Notice 2017-56 (IRB 2017-43) provides relief to residents of Puerto Rico and the U.S. Virgin Islands who evacuated or couldn’t return because of Hurricane Irma or Hurricane Maria. Most such individuals may otherwise lose their status as “bona fide residents” of Puerto Rico or the U.S. Virgin Islands for tax filing and reporting purposes. Notice 2017-56 extends the usual 14-day absence period to 117 days, beginning September 6, 2017 and ending December 31, 2017, for the presence test for residency under the tax rules. Further, an individual who is absent from either U.S. territory on any day during this 117-day period will be treated as leaving or being unable to return to the relevant U.S. territory as a result of Hurricane Irma and Hurricane Maria on such day.

FinCEN is re-issuing an earlier notice providing FBAR-filing relief to victims of Hurricane Harvey, to expand the relief to include victims of Hurricane Harvey in additional areas that FEMA designated as qualifying for individual assistance or public assistance. Hurricane Harvey victims in affected areas of Texas will have until January 31, 2018 to file their Report of Foreign Bank and Financial Accounts for calendar year 2016.

You may be able to escape joint liability on a tax return you filed with a spouse, but that wasn't the case in William J. Cojocar, Petitioner, and Sally Carrillo, Intervenor (T.C. Memo. 2017-189). The petitioner was the primary income producer of the couple. The Tax Court weighed all the facts and circumstances and decided it would not be inequitable to deny the petitioner relief. The Court noted that the petitioner knew or had reason to know the intervenor would not or could not pay the tax liabilities reported on the return.

Tip of the Day

Read the fine print . . . While it might seem like a routine transaction, be sure to read the fine print. Or at least scan the bold headings. That's especially true if it looks like you're getting a special deal. One business owner signed up for a service that was cheaper than the competition, only to find it wasn't nearly as good as his previous service. When he went to cancel he discovered he signed up for a 3-year contract. The service was $2,500 a year and the penalty for early cancellation of the contract was $1,900. He paid the $1,900. As a business there's a good chance you won't have nearly the same protection as a consumer.

 

October 4, 2017

News

To satisfy tax debts, the IRS may levy funds held in retirement accounts. Special procedures are required before levying retirement accounts because taxpayers may need to rely on those funds, either now or in the near future, to pay living expenses. In addition, withdrawals from retirement accounts may result in taxpayers owing taxes. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether the IRS has adequate controls and procedures in place to properly issue levies on retirement income, retirement accounts, and TSP accounts. Pre-levy procedures for retirement income require managerial approval for Automated Collection System (ACS) employees and more discretion by revenue officers. TIGTA’s review of a random sample of 30 levies of retirement income issued by ACS employees and 28 levies of retirement income issued by revenue officers showed that pre-levy procedures were properly followed in most cases. However, TIGTA’s analysis of the financial condition of these taxpayers showed that 11 taxpayers were potentially in economic hardship at the time of the levies. Revenue officers must follow special procedures prior to levying assets in retirement and TSP accounts, including determining if the taxpayer has other property or non-retirement assets that could be used to collect the liability or if a payment agreement can be reached; has exhibited flagrant behavior; or needs the money in the retirement account (or will in the near future) to pay necessary living expenses. In addition, revenue officers must obtain Collection function Area Director approval for such levies. To see the complete report go to www.treasury.gov/tigta/auditreports/2017reports/201730082fr.pdf.

The United States taxes corporations on their worldwide income. The Foreign Tax Credit (FTC) is intended to eliminate the double taxation burden that would otherwise occur when foreign source income is taxed by both the United States and the foreign country from which the income is generated. The FTC can significantly affect the amount of income taxes paid by corporations on U.S. tax returns. The FTC is the largest tax credit taken by corporations. For tax periods 2013 through 2015, approximately $298.9 billion in the FTCs were claimed. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether IRS controls ensure that the FTC is accurately claimed on a tax return when foreign government taxes are used to offset Federal taxes. TIGTA found the IRS processed corporate tax returns that allowed taxpayers to claim the FTC without the required supporting documentation, resulting in potentially erroneous FTCs for tax periods 2013 through 2015. TIGTA found that 9.2 percent of the corporations filing paper returns received the FTC without the supporting documentation, and that 2.6 percent received an incorrect FTC amount or an FTC they did not request. In addition, some tax returns under examination were not referred to international examination specialists as required. In many cases, IRS examiners were not inputting key information into the Issue Management System; discrepancies existed in the FTC amount recorded by the taxpayer and the amount recorded in IRS computer systems; and the Large Business and International Division did not sufficiently monitor or track FTC examination results. The IRS should know the results of FTC examinations to more accurately determine what role they should play in the new Large Business and International Division’s compliance strategy. For the complete report, go to www.treasury.gov/tigta/auditreports/2017reports/201730084fr.pdf.

Tip of the Day

Trading work hours . . . Whenever a wage and hours question pops up, it's best to get advice from your state labor department or a labor law professional. One employer gave nonexempt workers paid time off to deal with a snowstorm. He later asked them to work an equal amount of time for free to make up for the time off. The state said the employer had to pay the employees for any time worked. The paid time off couldn't be used to offset time worked.

 

October 3, 2017

News

President Trump has signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017. The new law provides additional disaster relief for taxpayers affected by Hurricanes Harvy, Irma, and Maria including:

Notice 2017-57 announces that the Department of the Treasury and the IRS intend to amend the regulations under Section 987 to defer the applicability date of the final regulations under Section 987, as well as certain provisions of the temporary regulations under Section 987, by one year. The final regulations under Section 987 were identified in Notice 2017-38 as significant tax regulations requiring additional review pursuant to Executive Order 13789. As part of that review, the Treasury Department and the IRS are considering changes to the final regulations that would allow taxpayers to elect to apply alternative rules for transitioning to the final regulations and alternative rules for determining Section 987 gain or loss.

Notice 2017-58, in response to Hurricane Harvey, Hurricane Irma, and Hurricane Maria, extends the due date for affected participants to file disclosures under Notice 2017-10 (syndicated conservation easement transactions) and Sec. 1.6011-4(e)(2)(i) from October 2, 2017 to October 31, 2017.

Tip of the Day

Public copy machines . . . If you have sensitive documents such as medical records, tax returns, anything with a social security number or bank account information, etc. you might want to avoid outside copy services--and even be careful with inside machines. Many copy machines now have a substantial memory that can be accessed by identity thieves. Another point. If you're getting rid of a machine--either turning back one on lease or sending it to the scrap dealer--you should make sure the memory has been wiped before it leaves the premises.

 

October 2, 2017

News

IRS will conduct maintenance on numerous electronic systems over the Columbus Day weekend. e-Services will remain operational during this time. However, delivery to the Secure Mailbox will be delayed until power is restored. The Secure Mailbox outage period begins Saturday, Oct. 7 at 7:00 p.m. ET and ends Tuesday, Oct. 10 at 6:00 a.m. ET. If you will need to retrieve products from your mailbox, please plan to do so before the outage.

Married taxpayers can either file a joint return or file as married, filing separate. The second option is not the same as filing single. Indeed, married taxpayers cannot elect to file as single individuals. In Fansu Camara and Aminata Jatta (149 T.C. No. 13) although the taxpayers were married at all relevant times, the husband erroneously claimed single filing status on his 2012 individual income tax return. In the notice of deficiency the IRS changed his filing status to married filing separately. After petitioning the Tax Court, the taxpayers filed a joint 2012 income tax return. The IRS contended that the husband's original 2012 single return was a “separate return” such that the limitations of Sec. 6013(b)(2) apply to prevent the taxpayers from claiming the benefits available to married taxpayers who file a joint return. The Tax Cour held the 2012 return that the husband originally filed, erroneously claiming “single” status, did not constitute a “separate return” within the meaning of Sec. 6013(b).

In Charles D. Martin et ux. (149 T.C. No. 12) the taxpayers owned a farm, renting a portion of the land to wholly owned S corporation C. C contracted with unrelated entity S to raise chickens according to S' exacting specifications. The taxpayers followed S' specific instructions to build structures designed only to raise S' chickens. C paid the taxpayers wages for their labor and rent for the use of the farm and structures. The IRS asserted that the rent is subject to self-employment tax pursuant to Sec. 1402(a)(1). The Tax Court held that the facts of the instant case were not materially distinguishable from the facts of McNamara T.C. Memo. 1999-333, rev'd, 8th Cir. 2000. The U.S. Court of Appeals for the Eighth Circuit in McNamara also reversed Hennen T.C. Memo. 1999-306, and Bot T.C. Memo. 1999-256. In the light of the reversals by the Court of Appeals for the Eighth Circuit, the Tax Court reconsidered its holdings. It also held the taxpayers established that the rent received was at or below fair market value. The IRS failed to show a sufficient nexus between the rental income and the taxpayers' obligations to participate in the production or management of the production of agricultural commodities. Therefore, the rent the taxpayers received pursuant to the lease was not includible in their net self-employment income. To the extent McNamara, Hennen, and Bot are inconsistent with this holding, they are not followed.

Tip of the Day

Collectibles as investments? . . . Sounds like an easy way to amass a fortune. Buy artwork, autographs, rare books, a 1969 Camaro, or any number of other collectibles. But the approach isn't as foolproof as you might think. First, not every collectible goes up consistently; they often move in cycles. Some common collectibles that were worth big money in the early 90's won't command half that amount today. And vice versa. Second, old doesn't mean it's valuable. Often it's a combination of old, rare, in excellent condition, and in favor. Third, you've got to buy from the right source. A rare find at a flea market could be a great investment. Buying from a dealer often means waiting a long time to recover your investment. Fourth, the market can be very illiquid. That means you may not be able to get the best price when you want to sell. And you may have to use an auction house which can take a 10%. Fifth, buy low and sell high doesn't always work. You don't have to overpay for more than one or two items to offset the gain on a number of others. Sixth, if you do have a gain, it could be taxed at 28% rather than the lower capital gain rates applied to most investments. Having said all that, investing in collectibles can be rewarding from a personal as well as a monetary standpoint. Do your homework, learn the market, and start slow. Until you become an expert, keep the investment to a very small portion of your portfolio. But if you think it's the road to retirement, you're on the wrong street.

 

September 29, 2017

News

The IRS has provided temporary relief from certain requirements of the Code to allow owners and operators of low-income housing projects located anywhere in the U.S. and its possessions to provide temporary emergency housing to individuals who are displaced by a major disaster from their principal residences, regardless of income. This special relief detailed in Revenue Procedure 2014-49 and Revenue Procedure 2014-50 authorizes owners and operators, in conjunction with agencies and issuers, to disregard the income limits, transience rules and certain other restrictions that normally apply to low-income housing units when providing temporary emergency housing to displaced individuals. As a result, owners and operators can offer temporary emergency housing to displaced individuals who lived in a county or other local jurisdiction designated for individual assistance by the Federal Emergency Management Agency (FEMA). Currently, this includes parts of Texas, Florida, Georgia, Puerto Rico and the U.S. Virgin Islands, though FEMA may add other locations in the future. Upon approval, emergency housing can be provided for up to a year after the close of the month in which the major disaster was declared by the President. This relief automatically applies as soon as the President declares a major disaster and FEMA designates any locality for individual or public assistance. For that reason, individuals affected by some other recent major disasters, including those affecting parts of Michigan, West Virginia and other localities, may also qualify for emergency housing relief. Although owners and operators of low-income housing projects are allowed to offer temporary housing to qualified disaster victims, they are not required to do so. For those who do, special rules apply, detailed in Revenue Procedure 2014-49 and Revenue Procedure 2014-50, available on IRS.gov.

If audited, the IRS can allow any deductions or credits if you don't have the required supporting documentation. In Joe Pokawa and Nancy Fatoma (T.C. Memo. 2016-186) the Tax Court denied the taxpayers the American Opportunity Credit for two years because he introduced no evidence to show they were entitled to the credit. They produced no records of tuition payments or educational expenses.

Tax treatment of an amount often depends on the facts and circumstances. In Thomas Joseph Ritter (T.C. Memo. 2017-185) the taxpayer received a payment from a qualified settlement fund (QSF) as compensation for certain deficiencies and unsafe or unsound practices in servicing residential mortgages. The Independent Foreclosure Review expressly provided that the payments from the QSF did not “in any manner reflect specific financial injury or harm that may have been suffered by borrowers receiving payments”. The taxpayer received a 1099-MISC reporting the payment with a letter on how to secure information regarding the tax treatment of the payment. The taxpayer excluded the amount (some $31,000) from his income. The Court noted that there was no evidence to indicate the payment was intended to be a deemed increase or decreas in the amount realized by the taxpayer from the foreclosure with respect to the mortgage loan on his principal residence. The Court found the taxpayer had to include the amount in his income.

Tip of the Day

Reconstructing lost records . . . With hurricanes in Texas, Florida, Georgia, Puerto Rico and Virgin Islands as well as fires, floods and other disasters, there's a chance your tax and business records may be partially or wholly destroyed, despite your best efforts. If you can show the IRS or court that your records were in the disaster area you're sure to get sympathy as well as some leeway. Nonetheless, you can't just say they were lost in the flood and expect to be believed. You're expected to take steps to reconstruct your records. That includes requesting bank and credit card statements from the financial institutions, invoices from vendors, etc. If you paid by credit card or check you should be able to secure the original invoice at many stores. Paid cash at the gas pumps? No way you'll recover those. Often the IRS and courts will accept less documentation than they would under other circumstances. And you may be able to use a back door approach. Your mechanic provided oil change receipts that show the car mileage. The court may estimate the amount of gas used based on a prior year's documentation and use an average cost per gallon. Chances are the 80-20 rule will apply. You should be able to alternatively document 80% of the expenses fairly easily (though time consuming). The other 20% could be extremely difficult. The IRS and court may give you a significant part of the 20%. Talk to your accountant and tax advisor on other tips.

 

September 28, 2017

News

President Trump and Congressional Republicans have released their framework for tax reform. The proposal cuts corporate tax rates to 20%; and reduces tax brackets for individuals to just three--12%, 25%, and 35%. To provide relief for pass-through entities, they would be taxed at maximum rate of 25%. Most deductions would be eliminated for individuals but the standard deduction would be higher. The alternative minimum tax would be eliminated for individuals and corporations. Capital investments could be expensed immediately rather than being depreciated. This release still provides little detail on critical issues such as the breakpoint for tax brackets, etc. We'll publish a more detailed discussion shortly.

Notice 2017-55 (IRB 2017-42) excludes from the definition of United States property for purposes of Section 956 certain property temporarily stored in the United States following Hurricane Irma or Hurricane Maria.

You can generally take credit in a subsequent year for an overpayment from an earlier year. But if you have an unpaid tax liability, from another year the IRS can apply any overpayment to that year. That was the situation in Robert Williams (T.C. Memo. 2017-182). The Court noted Sec. 6402 allows the IRS to credit the amount of an overpayment against the taxpayer's tax liabilities for other taxable years. The Court also noted that the tax form providing for taking credit for an earlier overpayment is not controlling. The Court held that the IRS's approach was correct and, because of Sec. 6512 the Court lacked jurisdiction to review the IRS's action.

Tip of the Day

One trick pony . . . Or executive. A great manager can come up with new ideas and be productive in different fields. Often a fresh look at the problem, or a look from a different angle can be just the answer needed. But just because Fred Flood turned around an appliance manufacturer doesn't mean he can revive a chain of hardware stores. If you're hiring someone from a different field or culture, you've got to ask more questions and tread cautiously. Retailing is different than manufacturing; and selling hardware at retail is different than selling dresses.

 

September 27, 2017

News

The IRS has issued a summary of the key tax relief that has been made availabnle to victims of Hurricanes Harvey, Irma and Maria. In general, the IRS is now providing relief to individuals and businesses anywhere in Florida, Georgia, Puerto Rico and the Virgin Islands, as well as parts of Texas. Because this relief postpones various tax deadlines, individuals and businesses will have until Jan. 31, 2018 to file any returns and pay any taxes due. For additional detail and links to more information, go to IRS Offers Help to Hurricane Victims (IR-2017-160).

The IRS has issued final regulations (T.D. 9824) with respect to the withholding from, and the information reporting on, certain payments of gambling winnings from horse races, dog races, and jai alai and on certain other payments of gambling winnings. The final regulations affect both payers and payees of the gambling winnings.

If you incur expenses related to your employment that are not reimbursed by your employer, you may be able to deduct them as a miscellaneous itemized deduction. In Jesse A. Linde et ux. (T.C. Memo. 2017-180) the Tax Court denied the taxpayers' deductions for such expenses because they failed to establish a business purpose for travel and a computer. Certain other expenses were disallowed because the taxpayers failed to show the expenses were not reimbursable by the husband's employer. On another issue, the Court found the taxpayer qualified for the foreign earned income exclusion. The Court found he was a bona fide resident of Iraq while he was a helicopter pilot working for a military subcontractor.

Tip of the Day

Consider local bank . . . If you live and do business in a rural area your choices for business (and personal) banking may be limited. And you may already be dealing with a smaller, local bank. But as you get closer to a big city, it's more likely even a small to mid-size business will be dealing with a big bank. That could be a mistake. Often a smaller bank will provide better service, lower fees, and be more responsive to any financing needs. Many credit unions are also getting into commercial banking, but the services available may be less than from a regular commercial bank. You may have to do some shopping to get the right fit, but it should be worth the effort. Make a list of the services you need, then shop the fees.

 

September 26, 2017

News

It's anticipated that the White House and Republicans in congress will release their tax reform proposal basics later this week.

In response to continued shortages of undyed diesel fuel caused by Hurricane Irma, the IRS announced (IR-2017-159) it will extend its waiver of penalties for dyed diesel fuel, first announced in IR-2017-149, when such fuel is sold for use or used on the highway in the state of Florida. The Environmental Protection Agency (EPA) granted a waiver for the state of Florida regarding use of Non-Road Diesel Locomotive and Marine Fuel, which was effective from Sept. 6 through Sept. 22, 2017. The EPA has extended that waiver through Oct. 6, 2017. Consistent with the EPA extension, this extension is effective from Sept. 6, through Oct. 6, 2017. Any dyed diesel fuel that is stored for distribution to retailers, wholesale purchasers, and consumers in the state of Florida prior to Oct. 6, 2017, may continue to be distributed and sold until the supply is exhausted.

Notice 2017-54 (IRB 2017-42) announces the special per diem rates effective October 1, 2017, which taxpayers may use to substantiate the amount of expenses for lodging, meals, and incidental expenses when traveling away from home. This notice provides the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. There is an important change in the amount for incidental expenses. Now, transportation between places of lodging or business and places where meals are taken, and the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings are no longerincluded in incidental expenses.

The Employee Benefits Security Administration (EBSA) has posted relief information in connection with Hurricanes Harvey and Irma along with Form 5500 filing extension information.

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.

 

September 25, 2017

News

The IRS is providing additional relief for residents and businesses in Puerto Rico. In the case of Hurricane Irma the municipalities of Adjuntas, Aguas Buenas, Barranquitas, Bayamón, Camuy, Canóvanas, Carolina, Cataño, Ciales, Comerío, Culebra, Guaynabo, Hatillo, Jayuya, Juncos, Las Piedras, Loiza, Luquillo, Orocovis, Patillas, Quebradillas, Salinas, San Juan, Utuado, Vega Baja, Vieques, and Yauco now qualify for relief. For Hurricane Irma the IRS is now offering expanded relief to any area designated by FEMA, as qualifying for either individual assistance or public assistance in the Commonwealth of Puerto Rico. This represents all 78 municipalities of Puerto Rico. For more details go to Help for Victims of Hurricanes Irma and Maria.

After filing a Form 668(Y)(c) Notice of Federal Tax Lien (NFTL) the IRS must notify the affected taxpayers in writing, at their last known address, within five business days of the NFTL filings. Taxpayers' rights to timely appeal the NFTL filings may be jeopardized if the IRS does not comply with this statutory requirement. In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found that in some cases notices were mailed to taxpayers' old addresses even though the IRS had new address for the taxpayers, that the NFTL was mailed while there was an open NFTL appeal, and taxpayer representatives were not provided copies of all taxpayer correspondence. For the complete report, go to www.treasury.gov/tigta/auditreports/2017reports/201730070fr.pdf.

Tip of the Day

Indicia of tax fraud . . . The principal indication of tax fraud is unreported income. And, while not essential, it's generally present in most tax fraud cases. Often it's found along with dealing in cash and paying personal and other nondeductible expenses with the unreported cash income. But simply paying clearly personal expenses (e.g., home improvements, domestic help, utility bills, etc.) using company funds and deducting the expenses can be an indication of fraud. In at least one case the IRS cited the payment of a salary to a third-party investor who performed no services for the company as a sign of fraud. There are other indicia of fraud. You need professional help if the IRS is talking about fraud. Civil penalties are 75% of the tax underpayment attributable to fraud. More than likely the state will also assess a deficiency and penalties when informed of the IRS action.

 

September 22, 2017

News

Revenue Procedure 2017-52 (IRB 2017-41) introduces an 18-month pilot program to accept letter ruling requests addressing the general federal income tax consequences of transactions intended to qualify as tax-free stock distributions.

the IRS released new versions of Form 14568, Model VCP Compliance Statement, and Forms 14568-B through 14568-I, Model VCP Schedules. Plan sponsors of tax favored retirement plans can use these forms to make an IRS Voluntary Correction Program (VCP) submission. The model schedules (Forms 14568- A to 14568-I) contain standardized methods to correct common errors that sponsors may discover in their plans and wish to resolve using VCP. Generally, the IRS revised the following forms to (1) make them easier to understand and (2) better work with the Rev. Proc. 2016-51 requirements effective as of January 1, 2017. For more details on the changes go to Revised VCP Forms--Model VCP Compliance Statement and Model VCP Schedules .

There are a number of exceptions to the early distribution penalty for IRAs. In Dean Russell Cates et ux. (T.C. Memo. 2017-178) the taxpayer argued that the use of the funds for qualified higher education expenses exception applied in their case. But the taxpayers were unable to convince the Court that they actually paid such tuition. A 1098-T showed some $11,000 was billed to the taxpayers but the form did not show any payments. In the absence of such evidence the Court found the taxpayers liable for the early distribution penalty.

Tip of the Day

Looking for higher interest rates on savings accounts? . . . Even if interest rates on home mortgages, car loans, bonds, etc. rise, rates on savings accounts are unlikely to keep pace. There are several technical reasons for that, including the fact that many banks don't need the funds and want to increase margins. You may do better in a bond fund (somewhat higher risk) or at a credit union. And watch any small accounts. You could be hit with a monthly fee if you carry a small balance or have an inactive account.

 

September 21, 2017

News

The IRS has added the counties of Burleson, Grimes, Madison and Washington to those in Texas that qualify for full relief as a result of Hurricane Harvey. That includes postponement of filing deadlines.

If you fail to file a return, the statute of limitations never begins to run and the IRS (or state) can examine that year, no matter how long ago. In New Capital Fire, Inc., as Successor by Merger to The Capital Fire Insurance Company (T.C. Memo. 2017-177) Old Capital was merged into New Capital and Old Capital's operations reported on New Capitals tax return for the short year that Old Capital continued to exist. The IRS argued that no return was filed for Old Capital's short period, the statute of limitations remained open on the 2002 year. The Court had to determine if including the results of the merged company on the surviving corporation's return constituted a return. The Court noted that in order to constitute a return (1) the document must contain sufficient data to calculate tax liability; (2) the document must purport to be a return; (3) there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) the taxpayer must have executed the document under penalties of perjury. The Court found the filing of the return by the surviving corporation started the limitations period and the IRS assessment of the deficiency and additions to tax was barred by the statute of limitations.

If you don't show up for court, you can risk losing your case. That was what happened in Ernesto P. Patacsil et ux. (T.C. Memo. 2017-176). Despite warnings from the Tax Court six months and three months before the trial date the taxpayers failed to appear, and told the IRS attorney they would not appear and did not give a reason. The judge had warned them he would not agree to a continuance. Because there was no reason given for the taxpayers' absence from the trial, the judge granted the IRS's motion to dismiss the case.

Tip of the Day

Every shareholder must consent to S election . . . Most corporations elect S status on startup and usually there are only a few shareholders who have held stock from the inception of the corporation. But that's not always true and you could find the S election void if you don't follow the rules. Each shareholder who owns (or is deemed to own) stock at the time the election is made must consent. If the election is made during the corporation's tax year for which it first takes effect, any person who held stock at any time during the part of that year that occurs before the election, must consent even though the person may have sold or transferred his or her shares before the election is made. For example, Sue, Fred and Mike were shareholders in Madison Inc. (a calendar-year corporation) during January, 2017. In early February Mike sells his shares to Fred. In early March Sue and Fred decide to elect S status for 2017. Mike must sign the consent section of Form 2553 because he owned shares during the first month of the tax year. On the other hand, if a new shareholder buys stock in the corporation after the election is made, he or she is not required to consent.

 


Copyright 2017 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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