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December 1, 2023
NewsIf you make a charitable contribution of property you can (with certain exceptions) claim a deduction the fair market of the property at the time of the contribution. In Glade Creek Partners, LLC, Sequatchie Holdings, LLC, Tax Matters Partner (T.C. Memo. 2023-82) the taxpayer ran up against one of those exceptions. Originally the IRS denied any deduction for the contribution based on another issue. The taxpayer appealed to the Circuit Court of Appeals and won. The IRS decided to take a second swipe. The property in question that was to create a conservation easement deduction had a complicated history attempts having been made to develope the property which provied unsuccessful. The Court noted that the amount of any charitable contribution deduction must be reduced by "the amount of gain which would not have been long-term capital gain--if the property contributed had been sold by the taxpayer at its fair market value." If a sale of donated property would have generated ordinary income or short-term capital gain, the amount of the deduction is reduced by the amount of the ordinary income or short-term capital gain. In other words, in such a case, the deduction is limited to the taxpayer's adjusted basis in the property. The Court also noted that the property was contributed to the partnership by a partner who had held the property as inventory property. That tainted the property as inventory property for five years after the contribution. The partnership argued that the property was investment (not inventory) property in the hands of the contributor. The Court found the property was inventory and limited the charitable conservation easement deduction to the taxpayer's adjusted basis.
Tip of the DayTaking a tax issue to court? . . . Get good advice. Despite the fact that the Internal Revenue Code should be consistently interpreted in every state, that's not always the case. First, it's not unusual for a federal court to look to state law to interpret an agreement, determining the standing of a corporation or partnership, etc. Second, the various circuits in the Court of Appeals have sometimes decided issues differently or used a different approach to coming to a conclusion. Even the Tax Court which would normally follow other Tax Court rulings around the country will look to which Court of Appeals the its holding is appealable and how that Appeals Court would rule before rendering an opinion.
November 30, 2023
NewsThe Financial Crimes Enforcement Network (FinCEN) is extending the deadline for certain reporting companies to file their initial beneficial ownership information (BOI) reports. Specifically, reporting companies created or registered in 2024 will have 90 calendar days from the date of receiving actual or public notice of their creation or registration becoming effective to file their initial reports. This extension will give reporting companies created or registered in 2024 more time to become familiar with FinCEN’s guidance and educational materials located at www.fincen.gov/boi, and to resolve questions that may arise in the process of completing their initial BOI reports. Reporting companies created or registered before January 1, 2024, have until January 1, 2025, to file their initial BOI reports with FinCEN, while reporting companies created or registered on or after January 1, 2025, will have 30 calendar days to file their initial BOI reports after receiving actual or public notice of their creation or registration becoming effective. FinCEN will not accept BOI reports from reporting companies until January 1, 2024--no reports should be submitted to FinCEN before that date.
As opposed to an S corporation, the income of partnerships and LLCs taxed as partnerships is self-employment income, subject to the self-employment tax. There are exceptions. In Soroban Capital Partners LP, Soroban Capital Partners GP LLC, Tax Matters Partner (161 T.C. No. 12) the partnership made guaranteed payments and distributed ordinary income to its limited partners. It excluded distributions of ordinary income to its limited partners from its computation of net earnings from self-employment. The IRS determined that the distributions of ordinary income should have been included in the partnership's computation of net earnings from self-employment. The partnership argued that a limited partner's distributive share of partnership income is excluded from net earnings from self-employment. The Court noted that the law does contain an exception for a limited partner, but went on to say that the limited partner exception does not apply to a partner who is limited in name only and that determining whether a partner is a limited partner in name only requires an inquiry into the functions and roles of the limited partner. The Court held the test was a partnership item that it had jurisdiction to determine in a TEFRA proceeding. The Court came to no conclusion as to whether the actual distributions were self-employment income, but denied the partnership's motion for summary judgment.
Tip of the DayThere's an app for that . . . Apps can be great help in both your business and personal life. But just because you're using an app doesn't guarantee success. First, clearly some are better than others. How does that fitness app measure your workouts? Some measurements work great for some activities but not others. And even if you've got the best app you have to be diligent enough to actually work out. The same is true of financial apps. Using one for budgeting or retirement planning can be a big help in planning, but you've got to follow through. Even if your investments return 25% a year you won't have enough to retire if you don't put money into the investments.
November 29, 2023
NewsThe IRS has issued a proposed regulation (REG-104194-23) that would amend the rules applicable to plans that include cash or deferred arrangements under Section 401(k) to provide guidance with respect to long-term, part-time employees. The proposed regulation reflects statutory changes made by the SECURE Act and the SECURE 2.0 Act that relate to long-term, part-time employees. The proposed regulation would affect participants in, beneficiaries of, employers maintaining, and administrators of plans that include cash or deferred arrangements.
Some activities stand out when the IRS is looking at entities that may be hobbies instead of businesses. In Donald E. Swanson (T.C. Memo. 2023-81) the taxpayer operated a charter fishing business. The taxpayer had only a few paying customers for the years at issue. His charter fishing endeavor was considerably less that successful. The taxpayer's records were inadequate although he did keep expense receipts. The IRS reconstructed his income using the bank deposits method. The IRS claimed the enterprise was a not-for-profit activity and disallowed his deductions. The Court looked at the nine factors used in determining whether or not the taxpayer had a profit motive. All the factors but one weighed against the taxpayer and the Court found the taxpayer lacked a profit motive with respect to the activity.
Tip of the DayReady to be sued? . . . Some professions and businesses have always faced the danger of a lawsuit. For example, doctors and malpractice, manufacturers of baby products, amusement park operators, etc. But the reasons for litigation has gotten more diverse. Slip and falls in stores and in adjacent areas has grown significantly, all manner of medical products, injuries on public transportation, worker's compensation claims, discriminatory hiring and firing and more. Some types of claims have been going on for years, but have now grown in number. As a business owner you have to do the best you can to avoid the claims, make sure you have done due diligence to avoid them, and be fully insured and have a rainy day fund to cover uninsured expenses.
November 28, 2023
NewsWhat constitutes an operating trade or business? Most of the time it's obvious an individual is in a business. He or she may not put in 40-hour weeks, but works at it regularly with an intent to make a profit. In Neel Kamal and Preeti Sharma (T.C. Memo. 2023-80) the taxpayer worked for a firm that was merged into a larger entity. He cashed in his stock options, received a bonus, as well as a salary. Rather than report various amounts received as income from the options and other payments, he reported it as consulting income on a consulting company he organized. To offset some $335,000 in "consulting income" he claimed expenses of $409,823 resulting in a net loss of some $74,000. The IRS found that the little or no documentation existed for the expenses, mostly notations in a ledger. The Court found the consulting company was not carrying on a trade or business. The Court also found the documentation for the expenses inadequate.
You may be able to get a Notice of Federal Tax Lien (NFTL) withdrawn if you can show that it affects your ability to earn income, affect assets, or affects your ability to make payments on an installment agreement or, in the case of Henry Seggerman (T.C. Memo. 2023-78) affects your ability to make payments on a restitution-based assessment. While the taxpayer demonstrated his ability to make the payments, he did not demonstrate how the NFTL affected his income or other accounts. The Tax Court noted that while the monthly payments were set out by a District Court at 10% of this income, the IRS argued it was not bound by that schedule and that the taxpayer and the Department of Justice stipulated in the cooperation agreement that the existence of a payment plan set by the [c]ourt shall not bar Governmental collection efforts against any of the defendant's available assets. The Court held the IRS did not abuse its discretion in refusing to remove the NFTL.
Tip of the DayDitch the store card . . . This is the shopping season and many taxpayers will carry a balance on their credit cards, even when they usually don't. You may have used the store card to get $100 on sign up, or a 50% discount on the merchandise purchased that day. But the interest rate on many store cards can be 30%--far higher than on the regular bank cards. Use the store cards if you're sure you'll pay that balance when the statement arrives. Be especially careful if you're purchasing big ticket items such as a set of kitchen appliances.
November 27, 2023
NewsThe IRS announced (IL-2023-07) tax relief for individuals and businesses affected by severe storms and flooding in parts of Illinois. These taxpayers now have until Feb. 15, 2024, to file various individual and business tax returns and make tax payments. Following the disaster declaration issued by the FEMA, individuals and households affected by severe storms and flooding that reside or have a business in Cook County qualify for tax relief. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Sept. 17, 2023, and before Feb. 15, 2024, are granted additional time to file. As a result, affected individuals and businesses will have until Feb. 15, 2024, to file returns and pay any taxes that were originally due during this period.
Between Nov 27, 2023, and Jan 19, 2024, tax pros may be randomly selected to participate in a voluntary phone survey. This is not a scam. Responses will help the IRS improve services to the tax pro community and the taxpayers they serve. The survey will be conducted by ICF, an independent research firm hired by the IRS. It will take about 20 minutes to complete, and covers topics including e-filing, due diligence requirements, data security, and electronic document submission. All responses are anonymous and confidential. Tax pros will not be asked to provide any personal info about themselves or their clients. Contacts will be Monday through Friday between 8:30AM--6:30PM local time and they’ll see a Kansas City (816) area code on their caller ID. For more information or questions about the survey tax pros can email TaxProfessional@icfsurvey.com or call (888) 504-6387.
Tip of the DayStill need an executor . . . You may have put all your assets in trusts, transfer on death, etc. but you should still have a will. Why? First, there will surely be some assets that will not transfer automatically. You'll need a will to take care of them. Second, you're almost assuredly going to have to file a final tax return, an estate tax return, someone will have to value the assets so that your heirs will know what their basis in the assets are, Someone will have to sign off on tax returns, etc., take care of If most of your assets transfer automatically, etc. The will might be extremely simple, but an executor or administrator will be necessary and it's either name one in the will or the court will appoint one.
November 22, 2023
NewsFollowing feedback from taxpayers, tax professionals and payment processors and to reduce taxpayer confusion, the IRS released Notice 2023-74 announcing a delay of the new $600 Form 1099-K reporting threshold for third party settlement organizations for calendar year 2023. As the IRS continues to work to implement the new law, the agency will treat 2023 as an additional transition year. This will reduce the potential confusion caused by the distribution of an estimated 44 million Forms 1099-K sent to many taxpayers who wouldn't expect one and may not have a tax obligation. As a result, reporting will not be required unless the taxpayer receives over $20,000 and has more than 200 transactions in 2023. Given the complexity of the new provision, the large number of individual taxpayers affected and the need for stakeholders to have certainty with enough lead time, the IRS is planning for a threshold of $5,000 for tax year 2024 as part of a phase-in to implement the $600 reporting threshold enacted under the American Rescue Plan (ARP).
Tip of the DayState taxes . . . You may only have to worry about real estate taxes on your vacation home in Maine that you only visit a couple of times a year, but that can quickly change. If you rent it out you have income that sourced to the state and may have to file income taxes in the state. If you sell the property at a gain you'll probably have to file a return and pay tax on the gain. Even if you hold the property until your death and never rent it, you may still have to pay estate taxes on the property.
November 21, 2023
NewsThe IRS has issued proposed regulations (REG-112916-23) concerning the statutory disallowance rule enacted by the SECURE 2.0 Act of 2022 to disallow a Federal income tax deduction for a qualified conservation contribution made by a partnership or an S corporation after December 29, 2022, if the amount of the contribution exceeds 2.5 times the sum of each partner's or S corporation shareholder's relevant basis. The proposed regulations would provide guidance regarding this statutory disallowance rule, including definitions, appropriate methods to calculate the relevant basis of a partner or an S corporation shareholder, the three statutory exceptions to the statutory disallowance rule, and related reporting requirements. In addition, the proposed regulations would provide reporting requirements for partners and S corporation shareholders that receive a distributive share or pro rata share of any noncash charitable contribution made by a partnership or S corporation, regardless of whether the contribution is a qualified conservation contribution (and regardless of whether the contribution is of real property or other noncash property).
Tip of the DayCapital gain on home sale? . . . Many homeowners believe they'll owe no capital gains taxes on their home sale. With the current market there's a better chance of it happening than in the past. The exemption is $500,000 if you're married, but only $250,000 if you're single. If your spouse died you get a break; the $500,000 will apply for two years if you don't remarry. And if you do remarry you're spouse will have to meet the use requirement to get the full $500,000. Of course you can still add to your basis improvements made over the years such as when you added a bedroom, expanded the garage, etc. The IRS may soon be looking closer at home sales, knowing that the $500,000 exclusion doesn't go as far as it used to.
November 20, 2023
NewsThe IRS has issued proposed regulations (REG-132569-17) updating rules for the investment tax credit under Section 48 (ITC) that have been unchanged since 1987. The proposed rules update the types of energy properties eligible for the sSection 48 ITC, reflecting changes in the energy industry, technological advances, and updates from the Inflation Reduction Act of 2022 (IRA). The proposed regulations provide definitions of energy properties for which the ITC was available before the IRA. These include, but are not limited to, solar process heat, fiber-optic solar property, combined heat and power system property, qualified fuel cell property, and qualified microturbine property. These proposed regulations also address technologies that were added to the ITC as energy property by the IRA, including electrochromic glass, energy storage technology, microgrid controllers, and biogas property. Importantly, the IRA added new provisions to the ITC to allow smaller projects to include the cost of certain types of interconnection property in their credit amount. Additionally, the proposed regulations provide general rules for the ITC including the application of the "80/20" Rule to retrofitted energy property, dual use property, and issues related to multiple owners of an energy property.
The IRS announced (Rev. Proc. 2023-22) that interest rates on over- and underpayments will remain the same for the calendar quarter beginning Jan. 1, 2024. For individuals, the rate for overpayments and underpayments will be 8% per year, compounded daily. Here is a complete list of the new rates:
Tip of the DayRequired minimum distributions . . . More commonly known as RMDs. If you reached age 73 in 2023 (72 for individuals before 2023 and 70-1/2 before 2020) you must start taking distributions from your IRAs (but not Roth) and pension plans. You may be able to avoid distributions from a pension plan if you are still working for your employer (unless you're a 5% or more owner of the business). In your first year you can delay the distribution to April 1 of the following year. However, since in 2024 and subsequent years you'll have to take the RMD by December 31 you end up taking two required distributions in the first year. You can aggregate the RMDs if you have more than one IRA you can take the entire RMD from one IRA, or any combination. All that's required is you take that total RMD. The same rule does not apply to pension plans. They're sepearate and distinct from eacy other and from IRAs.
November 17, 2023
NewsIn a Government Accountability Office (GAO-24-107095) the GAO reviewed the IRS's use of information returns (W-2s, 1099s, etc.) in taxpayer compliance and identify potential fraud. The GAO report found that the Service could do more to improve coordination among stakeholders and improve outreach to external stakeholders, better utilize the information, research potential recommendations to expand third-party information reporting, among other suggestions.
The IRS has added the areas of Iditarod, Kusilvak Census, Yukon-Koyukuk Census and Yupiit to the locales in Alaska qualifying for relief as a result of flooding in parts of Alaska that began on May 12, 2023.
The research and development tax credit can save substantial taxes for businesses that qualify, but there are a number of hurdles to qualification. In Leonard L. Grigsby; Barbara F. Grigsby (U.S. Court of Appeals, Fifth Circuit) the appellate Court affirmed a district court decision denying the credit to a taxpayer. The Court noted the requirements for the research credit and further noted that qualified research eaxcludes so-called funded research. Funded research include "any research to the extent funded by any grant, contract, or otherwise by another person (or governmental entity)" and where the researcher does not retain substantial rights to their research or payment is not contingent upoon the research's success. The Appeals Court found, as did the District Court, that the taxpayer failed these tests.
Tip of the DayRetail sales slowing . . . We may have a soft landing after all. Retail sales are down slightly in the latest month, inflatiion is easing, and yet there's little or no sign of a recession on the horizon. There's a chance that the fed's interest rate hikes are almost over. That should all be good news. On the other hand, consumers are restricting discretionary purchases, credit card debt is rising, and most consumers have used most, or a good part, of the pandemic savings. There's no doubt that some businesses will be impacted, at least somewhat, particularly by the high interest rates. Having said that, as we've seen by the pandemic, the economy can turn on a dime. And the high debt service resulting from higher interest rates for both businesses and individuals can have a strong negative impact should the economy turn sour.
November 16, 2023
NewsThe IRS announced (IR-2023-213) it will hold a free webinar at 1 p.m. ET on Thursday, Nov. 16, to update employers, tax professionals and others on the most recent developments of the e-file requirements for information returns that take effect Jan. 1, 2024. The hour-long session will explain the changes mandated by the Taxpayer First Act (TFA) provision 2301, how they affect taxpayers and how to comply with the information returns e-file requirement. It will also include information about the various IRS systems involved. There will also be a question-and-answer period where participants can ask questions. The event is open to anyone who is interested. Register online for the webinar. Click this link for more on e-filing requirements.
Forgiveness of debt generally produces taxable income. There are some exceptions to the rule. One of them is insolvency. The amount of forgiveness can be excluded up to the amount of the insolvency. Thus, if your liabilities exceed your assets by $6,000 you could exclude up to that amount of forgiven debt from income. In Katrina E. White (T.C. Memo. 2023-77) the taxpayer claimed to be insolvent. The taxpayer opened a business and it was soon clear the cash flow would not pay the rent and other expenses. The lease contained a clause that, should the taxpayer fail to pay the rent for a certain number of months the entire remaining lease amounts would be payable. The IRS disputed the amount of the taxpayer's claimed debts. The forgiven business loan was clearly bona fide debt, but the IRS disputed lease liability was not. The Court noted that the lease was an arm's length transaction and created a valid debt. The fact the landlord had not sued for the amount did not mean the debt was not bona fide. While not necessary to show the required amount of insolvency, a loan from the taxpayer's family was problematic because there was no written documentation, and the record was unclear if any interest was charged.
Tip of the DayAcceleration clause . . . It's a provision in a contract, frequently a loan agreement, which specifies that the entire amount of the loan will be due should the borrower fail to meet certain covenants. For example, missing four consecutive debt service payments, failing to maintain a certain debt service coverage, etc. Similar clauses can be found in lease agreements or other contracts. It can be a draconian measure. For example, should the bank accelerate a mortgage on a commercial property the borrower could be forced to relinquish the property. That's why it's important to read a contract carefully and be on the lookout for such clauses. Before signing have your attorney point them out to you and make sure your accountant is also aware.
November 15, 2023
NewsThe IRS has released proposed regulations (REG-142338-07) regarding excise taxes on taxable distributions made by a sponsoring organization from a donor advised fund (DAF), and on the agreement of certain fund managers to the making of such distributions. The proposed regulations would provide guidance regarding DAFs and taxable distributions. The proposed regulations generally would apply to certain organizations, including community foundations and other charitable organizations, that maintain one or more DAFs, and to other persons involved with the DAFs, including donors, donor-advisors, related persons, and certain fund managers.
The Treasury Inspector General for Tax Administration (TIGTA) performed an audit to review the results of the 2023 filing season. IRS management stated that for the first time since the Coronavirus Disease 2019 Pandemic (Pandemic) began, individual tax return processing and related activities are returning to normal timeliness goals. For example, the IRS cleared the carryover inventory of unprocessed individual tax returns received during Calendar Year 2022 by February 4, 2023. TIGTA's review of the IRS's business rules determined that 25 of 26 rules reviewed are accurately rejecting tax returns when applicable. One business rule had no rejections as of May 4, 2023. As such, TIGTA was unable to determine whether the rule is working correctly but will continue to monitor this in Calendar Year 2024. In addition, TIGTA's review of accepted electronically filed tax returns identified no concerns that tax returns with the conditions described in 24 of the 26 rules were accepted erroneously for processing. TIGTA was unable to test two of the 26 rules as no tax returns were filed containing the characteristics of the rules as of May 4, 2023. To see the complete report, go to www.tigta.gov/sites/default/files/reports/2023-11/2024400006fr.pdf.
Tip of the DayElectronic signatures . . . Rules can vary widely from one organization to another, so check before doing anything. In many applications for IRS purposes electronic signatures appear in many forms. The following are acceptable:
November 14, 2023
NewsIn order for a return to be valid it has to be signed by the taxpayer and, if a joint return, by his or her spouse. For electronically filed returns your signature on the form authorizing the preparer to file electronically has the same effect. In Noel M. Parducci and Kenneth L. Parducci, et al. (T.C. Memo. 2023-75) the question was whether the Form 1040 filed for petitioner Dennis Lee Simpson for 2013 is actually his return. Mr. Simpson's 2013 Form 1040 was not signed by him nor accompanied by any document showing that he authorized anyone to sign it on his behalf. An individual return must be signed by the individual or by an agent authorized to sign on his behalf. If the return is signed by someone authorized to do so, that authorization must accompany the return. Because Mr. Simpson neither signed his 2013 Form 1040 nor included a document showing that he authorized an agent to sign it on his behalf, the return filed as Mr. Simpson's 2013 Form 1040 is not a valid return. There was confusion in the facts as to how the taxpayer's signature got on the return. A forensic document examiner opined that it was highly probably the signature on the Form 1040 was not Mr. Simpson's signature. The Court also found the signature on the return was not made by a properly authorized agent.
Tip of the DayDon't put all your eggs in one basket . . . It's an old adage, but continues to apply. It's particularly true if you're investing in the company you work for or putting your money in stocks that are in the same line as your business. Enron was a prime example. The company stock was doing so well that many employees put their retirement money (and more) in the stock. When the company collapsed they lost their retirement, their investments and their jobs. Same thing can apply to business owners. If you're a contractor and the housing market turns down, you could not only have a hard time getting jobs, an investment in the big box home supplies retailer could get hit. Fighting the desire to invest in the industry you know best is tough. If it makes you feel better, put a small percentage of your money there to satisfy that urge and put the bulk in diversified investments.
November 13, 2023
NewsFinCEN is issuing a final rule (RIN: 1506-AB49) to specify when and how entities required to report beneficial ownership information to FinCEN may use a FinCEN identifier to report the beneficial ownership information of certain related entities. These regulations amend FinCEN's Beneficial Ownership Information Reporting Requirements Rule, which implements Section 6403 of the Corporate Transparency Act (CTA).
If you materially participate in a S corporation, LLC, partnership, etc., you may be able to deduct your share of the losses. But there are additional requirements. One of those is you must have sufficient basis to use the losses. Basis can either be direct equity investment, a loan by you to the entity, or, in the case of a partnership by a loan to the partnership for which you're liable. In Anthony J. A. Byran, Jr. (T.C. Memo. 2023-74) the taxpayer was a member of limited liability company which was a member of another LLc. A loss was distributed from the lower tier to the LLC member which the taxpayer claimed on his return. However, the Tax Court held the taxpayer was not personally liable on a loan to one of the LLCs and there was no additional capital contribution. The Court held the taxpayer did not have basis in and was not at risk with the activity and could not deduct the losses. (Note. The facts here were complex and involved partnership tax law.)
Tip of the DayCredit score . . . Don't put too much on a credit card. Or pay it off real quick. If you use a high percentage of your card, it can put a real dent in your score. Fred was carrying a credit score of 795. He had several cards with small during-the-month balances. Then he had a car repair, his auto insurance, and a computer purchase that put $3,700 on a card with a $5,000 limit. It was paid off at the end of the month, but that balance was there long enough to trigger a 26 point drop in his credit score.
November 9, 2023
NewsTheIRS is reminding (IR-2023-206) dealers and sellers of clean vehicles to register their organizations immediately on the Energy Credits Online tool. The IRS is strongly urging sellers of clean vehicles to register by Dec. 1, 2023, if they want to be in a position to receive advance payments starting Jan. 1, 2024. Energy Credits Online or IRS ECO, is a free electronic service that is secure, accurate and requires no special software. Though available to any business of any size, IRS Energy Credit Online may be especially helpful to any small business that currently sells clean vehicles. Clean vehicle sellers should begin the online enrollment process immediately. The IRS encourages any dealer or seller to register using Energy Credits Online by Dec. 1, 2023 to share in its benefits and ensure that by Jan. 1, 2024, dealers and sellers are ready to submit time-of-sale reports and receive advance payments. The tool will generate a time-of-sale report the taxpayer will use when filing their federal tax return to claim or report the credit. Beginning in 2024, clean vehicle sellers and licensed dealers must use the tool for their customers to successfully claim or transfer the new or previously owned clean vehicle credit for vehicles placed in service Jan.1, 2024, or later.
There are a number of reporting requirements with respect to a charitable contribution of a conservation easement. In Wendell H. Murphy, Jr. and Wendy F. Murphy; Wendell H. Murphy and Linda G. Murphy (T.C. Memo. 2023-72) the taxpayers failed to report their cost basis on their tax returns on land they contributed on Form 8283. The taxpayers argued they supplied the basis elsewhere. The Court held the taxpayers did not satisfy the appraisal summary requirements of Section 170(f)(11) in connection with the claimed charitable contribution deductions at issue, but it also hold that their failure to do so is excused for reasonable cause because the IRS, in raising this issue as new matter in this litigation, failed to carry its burden to show an absence of reasonable cause. The Court allowed a charitable contribution equal to what it determined to be the fair market value at the time of the contribution.
Tip of the DayResidential real estate prices . . . They appear to be at impossible highs and based on historical trends the market should collapse at any time. But a number of factors are likely to sustain the current prices. There are a number of reasons prices are unlikely to collapse near term. First, there's a lack of supply. Builders aren't building fast enough and owners aren't selling because any place they buy will carry a much more expensive mortgage. Second, there appears to be strong pent-up demand. Should inventory come on the market it's likely to be smapped up. Third, interest rates are unlikely to go much higher and may start to decline in nine months to a year. Should that happen, demand is likely to increase. Fourth, demographically, demand is likely to increase and supply increase slowly as population ages. Fifth, so far we haven't see a big upswing in foreclosures. While that might occur, they should be snapped up quickly and absorbed into the system by both those looking for a home and speculators. But, having said all that, buyers should always be on the lookout for any break in the market. Any number of factors could shift the market.
November 8, 2023
NewsThe IRS announced (FS-2023-25) additional improvements taxpayers will experience next Filing Season. Treasury and IRS also announced meeting the first goal of the Paperless Processing Initiative announced in August. Taxpayers are now able to digitally submit all correspondence and responses to notices. For additional information and links to other resources, click on the link above.
If you're the prevailing party in a dispute with the IRS you may be able to recover your litigation costs from the IRS. But like many IRS requirements, there's more than one hoop to jump through. In Haruki Yamada; Yasuko Ogawa (T.C. Memo. 2023-70) the IRS conceded the taxpayers substantially prevailed on most significant issues, but the IRS countered that it was substantially justified in the position it took because the husband was a U.S. citizen and the IRS assumed the wife was a permanent resident, it was justified in assuming the income was taxable in the U.S. The Court sided with the IRS in finding the IRS was substantially justified and did not allow litigation costs.
Tip of the DayWork the numbers . . . Raising prices can improve your profits--but only if done intelligently. One landlord raised the rent from $5,000 to $6,000 a month, what he thought was the new market. But there were no takers for 11 months. When he dropped the price to $5,000 it leased almost immediately. During the 11 months he lost $55,000 in rent. Even if he finally got the extra $1,000 per month at the end of the 11-month vacancy, it would still take 55 months to recoup the lost rent. That's particularly important if it's a short-term rental--i.e., a year or two. Study the market carefully and work the numbers. Holding out for X months may sound like a good idea until you look at the numbers. The same approach works in other situations. For example, holding on to a property to get a higher price. In that case you have to consider your holding costs--real estate taxes, upkeep if any, and the interest or other income you could have earned if you sold the property quicker.
November 7, 2023
NewsMost tax deadlines are hard and fast. In Tiffany Lashun Sanders (161 T.C. No. 8) the IRS issued a notice of deficiency to the taxpayer. She filed her Petition with the Tax Court three days after the expiration of the 90-day period, (as extended by Code Sec. 7503) to file a petition disputing the notice of deficiency under Sec. 6213. R moved to dismiss this case for lack of jurisdiction. Any appeal of our decision by P would presumptively lie in the U.S. Court of Appeals for the Fourth Circuit, which has not yet issued a precedential, published opinion as to whether the 90-day deadline in is jurisdictional. The Court hald that the 90-day deadline for filing petitions with this Court in deficiency cases is jurisdictional and that the Petition in this case was untimely filed. The Court dismissed the case for lack of jurisdiction.
Tip of the DayNoncompete agreement . . . If you're selling your business, more than likely you'll be asked to sign a noncompete agreement. Generally, there's nothing wrong with that. However, you should make it conditional on the buyer fulfilling his side of the deal. For example, if he defaults on the payments on a note, the noncompete becomes voidable. It gives you some leverage and allows you to get back in the business, if you want. Talk to your attorney. You'll probably want other guarantees.
November 6, 2023
NewsThe U.S. Department of Labor announced that its Employee Benefits Security Administration has proposed a retirement security rule updating the definition of an investment advice fiduciary under the Employee Retirement Income Security Act. The proposal would require trusted investment advisers to adhere to high standards of care and loyalty when they make investment recommendations and avoid recommendations that favor their financial and other interests at the expense of retirement savers. The updated definition of an investment advice fiduciary would apply when financial services providers give investment advice for a fee to retirement plan participants, individual retirement account owners and others. While investment professionals deserve to be paid fairly for helping people meet their savings goals and retire with dignity, there are some financial advisers who put their interests before their clients' interests. This can result in reduced returns and higher costs which are junk fees that chip away at many Americans" savings. Analysis of just one investment product—fixed index annuities— suggests that conflicted advice could cost savers up to $5 billion per year for this product alone. The proposed rule would also ensure investment professionals are able to compete for business on a level playing field, instead of an unbalanced system that holds advisers to different standards based on their recommended products. Click on the link above for more information.
A computer printout is not a suffient record of expenses. In Ray Kouza and Dalia Kouza (U.S. District Court, E.D. Michigan, Southern Div.) the Court cited a Tax Court case where the Court found substantiation lacking when a taxpayer offered "hundreds of accounting records from an electronic database as replacements for source documents". Accounting entries are part of recordkeeping, but the IRS requires the source documents such as receipts, invoices, etc. and proof of payment such as a canceled check, bank transfer, etc. In this case the Court held the taxpayers were not entitled to the Cohan rule (where the court is allowed to estimate the allowable deductions based on some evidence the expenses were incurred) because the case was appealable to the Sixth Circuit which has never accepted or rejected the Cohan rule.
Tip of the DayAccounting for business assets . . . Whether you expense business assets under Sec. 179 or depreciate them over a number of years, if you're audited by the IRS there's a good chance you'll have to show the information surrounding the acquisition such as an invoice. You may also have to show details of any disposition or be able to show you still own the asset. The higher the asset's value, the greater the chance documentation may be requested. Ideally each asset of significance should be tracked and a file kept. That may also be required for accounting purposes. It's also a good way to check on assets from time to time to make sure they don't grow "legs".
November 3, 2023
NewsIn order for a penalty to be valid (other than automatic penalities and some other exceptionns) the IRS person deciding on the penalty must have it approved by his or her immediate supervisor. In Salacoa Stone Quarry, LLC, Eco Terra 2017 Fund, LLC, Tax Matters Partner (T.C. Memo. 2023-68) the taxpayer challenged the supervisor's signature. The taxpayer focused on what it calls a "discrepancy" between the date of the supervisor's digital signature block (November 10) and the date appearing in the bottom right-hand corner of the form (November 20). Given this supposed discrepancy,the taxpayer contended that additional discovery is necessary to determine whether the IRS actually complied with approval requirements of Sec. 6751(b)(1). The taxpayer sought IRS emails, correspondence, note, etc. between the revenue agent and the supervisor. The Court found the documents sought were irrelevant to resolution of the question presented by IRS's Motion. The Court said it would confine its search to seeking evidence of timely written supervisory approval. The record includes documents demonstrating the required written supervisory approval. By propounding discovery requesting communications among the IRS exam team, the taxpayer seeks improperly to look behind the signature appearing on the face of the form. In any event, the Court continued, under Eleventh Circuit precedent, the line of argument the taxpayer seeks to advance is a nonstarter. The Form 4605–A and the Form 866–A were mailed to petitioner on February 2, 2021, and the FPAA was issued on June 17, 2021. During the time in question the supervisor had discretion to approve or disapprove the penalty recommendations.
Tip of the DayGrow to survive? . . . Some businesses can be stand alone operations. A restaurant that's profitable and has loyal customers may not want to, or need to expand to a second location. In fact, some businesses don't do well at multiple locations or on a larger scale. The personal touch of the owner is what makes the business. But some businesses have to grow in order to survive. A business that benefits from economies of scale is one of those. But in more recent times many industries have seen a major players or investment funds buying into traditionally smaller businesses. Funeral homes, medical practices, car dealerships, etc. To survive on your own you may have to expand your business to additional locations or otherwise grow. Be sure to follow the trends, position yourself well in the market and understand your financials. Don't hesitate to get outside advice. Sometimes the smart move is to position yourself well and look to sell out at an attractive price.
November 2, 2023
NewsThe IRS has released the cost-of-living adjustments for pension plans for 2024 (Notice 2023-75). IRA contributions of up to $7,000 (up from $6,500) will be allowed. The $1,000 catch-up contribution for those age 50 and older remains the same. The limitation for SIMPLE retirement accounts is increased from $15,500 to $16,000. Contributions to 401(k) plans goes from $22,500 to $23,000. Catch-up contributions for a 401(k) plan for individuals over 50 remains at $7,500. The limitation on defined contribution plans increases from $66,000 to $69,000. The definition of "highly compensated employee increases from $150,000 to $155,000. The definition of a "control employee" increases from $130,000 to $135,000. The compensation under Reg. Sec. 1.61-21(f)(5)(iii) increases from $265,000 to $275,000. The limit on qualified charitable distributions not includable in income increases from $100,000 to $105,000. For the remainder of the limitations, click on the link above.
The IRS has updated the relief for victims of of severe storms and flooding in parts of Illinois that began on June 29, 2023 to file various individual and business tax returns and make tax payments by adding a number of counties to the list where individuals and businesses affected by the storms can get relief. As a result the full list of counties qualifying for relief include Calhoun, Christian, Clark, Coles, Cook, Cumberland, DeWitt, Douglas, Edgar, Hancock, Logan, Macon, McDonough, Monroe, Morgan, Moultrie, Pike, Sangamon, Scott, Vermilion, Warren, and Washington. For more information, go to "Illinois"
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.
November 1, 2023
NewsThe IRS announced (IR-2023-201) will present a free webinar, Thursday, Nov. 2, at 2 p.m. ET, to update employers and tax professionals on the most recent developments about the Employee Retention Credit (ERC). The hour-long session will include information about the freeze on ERC claims, how to withdraw claims and what ERC resources are available from the IRS. When properly claimed, the ERC is a refundable tax credit designed for businesses and organizations that continued paying employees while shut down due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods. The credit is not available to individual employees. This year, scams tied to the ERC made the tax agency's Dirty Dozen list of the most egregious tax-related scams. Employers should continue to be on the lookout for ERC advertisements that instruct them to "apply" for money by claiming the ERC when they may not qualify. Anyone who incorrectly claims the credit has to pay it back and may owe penalties and interest. The only way to claim the ERC is on a federal employment tax return. The IRS continues to warn businesses to not fall for aggressive marketing or scams related to the ERC. Businesses should first check with their trusted tax professional before submitting an ERC claim. Click on the first link above for additional information and additional resources.
Tip of the DayCredit score . . . Just because you can pay cash for a new car, own your home outright, and have all the credit cards you'll ecer need doesn't mean you shouldn't be concerned with your credit score. Today that number is used for a lot more than getting a car loan or a new credit card. It can affect a host of other financial and nonfinancial decisions on how much you'll pay for things such as car and home insurance, deposits on utilities, the cost of certain plans that are billed on a monthly basis, etc. And should you decide to move or borrow for some reason, you may not be able to boost your score quick enough to get the best deal.
October 31, 2023
NewsThe IRS announced (IR-2023-199) that it has extended certain temporary flexibilities. The acceptance of digital signatures is extended indefinitely until more robust technical solutions are deployed, and encrypted email when working directly with IRS personnel has been extended until Oct. 31, 2025. Put in place during the COVID-19 pandemic, the flexibilities promoted secure and effective communications and were well received by tax professionals and taxpayers who reported that allowing for the use of electronic or digital signatures saved time and resources. During the pandemic the Internal Revenue Manual (IRM) 10.10.1 was updated to allow the acceptance of alternatives to handwritten signatures for certain tax forms and the ability to accept images of signatures and digital signatures in compliance interactions. (A listing of allowable signature options can be found in IRM Exhibit 10.10.1-2 on IRS.gov.) In addition, Interim Guidance Memorandum PGLD-10-1023-0002 provides for the receipt and transmission of documents through Oct. 31, 2025, using email with encryption when working person-to-person with IRS personnel to address compliance or resolve issues in ongoing or follow-up authenticated interactions (primarily with field compliance, Independent Office of Appeals, Counsel and Taxpayer Advocate Service personnel). This guidance remains in effect until the IRS fully implements long-term solutions for secure electronic communication channels with taxpayers as alternatives to encrypted email. On March 27, 2020, the IRS issued guidance allowing for the acceptance of digital signatures and the receipt and transmission of documents via email during compliance interactions. The IRS also permitted the use of electronic or digital signatures on certain paper forms that required a handwritten signature. These digital flexibilities were subsequently extended to Oct. 31, 2023.
Tip of the DayThere's an app for that . . . There seems to be an app or an online video for just about everything. And some of them are fantastic. They detailed and accurate. But some of them aren't worth the bytes they take up on the cell phone or computer. Some are designed to sell you something else, get your email address, or leave cookies on your device. Converting from inches to centimeters is simple, but most complex financial or business models require assumptions and algorithms which may or may not be accurate or fit your situation. Is the source trustworthy? And even if it is, don't rely blindly on the results.
October 30, 2023
NewsThe IRS is generally pretty good at following procedures and it's tough to challenge them in court. In Wolfgang Frederick Kraske (161 T.C. No. 7) the IRS examined the taxpayer's return and proposed deficiencies as well as penalties. The taxpayer requested Appeals considerations. Before the letter was received the tax compliance officer (TCO) the TCO's immediate supervisor gave written approval for the imposition of the penalties for both years at issue. The Court held that holding of the Court of Appeals for the Ninth Circuit, where an appeal in this case would ordinarily lie, in Laidlaw's Harley Davidson Sales, Inc. concerning the timeliness of the written supervisory approval of a penalty required by Code Sec. 6751(b), is squarely on point. The Cour also held that the written supervisory approval for the penalties at issue, which were subject to deficiency procedures, was timely, as the TCO's immediate supervisor gave approval before the case was transferred to Appeals, while she retained discretion to approve or to withhold approval of the penalties.
Tip of the DayCharitable contributions . . . With the cap on deductions for state and local taxes, the elimination of most miscellaneous deductions, and the higher standard deduction ($27,700), less taxpayers are itemizing. That's particularly true if you don't have much of a mortgage on your principal or second residence. That means charitable contributions won't be deductible. The calculus changes for single taxpayers. Their standard deduction is $13,850. High state and local taxes along with a small mortgage, high medical expenses, or a substantial amount in charitable contributions and those charitcontributions could be worth something. Your tax advisor may have some suggestions in your particular situation.
October 27, 2023
NewsThe IRS is reminding employers (IR-2022-198) that the best way to file their next quarterly payroll tax return by the Oct. 31, 2023, due date is electronically. While paper filing is available, the IRS strongly encourages e-filing. E-filing is the most secure, accurate method to file returns, and saves time. E-filing is easy with auto-populating forms and schedules and a step-by-step process that performs calculations for the user. The IRS acknowledges receipt of e-filed returns within 24 hours, giving employers reassurance that their return was not misplaced or lost in the mail. E-file users also receive missing information alerts. For more information and links to additional resources, click on the link above.
You're responsible for filing your tax return and you generally can't pass it off to anyone else. In Wayne Lee (U.S. Court of Appeals, 11th Circuit) The taxpayer had his return prepared by a CPA. The taxpayer signed Form 8879, authorization to e-file, on time but the CPA failed to electronically transmit the taxpayer's return. The bright-line rule (Boyle) has been that you can't delegate the filing of a return. But that case was decided before returns were filed electronically. Circuit courts have not applied that ruling to e-filed returns. Here the Circuit Court sided with the IRS and held that the rule applies to e-filed returns and denied the taxpayer's reasonable cause for failure to file argument. (Note. The tax preparer receives an acceptance notice from the software company with whom the return is electronically filed. Ask the preparer to provide a copy to you.)
Tip of the DayFad or trend?. . .Sometimes it's hard to tell when you're in the middle. It's important because you don't want to ramp up expenses, invest in equipment, etc. only to see sales drop in a year or two. During the pandemic everyone bought exercise equipment. Once it was over the market dried up and people went back to the gym. On the other hand more than a few people thought the video game market wouldn't last--but 40 years later it's as strong as ever. Best advice? If you'r not sure proceed cautiously.
October 26, 2023
NewsSometimes substantial compliance with the rules will save the day. Sometimes strict compliance is required. But don't rely on substantial compliance as a plan, rather it's a possible escape hatch if you or your tax preparer make a mistake. In Ronald Schlapfer (T.C. Memo. 2023-65) the IRS claimed the taxpayer failed to adequately disclose required information on a gift tax return. As a result the 3-year statute of limitations had not begun to run and the IRS was able to issue a notice of defiicency. The Court noted "A disclosure is 'adequate' if it is "sufficiently detailed to alert the Commissioner and his agents as to the nature of the transaction so that the decision as to whether to select the return for audit may be a reasonably informed one." The Court cited the five items providing the required information for a gift tax return to be adequately disclosed. Th Court found the taxpayer strictly or substantially complied with Treasury Regulation §301.6501(c)-1(f)(2)(i), (ii), and (iv) by way of his gift tax return, protective filing, Offshore Entity Statement, and Forms 5471. As a result, he adequately disclosed the gift on his return. Thus, the period of limitations to assess the gift tax had expired before the deficiency notice was issued.
Tip of the DayLooking for more revenue? . . . Look to existing customers. We're not talking about raising prices but selling more to them. Expand your product line or add another service, Or tell them about products or services you have that they're not aware of. Selling more to existing customers is almost always cheaper than trying to secure new ones. But if your customer base is avery limited and you serve a limited industry or area be careful you don't increase your risks should you lose a customer or two.
October 25, 2023
NewsThe IRS is reminding (IR-2023-197) the nearly 800,000 active tax return preparers that they can take the first step in their filing season readiness by renewing their Preparer Tax Identification Numbers (PTINs) now. Anyone who prepares or helps prepare a federal tax return or a claim for refund for compensation must have a valid PTIN from the IRS. They also need to include the PTIN as their identifying number on any return or claim for refund filed with the IRS. PTINs expire on December 31 of the calendar year for which they are issued. All 2023 PTINs will expire on Dec. 31, 2023. The fee to renew or obtain a PTIN for 2024 is $19.75. The fee is set at $11 per application or renewal (plus an $8.75 fee payable to the third-party contractor). The PTIN fee is non-refundable. Failure to have and to use a valid PTIN may result in penalties. Paid tax return preparers with a PTIN expiring on Dec. 31, 2023, should use the online renewal process, which takes about 15 minutes to complete. A paper option, Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application and Renewal, along with the instructions, are also available for PTIN applications and renewals. However, the paper form can take approximately six weeks to process. For more information, click on the link above. To renew online, go to IRS.gov/taxpros.
Employee or independent contractor is still an important issue with the IRS. In Cardiovascular Center, LLC (T.C. Memo. 2023-64) the workers worked long hours and were paid a higher hourly rate for time in excess of eight hours in a day, the workers were subject to supervision and had set procedures, there were no formal contracts. The taxpayer did not file 1099-MISC or W-2s. The Court looked at seven factors including the degree of control exercised, which party invests in work facilities, worker's opportunity for profit or loss and four other factors and concluded the workers were employees. In addition, the Court found the taxpayer did not qualify for section 530 relief.
Tip of the DayRental property as retirement investment? . . . Could be. Many rental properties don't produce taxable income because of depreciation and interest. As the years go by rents increase and at some point mortgage payments disapper. Because depreciation is a noncash charge, your cashflow from the property could be significant. In addition, the value of the property should have increased substantially allowing you to refinance and take cash outor sell it. While this could be a great retirement investment, it's not for everyone and the timing can be important. Get good advice.
October 24, 2023
NewsStartup businesses typically incur losses for the first few years, sometimes for much longer, but a number of years of losses, along with other factors can indicate to the IRS a not-for-profit activity (hobby loss). If so, your deductions could be disallowed. In Joseph William Sherman (T.C. Memo. 2023-63) the taxpayer was a doctor who launched a film company that combines music and film and a website that owns copyrights and other digital assets. From the court record much of the details were hazy. There was no evidence the company was licensed to do busness in any state and the taxpayer had no business plan. The taxpayer "guesstimated" he spent 200-300 hours per month on the project. There ware no receipts or similear documents for the claimed expenses. Generally, to determine if an activity is entered into with the intention of making a profit, the court will examine nine factors. They are (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or loss with respect to the activity; (7) the amount of occasional profits, if any, which are earned from the activity; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. The Court examined all the factors and concluded all the factors favored the IRS and held the activity a not-for-profit one.
Tip of the DayDealing with fluctuating income . . . While many people get a regular paycheck, possibly with predictable annual increases, many also are faced with big fluctuations in their income. It could be much of their income comes from bonuses or commissions, or the unpredictable income of a business owner. Budgeting is more challenging. The safest approach is to assume a low baseline when budgeting for expenses. For a business owner it might be what you'd earn in a poor year. When you earn amounts over that save part for special expenditures and a rainy day fund. Retirement is an important consideration so additional amounts should be put into a retirement plan. Maxed out? Save extra funds for those years when you can't max out.
October 23, 2023
NewsThe IRS has announced (IR-2023-194) that following an improved 2023 filing season it has targeted IRA resources on strengthening enforcement, with announcements on new initiatives to pursue high-income, high-wealth individuals who do not pay overdue tax bills and complex partnerships. Today the IRS announced new initiatives to ensure large corporations pay taxes owed. As these initiatives to improve compliance among high-income individuals, complex partnerships and large corporations ramp up, the IRS is continuing its work to improve customer service and modernize core technology infrastructure, most notably with the launch of business tax account. The main targets are large foreign-owned corporations transfer pricing initiative, expansion of large corporate compliance, prioritization of high-income cases (high income, high wealth individuals who have either not filed their taxes or failed to pay recognized tax debt, particularly those with more than $1 million in income and more than $250,000 in tax debt, and improving taxpayer services. For more information go to IR-2023-194.
Tip of the DayAccounting methods . . . Most taxpayers know about two accounting methods--cash and accrual. While those are the most common used, there are others such as the completed contract method and the percentage of completion method. And their are hybrid methods and, if you have two or more distinct trades or businesses within an entity, you may be able to use one method for one business and another method for a diffent business. The law requires you to use a method which most clearly reflects income. The IRS knows there are many opportunities for manipulating income with accounting methods so be ready to defend any method you use. If you're not sure, check with your accountant or tax adviser.
October 20, 2023
NewsIn an effort to protect small businesses and organizations from scams, the IRS announced (IR-2023-193) the details of a special withdrawal process to help those who filed an Employee Retention Credit (ERC) claim and are concerned about its accuracy. This new withdrawal option allows certain employers that filed an ERC claim but have not yet received a refund to withdraw their submission and avoid future repayment, interest and penalties. Employers that submitted an ERC claim that's still being processed can withdraw their claim and avoid the possibility of getting a refund for which they're ineligible.
You can have a passport application denied or your passport revoked if your unresolved tax debt exceeds $50,000. (There are exceptions if you're working with the IRS.) In Guy Alvarez Gayou (T.C. Memo. 2023-61) the Cour found that all the documentation certifying the assessments were in order and none of the exceptios applied.
Tip of the DayCheck credit reports regularly . . . Even if you're not looking for a new credit card, car loan, etc., you should check your credit report at least once a year. That means review the report, not just your credit score. A lot more gets reported than you might think. Besides your payment history on a mortgage, credit card, or car loan, many businesses report late or failures to pay. Didn't pay that doctor bill for $500. It could show up and reduce your credit score. Late payments on utility bills, or any open account could affect your score. Those negative marks could affect your score for some time--and they may be in error. You did pay that $500 doctor bill, the receptionist didn't record the receipt. Issues like that are much easier to correct when they're young.
October 19, 2023
NewsThe IRS has released a Fact Sheet (FS-2023-23) providing additional details on the Direct File update to be available on a pilot basis in 2024. The filing is expected to be available to eligible taxpayers residing in Alaska, Arizona, California, Florida, Massachusetts, New Hampshire, New York, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. Direct File will only cover individual federal tax returns; it is not going to prepare state returns. However, once a federal return is completed and filed, Direct File will guide taxpayers in Arizona, California, Massachusetts and New York who want to file a state return to a state-supported tool that taxpayers can use to prepare and file a stand-alone state tax return, while taxpayers in Washington can apply for the Working Families Tax Credit. For this reason, participation in the 2024 pilot for people living in states with an income tax will be limited to those states that are actively partnering with the IRS on the pilot. And, as with the current Free File program, only relatively simple returns will qualify. For example, the only income allowed is W-2 wages, social security and railroad retirement benefits, unemployment compensation and up to $1,500 of interest income.
Tip of the DayWhat fringe benefits do employees want? . . . Based on several surveys, the benefit most desired by employees of small businesses is health insurance. Disability insurance, life insurance, a 401(k) plan, and a company funded retirement plan are the next most mentioned benefit, but the order varies among surveys, and they're all a distant second to health insurance.
October 18, 2023
NewsAs part of larger transformation efforts underway, the IRS announced (IR-2023-192) key details about the Direct File pilot for the 2024 filing season with several states planning to join the innovative effort. The IRS will conduct a limited-scope pilot during the 2024 tax season to further assess customer support and technology needs. It will also provide a platform for the IRS to evaluate successful solutions for potential operational challenges identified in the report the IRS submitted to CongressPDF earlier this year. Arizona, California, Massachusetts and New York have decided to work with the IRS to integrate their state taxes into the Direct File pilot for filing season 2024. Taxpayers in nine other states without an income tax--Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming--may also be eligible to participate in the pilot. Washington has also chosen to join the integration effort for the state's application of the Working Families Tax Credit. All states were invited to join the pilot, but not all states were in a position to join the pilot at this time.
Don't go to court or even the IRS with tainted documentation. In Benjamin Soleimani and Sharyn Soleimani (T.C. Memo. 2023-60) the taxpayers claimed a long-term capital loss as the result of property in Iran that was expropriated by the Iranian government. The IRS disallowed the deduction. The Tax Court noted that were significant discrepancies between tax maps and the property descriptions. The IRS's expert found that the taxpayer's witness was a fictious person after researching him in Tehran. In addition, property records in Iran showed these properties were never owned by the taxpayer.
Tip of the DayDon't understand the investment? . . . Then consider passing on the deal. Seems that more exotic investments are being introduced at a more rapid pace than in the past. With any investment you run the risk it will fail or produce negative returns. But the more exotic ones carry additional risks. And the risks may outweigh the potential reward. But for even mundane investments you should use common sense and your own knowledge. One individual was offered a share in a small medical building. The location was great, the building in good shape, etc. but he noticed that the parking lot was too small for the projected operation and there was no suitable parking within reasonable walking distance.
October 17, 2023
NewsThe IRS announced (IR-2023-189) it further postponed tax deadlines for most California taxpayers to Nov. 16, 2023. In the wake of last winter's natural disasters, the normal spring due dates had previously been postponed to Oct. 16. As a result, most individuals and businesses in California will now have until Nov. 16 to file their 2022 returns and pay any tax due. Fifty-five of California's 58 counties--all except Lassen, Modoc and Shasta counties--qualify. IRS relief is based on three different FEMA disaster declarations covering severe winter storms, flooding, landslides, and mudslides over a period of several months. The IRS normally provides relief, including postponing various tax filing and payment deadlines, for any area designated by FEMA. As long as their address of record is in a disaster-area locality, individual and business taxpayers automatically get the extra time, without having to ask for it. The current list of eligible localities is always available on the disaster relief page on IRS.gov. For more information, click on the link above.
Tip of the DayReverse mentoring . . . The idea behind mentoring has always been senior employees teaching junior ones. But senior employees can often learn from their juniors. That's especially true in certain technical fields where the science is always changing. Employees with advanced degrees may have just left school after doing cutting edge research. And in even nontechnical jobs younger employees are often much more adept at using the latest technology.
October 16, 2023
NewsDon't forget Monday, October 16 is the last day to file extended individual tax returns for federal and most states.
The Treasury Inspector General for Tax Administration (TIGTA) has released their 2024 Annual Audit Plan. The Plan reveals some of the areas TIGTA is focusing on and, by extension, areas the IRS is or should be focusing on. They include filing and payment compliance of Form 5329, ghost employer initiative (employers who have employees on which they're not withholding), auditing high income taxpayers, advanced manufacturing production credit, partnership noncompliance, nonfilers, and the qualified business income deduction.
Tip of the DayRenting a vacation home? . . . Sounds like a no-brainer. Get top dollar during the prime summer or ski season for a couple of months and still have the home available for personal use. And get the rentals to pay the mortgage and taxes. It often doesn't work out that way. Finding tenants can be more difficult than you might think. In some locations there can be considerable competition from other owners who have the same idea. If the property isn't rented for much of the prime time your income won't go far. Then there's always damage and maintenance expenses to consider. If the property is some distance away you should strongly consider a rental manager or real estate agent to assist. That will take a bite out of your gross. You'll have better luck if the property was rented regularly by the former owner. There's a good chance you'll get repeat business which makes marketing easier and the tenants more reliable. There are some areas that do really well. Houses in the Hamptons on Long Island are usually rented for a month or the season. It's not unusual for a season rental to generate $50,000 plus for just three months. Homes on many lakes or near a ski slope can be a close second. Just don't depend on the rental income to cover the mortgage and taxes.
October 13, 2023
NewsThe Social Security Administration has released its Fact Sheet with the cost-of-living adjustments (CO:A) for 2024. Benefits will increase by 3.2 percent, a more modest one than for 2023. Social Security (OASDI) will stop being withheld from paychecks at $168,600, up from $160,200 in 2023. A quarter of coverage will be $1,730, up from $1,640.
The IRS released (IR-2023-187) new tax gap projections for tax years 2020 and 2021 showing the projected gross tax gap increased to $688 billion in tax year 2021, a significant jump from previous estimates. The new estimate reflects a rise of more than $192 billion from the prior estimates for tax years 2014-2016 and a rise of $138 billion from the revised projections for tax years 2017-2019. This marks the first year tax gap projections have been provided for single tax years and also marks the beginning of tax gap updates on an annual basis. The $688 billion gross tax gap is the difference between estimated 'true' tax liability for a given period and the amount of tax that is paid on time. The gross tax gap covers three key areas--nonfiling of taxes, underreporting of taxes and underpayment of taxes. The IRS notes that the tax gap estimates and projections cannot fully account for all types of noncompliance. In addition, the projections released today are based largely upon the compliance behavior estimated from the most recent set of completed audits (from tax years 2014-2016). That estimated compliance behavior is projected forward to taxpayers in tax years 2020 and 2021. Late payments and IRS enforcement efforts are projected to generate an additional $63 billion on tax year 2021 returns, resulting in a projected net tax gap of $625 billion. Between tax years 2014-2016 and tax year 2021, the estimated tax liability increased by about 38 percent, roughly the same increase as the gross and net tax gaps. Much of these increases in tax liability and the tax gap can be attributed to economic growth.
Tip of the DayMunicipal bond funds . . . Many investors think they're risk free. Not true. There can be several risks. First, interest rates. As interest rates increase the value of the bonds in the fund decrease. That's a risk with any bond fund. You hope the manager handles that well. Second, some bonds are riskier than others. Some bonds are backed by the full faith and credit of the state or city. Some are backed by specific projects. Those are inherently more risky. Generally, the higher the yie of the bond or fund, the riskier it is. Third, some funds use leverage--they borrow art a low rate and invest the funds at a high rate. That can be very profitable when interest rates are in your favor, but a disaster if they turn on you. Do your homework before investing.
October 12, 2023
NewsThe IRS has updated the disaster relief for victims of Hurricane Idalia in parts of Georgia that began Aug. 30, 2023 to include the counties of Burke, Montgomery, Toombs and Treutlen. The complete list of counties now includes Appling, Atkinson, Bacon, Berrien, Brantley, Brooks, Bulloch, Burke, Camden, Candler, Charlton, Clinch, Coffee, Colquitt, Cook, Echols, Emanuel, Glynn, Jeff Davis, Jenkins, Lanier, Lowndes, Montgomery, Pierce, Screven, Tattnall, Thomas, Tift, Toombs, Treutlen, Ware, and Wayne. Click on the link above for more information.
You'll have to provide the most recent financial information to an IRS settlement officer (SO) if you want to settle your tax debt for less than the full amount. In Duane Whittaker and Candace Whittaker (T.C. Memo. 2023-59) the taxpayers offered to settle their $33,000 tax debt for only $1,629. They argued that the low offer was warranted because they were both near retirement age and burdened with significant unpaid debt and loss of their jobs during the pandemic. The IRS's SO rejected the offer because she concluded that the taxpayers had enough income and home equity to pay the tax bill in full. The taxpayers submitted a number of documents including pay stubs, a profit and loss statement for the husbabd's business, etc. The taxpayers also claimed they could not borrow against their home since it was in disrepair and the mortgage forbade it. The Court found that while the SO indicated the special circumstances were considered, apparently they were not since the centralized unit computing the taxpayer's reasonable collection potential computed the amount to be $250,000. The Court also noted there was a change in the taxpayer's working situation during the discussions with the SO. The Court sided with the taxpayers in finding the IRS abused it's discretion and remanded the case to the Appeals Office.
Tip of the DayCharging hidden fees . . . The Federal Trade Commission is proposing a new rule to prohibit junk fees, which are hidden and bogus fees that can harm consumers and undercut honest businesses. Even if you think you'll escape the wrath of the FTC, hidden fees that are clearly just attempts at a price increase are very likely to annoy a customer or client. How annoyed will depend on the type of charge and the amount. Charging for delivery that used to be free or increasing the minimum to get free delivery may not be viewed that negatively, prticularly if you announce the change well in advance and explain the reason.
October 11, 2023
NewsThe Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to assess whether the IRS is adequately reviewing the Qualified Plug-In Electric Drive Motor Vehicle Credits claimed by taxpayers. TIGTA found that in response to its recommendations in a prior audit, the IRS developed filters to identify returns with potentially erroneous Qualified Plug-In Electric Drive Motor Vehicle Credit claims. While the IRS has taken steps to address past recommendations, problems with the implementation of some of the filters have made existing issues worse. TIGTA's analysis found that 74 percent of the tax returns flagged by the filter to identify non-qualifying vehicle models flagged qualifying vehicle models in error, resulting in taxpayer burden and unproductive examinations. In addition, due to issues with the filter, many claims for non-qualified vehicles were not examined. To see the complete report, go to www.tigta.gov/sites/default/files/reports/2023-10/202330065fr.pdf.
You may be able to settle your tax debt with the IRS for less than the full amount with an offer-in-compromise (OIC), but you have to make the offer and the IRS will accept or reject it based on your financial situation. In Aubree Hill (T.C. Memo. 2023-58) the IRS settlement officer (SO) suggested collection alternatives and informed the taxpayer she should submit an offer-in-compromise, but the taxpayer failed to do so. The Tax Court found no abuse of discretion by the settlement officer.
Tip of the DayExit plan . . . You should always have exit plans for your business. Whether it's for a product, a product line, or the entire business. If it's for a portion of the business it can be relatively vague, if for the entire business it will need to be more detailed. It might include making sure the physical plant looks good, financials in order, customers satisfied, no problems with your products or services, etc. If there are problems you should be addressing them. An exit plan is especially important if you started the business late in life or you're getting on in years and you don't have an heir apparent lined up.
October 10, 2023
NewsThe IRS has issued proposed regulations, Revenue Procedure 2023-33 and frequently asked questions today for the transfer of new and previously owned clean vehicle credits from the taxpayer to an eligible entity for vehicles placed in service after Dec. 31, 2023. The Inflation Reduction Act provides taxpayers with credits for qualified new and previously owned clean vehicles acquired and placed in service during the taxable year. Beginning Jan. 1, 2024, in certain situations, taxpayers will be able to transfer the new and previously owned clean vehicle credits to eligible entities. The guidance clarifies how taxpayers can elect to transfer new and previously owned clean vehicle credits to dealers who are eligible to receive advance payments of either credit. The proposed regulations and revenue procedure also provide guidance for dealers to become eligible entities to receive advance payments of new or previously owned clean vehicle credits. The proposed regulations also provide guidance for the recapturing of the credit.
Tip of the DayResidential real estate . . . Headed higher or lower? As always it depends on the local market, but some professionals think that if rates decline in a year or so, prices may increase because the same income of a buyer will purchase more and more buyers will come to the market. But some believe that lower rates could trigger many current owners to sell increasing inventory, and the small inventory is driving up prices. But there's no question that interest rates will play a large part in pricing.
October 6, 2023
NewsThe IRS is warning (IR-2023-185 ) taxpayers to watch for promotions involving exaggerated art donation deductions that can target high-income filers and offered special tips for people to use to avoid getting caught in a scheme. There are ways for taxpayers to properly claim donations of art. But some unscrupulous promoters may use direct solicitation to promise values of art that are too good to be true. These promoters persuade taxpayers, usually high-income taxpayers, to purchase the art, wait to donate the art and then take an incorrect deduction for the art donated. As part of a larger effort to increase compliance work on high-income individuals and corporations, and protect taxpayers from scams, the IRS has active promoter investigations and taxpayer audits underway in this area. The IRS is using a variety of compliance tools to combat abusive art donations through audits of tax returns and civil penalty investigations. The IRS reminds taxpayers, including high-income filers that may be targets of these schemes, to watch out for aggressive promotions. In addition, following Inflation Reduction Act funding, the IRS is focused on increasing compliance efforts on high-income and high-wealth individuals to ensure filers pay the right amount of tax owed. For more information click on the link above.
You may be able to secure a tax credit for research and development expenditures, but you've got to meet a number of tests. One of the requirements is the business component test. The law defines a business component as "any product, process, computer software, technique, formula, or invention which is to be--(i) held for sale, lease, or license, or (ii) used by the taxpayer in a trade or business of the taxpayer." Under this test, the qualifying research must be undertaken to discover information useful in the development of a new or improved product, process, technique, etc. In Jeffrey A. Harper and Katherine M. Harper (T.C. Memo. 2023-57) the IRS aruged the taxpayer did not meet the business components test. The Court found that designs for construction of facilities could be construed as processes, techniques or inventions that would constitute a business component of the company's operations and it is further possible they were processes, techniques, or inventions replicated and used in the company's business. THe Court denied the IRS's motion for partial summary judgment.
Tip of the DaySold concert tickets online? . . . If the deal was for more than $600 you may be getting a Form 1099 this coming January. Same for a lot of other transactions that have been excluded from the information reporting rules. The threshold for reporting transactions has dropped from $20,000 to $600 beginning in 2023. That means you'll have to report the amount as income. You may be able to deduct your original purchase price, so be sure to save proof of the purchase such as a credit card, online transaction detail, etc.
October 5, 2023
NewsThe IRS is issuing proposed regulations (REG-106203-23) that amend the current regulations to reduce the amount of the user fee imposed on tax return preparers to apply for or renew a preparer tax identification number (PTIN). Under the new regulations the user fee will be $11 per application plus a $8.75 fee per application or application for renewal payable directly to a third party contractor.
Is interest paid on late child support payments interest income or child support? That was the question in Susan D. Rodgers (T.C. Memo. 2023-56). The Court noted that under Alabama law the amount for arrearages was specifically designated as interest. The Court found the amount to be taxable interest.
Tip of the DayThe right gift . . . Unlike inheriting property, your basis in property you receive as a gift is generally equal to the donor's basis. For example, uncle Fred gives you 10 shares of Madison Inc. that he purchased in 1969 for $3 a share. Your basis in the 10 shares is $30. A share of Madison is now worth $500. Sell those 10 shares today and you'll have a $4,970 gain. For gift tax purposes the value of the shares is $5,000 the current market value. Could it be worse? Yes, if the property is sold at a loss the donee's basis is the smaller of the carryover basis ($30 here) and the fair market value on the date of the gift. Thus, if the shares were worth $20 on the date of the gift and you sold them immediately, you would have no loss and Fred would not get the benefit of the loss. And, things could be even more complicated if you're giving property that's difficult to value, and that includes virtually anything not traded in an open market. Safest bet? Give cash.
October 4, 2023
NewsThe IRS has released it's 2023/2024 Current Year Priority Guidance Plan. The plan shows the scheduled released date of regulations, rulings, procedures, etc. the IRS is working on. Some of the releases are of new items, some are recurring itsms such as the monthly applicable federal rates. For a link to the new plan and prior years, go to Priority Guidance Plan.
If you work or provide services to a business but don't receive a paycheck but an interest in the company. The next question is how do you value the interest for tax purposes? That's particularly critical since the companies are typically startups or small business that are difficult to value. There are two possible solutions, one is Section 83 and it may provide a partial solution; the other is getting just a profits interest in an LLC. In ES NPA Holding, LLC, Joseph NPA Investment, LLC, Tax Matters Partner (T.C. Memo. 2023-55) the partnership received a profits interest in another partnership. The IRS claimed the receipt of the profits interest created taxable income. The taxpayer argued the profits interest was not taxable at that time. (In a partnership or LLC your "shares" may be a profits interest or a capital interest (or any number of mutations). With a profits interest you're simply entitled to a share of the profits. Should the business be sold, you receive nothing. With a capital interest you receive a portion of the proceeds when the business is sold. The Tax Court found that, based on the evidence, the taxpayer had received a simple profits interest which was not currently taxable.
Tip of the DayAttorney client privilege has its limits . . . The attorney-client privilege protects confidential communications between client and an attorney made for the purpose of obtaining or providing legal assistance. Information conveyed to a lawyer by a client solely for the purpose of retransmission to a third-party is generally not protected by the attorney-client privilege, and the result is no different when the third-party is the IRS and the means of retransmittal is a tax return. The issue hinges on whether the information was conveyed by the client to the attorney in confidence for the purpose of obtaining legal advice and not merely for the purpose of retransmittal to a third party. The attorney-client privilege can also be lost if you reveal the information to a third party. Best advice? If you want the information to remain privileged, talk to your attorney and make sure you understand the nuances of the law.
October 3, 2023
NewsRevenue Procedure 2023-35 amplifies and supersedes Rev. Proc. 2014-45 which describes circumstances in which the IRS will not treat a redemption of shares in a money market fund (MMF) as part of a wash sale for purposes of Section 1091 of the Code. This revenue procedure expands the scope of Rev. Proc. 2014-45 in response to final rules adopted by the Securities and Exchange Commission (SEC) on July 12, 2023, which amend Rule 2a-7 under the Investment Company Act of 1940.
The IRS has announced (IR-2023-182) an expansion of the Tax Pro Account capabilities that allows tax professionals access to new services to help their clients. New additions to Tax Pro Account, will help practitioners manage their active client authorizations on file with the Centralized Authorization File (CAF) database. Other enhancements will allow tax professionals to view their client's tax information, including balance due amounts. Tax Pro Account users can now also withdraw from their active authorizations online in real time.
Tip of the DayGift tax . . . More parents are making gifts to their children to help them purchase a home. The first $17,000 per individual (2023 amount; indexed for inflation) is tax free. Because a married couple can split the gift and you can give $17,000 tax free to your son and daughter-in-law, you could give a total of $68,000 to a married child in one year. If you plan ahead you could double that to $136,000 ($68,000 for each of two years). But even if you're widowed and your son is single, exceeding the $17,000 won't result in a tax liability. The tax is part of the unified estate and gift taxes. That means you won't owe a gift tax until you use up your estate tax exempton, currently $12,920,000.
October 2, 2023
NewsThe IRS has updated the relief for victims of of severe storms and flooding in parts of Illinois that began on June 29, 2023, now have until Oct. 31, 2023, to file various individual and business tax returns and make tax payments by adding a number of counties to the list where individuals and businesses affected by the storms can get relief. As a result the full list of counties qualifying for relief include Christian, Clark, Coles, Cook, Cumberland, DeWitt, Douglas, Edgar, Hancock, Macon, McDonough, Monroe, Morgan, Moultrie, Pike, Sangamon, Scott, Vermilion, Warren, and Washington. For more information go to IL-2023-06.
The IRS has announced (LA-2023-01) that taxpayers affected by seawater intrusion in parts of Louisiana that began Sept. 20, 2023, now have until Feb. 15, 2024, to file various individual and business tax returns and make tax payments. Following the disaster declaration issued by the FEMA, individuals and households affected by the Seawater Intrusion that reside or have a business in Jefferson, Orleans, Plaquemines, and St. Bernard parishes, qualify for tax relief. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Sept. 20, 2023, and before Feb. 15, 2024, are granted additional time to file. As a result, affected individuals and businesses will have until Feb. 15, 2024, to file returns and pay any taxes that were originally due during this period. This includes 2022 individual income tax returns due on Oct. 16, 2023. The IRS noted, however, that because tax payments related to these 2022 returns were due on April 18, 2023, those payments are not eligible for this relief.
The IRS has updated twice the relief for victims of severe storms, straight-line winds, and tornadoes in parts of Mississippi that occurred from June 14 to file various individual and business tax returns and make tax payments by adding a number of counties to the list where individuals and businesses affected by the storms can get relief. As a result the full list of counties qualifying for rlief include Adams, Amite, Attala, Claiborne, Copiah, Covington, Franklin, Greene, Holmes, Humphreys, Itawamba, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Lawrence, Leake, Madison, Neshoba, Newton, Perry, Rankin, Scott, Simpson, Smith, Warren, Wayne, and Yazoo as well as the and the Mississippi Choctaw Indian Reservation . For additional information, see MS-2023-03.
Tip of the DayDisaster relief . . . The IRS provides deadline relief from the filing of tax returns and from making some payments by extending due dates, usually by four months or more. But some deadlines aren't extended. For example, payroll tax deposits may get only modest relief of a couple of days on just one payment. The same is true of other withheld taxes. And if an extended due date (e.g., the October 15th date for individual returns) is provided relief, it's only for taxpayers who have an extension. That's why it's important to check the filing dates carefully. Required state filings may get similar relief but the rules vary from widely from state to state and from tax type to tax type. Again, withheld taxes such as employment taxes and other trust fund taxes such as sales tax will probably get little relief.
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