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December 1, 2022
NewsThe IRS announced (IR-2022-207) that the IRS Office of Chief Counsel partnered with the American Bar Association Tax Section to hold its first centralized National Virtual Settlement Event. This four-day event was inspired by the monthlong virtual event held in March 2021 during the height of the COVID-19 pandemic. Over the course of four days, an exceptional number of cases were settled: a total of 44. There were at least 59 meetings from October 24 through October 27 that included taxpayers, pro bono attorneys and representatives of the IRS Office of Chief Counsel. In contrast to past Settlement Day events that are generally organized locally for taxpayers with a nearby place of trial, this one was organized at the national level to support unrepresented taxpayers who may not be able to attend a local event.
Disability benefits received may be nontaxable, partly taxable, or fully taxable depending on who and how the premiums are paid. If your employer pays the premiums or you pay it with pretax dollars (like 301(k) contributios) the beneifts are fully taxable. If you pay the premiums with after-tax dollars (like writing a check for a contribution to your IRA), the benefits are nontaxable. You could have a mix of taxable and nontaxable benefits in which case only part of the benefits would be taxable. In Paul Christopher Caldwell (T.C. Memo. 2022-51) the taxpayer received disability payments from an insurance company and a W-2 for the taxable amount, but did not file a return. He was enrolled in two plans--one was fully paid by the company, the other paid with pre-tax dollars. The Court held all the benefits were taxable
Tip of the DayGifts to customers and clients . . . Keep in mind that the tax limits the deduction for a client gift to $25. If you need to go higher, the best approach is to take the client to dinner and discuss business. For 2022 you can then deduct the full cost of the meal. In 2023 you're limited to 50 percent as under prior law. If you are planning on giving actual gifts, you might want to consider all the circumstances. An expensive gift could backfire if you've just raised prices by 20 percent. Customers know about inflation, and chances are they have an idea of your costs. You might also want to play down the purchase of a new vacation home or three-wwek cruise.
November 30, 2022
NewsThe IRS announced (Rev. Rul. 2022-23) that interest rates will increase for the calendar quarter beginning January 1, 2023. For individuals, the rate for overpayments and underpayments will be 7% per year, compounded daily, up from 6% for the quarter that began on October 1. Here is a complete list of the new rates:
The Treasury Department and IRS announced (IR-2022-208) guidance providing taxpayers information on how to satisfy the prevailing wage and apprenticeship requirements for enhanced tax benefits under the Inflation Reduction Act. The guidance will be published in the Federal Register November 30, 2022. Notice 2022-61 explains how taxpayers--generally builders, developers, and owners of clean energy facilitie--receive the increased tax credits or deduction amounts by satisfying the wage and apprenticeship requirements as provided for in this notice. For instance, the notice provides guidance on what constitutes a prevailing wage and the determination of qualified apprenticeships with accompanying examples.
Tip of the DayWorker's compensation insurance . . . All states require worker's compensation insurance for your employees. Many states make an exception if you, or you and your spouse, are the owners or sole shareholders and only employees. Worker's compensation insurance can be very expensive, depending on the activities of the employees. In some professions the cost can be a significant percentage of the employee's wages. But you can't not have insurance. First, if an employee sues you for an on-the-job injury and second, many states impose substantial penalties for being uncovered. You should be careful of cut-rate companies and have a way of insuring you always have coverage.
November 29, 2022
NewsThe IRS is again warning (IRS Tax Tip 2022-181) about gift card scammers. The approach is the scammers request payment in the form of gift cards because payment can't be stopped and they're untraceable. But legitimate businesses will require payment by gift card and you can be assured that the IRS or any state taxing authority will accept a gift card as payment. The gift card request should be a red flag that the party is a scammer. Click on the link to the IRS webpage for more information.
You may be able to satisfy your outstanding tax liability by making payments in installments, but you've got to meet certain requirements. In Warren Keith Jackson and Barbara Ann Jackson (T.C. Memo. 2022-50) the IRS settlement officer (SO) in a collection due process hearing and after reviewing the computer transcripts and verifying that all requirements were met denied the taxpayers in installment agreement because they failed to provide the requested financial information and were not current on their estimated tax payment. The Court sided with the IRS and found no abuse of discretion.
Tip of the DayWatch for frequency changes in state tax requirements . . . Most states require filing returns and paying sales tax once a month (some less frequently for those with lower sales). But several states have moved to twice a month filing in the last few years. Watch the filing requirements for your state. You don't want to incur a penalty just because you weren't aware of the change. In some cases your filing frequency can be increased if your sales increase or the filing threshold for more frequent filing has decreased.
November 28, 2022
NewsTax law contains many elections that can reduce your taxes, make filing easier, accelerate deductions, etc. but elections must usually be made by the due date (or extended due date) of the return. Generally, elections can't be made after a return is filed. (As usual, there are a number of exceptions.) In Ronald G. Parks, individually; Ronald G. Parks, as Successor Personal Representative of the Estate of Merle L. Parks; Ronald G. Parks, as Trustee for the Ronald G. Parks Revocable Living Trust dated April 13, 2006; and Madeline M. Parks, (U.S. District Court, E.D. Michigan, Southern Div.) the decedant died September 19, 2003. The estate tax return was due nine months later, May 19, 2004. The estate made a payment toward the liability and requested a six-month extension which was granted. But the actual return wasn't filed until some five years later bin February 2010. The estate contained farmland for which the estate made a special use valuation. The IRS denied the election because the reutnr was not timely. The estate argued that it could make an election within 12 months of the first filing of the return, even if not timely as long as the return was not under examination. The Court sided with the taxpayer, holding the election need only be made on the first filed return.
Tip of the DayCash flow determines if the customer can pay . . . Profits only indirectly determine whether or not a customer will pay you on time. Cash flow is what's important. If you're reviewing the customer's financial statements look for a large cash balance and examine the cash flow statement. Concentrate on how the company is generating funds--is it selling assets to do so? That could be a sign of financial problems. Also examine what the company is doing with its cash. The company may be very profitable but spends it on capital expenditures or pays it out in dividends. What if you can't get financials? Often industry scuttlebutt will be helpful. You may find the company is cash poor because a major customer can't pay it, it's spending heavily on new equipment, the shareholders are taking money out of the company, etc. A project gone sour, such as a new store that is doing poorly or new product that bombed, is another indication of trouble.
November 23, 2022
NewsThe IRS is continuing its transition to the new IR-TCC Application for FIRE for customers who received their TCC(s) prior to September 26, 2021. Customers must take action to keep their existing TCCs active. Beginning September 25, 2022, FIRE TCC holders who submitted their TCC Application prior to September 26, 2021, will need to complete and submit a new application. The IR-TCC Application can be done any time between September 25, 2022, and August 1, 2023. Your TCC will remain active for use until August 1, 2023. Upon completion of your application, active TCCs assigned prior to September 26, 2021, will be added to your application. After August 1, 2023, any FIRE TCC without a completed Application will not be available for e-file.
Tip of the DayDiscounting . . . You may have to offer a discount from your regular price to stay competitive in the current environment, but excessive disounting can damage your margins and become endemic. For some businesses offering a free item or a discount on a second item can be preceived as valuable by the customer and better than excessive discounts. For merchandise it could be a free item, a service, etc. Your stated price doesn't change, or isn't dropped as much, so getting back to your normal price doesn't sound as drastic.
November 22, 2022
NewsThe IRS has issued corrections to T.D. 9967, the final regulations with respect to the low income housing project credits. The correction includes both the final and temporary regulations regarding the average income test.
Notice 2022-62 publishes the 2022 Required Amendments List (2022 RA List) that applies to both individually designed plans qualified under Sec. 401(a) of the Code (qualified individually designed plans) and indvidually designed plans that satisfy the requirements of Section 403(b) individually designed plans. Section 401(b) of the Code provides a remedial amendment period during which a plan may be amended retroactively to comply with the qualification requirements under Section 401(a). Section 1.401(b)-1 describes the disqualifying provisions that may be amended retroactively and the remedial amendment period during which retroactive amendments may be adopted.
Tip of the DayGet cash upfront . . . With interest rates on business loans rising, for some businesses that do project work it may be time to ask for an advance upfront, if you don't already do so. It should be at least enough to cover materials and out-of-pocket expenses. For longer projects, progress payments may be warranted. Each industry is different. Progress payments are standard in construction, but may not be for other businesses with shorter-term projects. And you've got to judge what your competitors are doing. If you need to stay competitive, you might reduce the price of the job. Upfront and progress payments could be especially worthwhile if we do encounter a recession. If a customer becomes a slow- or no-pay at least you'll have covered some of your costs. Discuss it with your accountant or financial advisor.
November 21, 2022
NewsThe Department of Justice has announced a second attorney and two tax professionals have been indicted in the $1 billion Garza tax shelter scheme. The alleged mastermind of the scheme, attorney Joseph Garza, was previously indicted on 18 counts of wire fraud, one count of conspiracy to commit wire fraud, and 22 counts of aiding and assisting in the preparation of fraudulent income tax returns. The superseding indictment added a charge of conspiracy to defraud the United States. According to the court documents, Mr. Garza allegedly directed his clientele to use hand-picked tax professional--including Mr. McDonnell, Mr. Richardson, and Mr. Fenton who helped him illegally shelter their otherwise taxable income. Mr. Garza allegedly charged clients a percentage of the predetermined amount of money they had chosen to shelter from taxes. The defendants allegedly created multiple shell companies including shell "services" companies and shell "investments" companies--to create a circular flow of funds to help clients avoid paying taxes. These shell companies purported to provide services to the clients' businesses or to serve as family investment vehicles, but actually had no legitimate purpose other than to move money. The defendants allegedly created sham operating agreements and service agreements, fictious invoices, and false private annuity agreements designed to give the companies the appearance of legitimacy and conceal the scheme from the IRS.
Tip of the DayFocus on the money . . . It's not unusual for projects to take a side road. The new product that takes longer to get to market because an engineer or marketing person added features or items that has little relevance, the IT project that gets more and more complicated as features are added just because there's a possibility they may be helpful or just because one manager wants it, etc. At best the added items can slow development time, at worst it can scuttle the project. As items are added to a project, ask will it eventually enhance revenue or cut costs. If neither, it may be best to leave them out.
November 18, 2022
NewsRevenue Procedure 2022-39 obsoletes Rev. Proc. 94-69 and prescribes special procedures for eligible taxpayers to file a qualified amended return in accordance with Reg Sec. 1.6664-2(c)(4)(ii). This revenue procedure also sets forth procedures for eligible taxpayers to show additional tax due or make adequate disclosure with respect to an item or a position on a previously filed return to avoid imposition of the accuracy-related penalties describted in Secs. 6662(b)(1) and 6662(b)(2).
Tip of the DayRepair or replace? . . . Years ago, unless the equipment was old, the answer generally was to repair. Large household appliances such as stoves, washing machines, refrigerators, etc. routinely lasted 20 years. Office desks were heavy wood or metal and could go much longee. Manufacturing equipment might need a periodic motor, belt, or bearing replacement, but could last 20, 30 or more years. Now technological and functional obsolescence can occur within 10 years or less. Many equipment manufacturers don't supply parts after 10 or 15 years. It probably makes sense to repair a unit that has a relatively low concentration of high-tech components, can be repaired relatively cheaply, will have a significant life extension after repair, with a relatively high cost and where a new unit won't provide significantly better performance. Repairing a $500 laptop doesn't make much sense unless you've got a contract or warranty. The cosdt to repair can be half the cost of a new one and a new one is likely to provide much better performance. On the other hand, repairing a skid-steer for $7,000 is a fraction of the cost of even a good used one,
November 16, 2022
NewsThe IRS announced that victims of Illinois severe storm and flooding occurring between July 25 and 28, 2022, now have until February 15, 2023, to file various individual and business tax returns and make tax payments. Following the disaster declaration issued by FEMA, individuals and households affected by the severe storm and flooding that reside or have a business in St. Clair 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 July 25, 2022, and before February 15, 2023, are granted additional time to file through February 15, 2023. This means individuals who had a valid extension to file their 2021 return due on October 17, 2022, will now have until February 15, 2023, to file. The IRS noted, however, that because tax payments related to these 2021 returns were due on April 18, 2022, those payments are not eligible for this relief. Also, under Notice 2022-36, penalties for late-filing certain 2019 and 2020 tax returns, as well as penalties for not reporting certain required information on the Form 1065 or Form 1120-S, are waived or abated if the relevant return is filed on or before February 15, 2023. IR-2022-185, provides details on the IRS: Deadline to file 2019 and 2020 tax returns to get COVID penalty relief postponed in declared disaster areas. The February 15, 2023, deadline also applies to the quarterly estimated tax payments, normally due on September 15, 2022 and January 17, 2023, and to the quarterly payroll and excise tax returns normally due on August 1 and October 31, 2022, and January 31, 2023. Businesses with an original or extended due date also have the additional time including, among others, calendar-year partnerships and S corporations whose 2021 extensions ran out on September 15, 2022, and calendar-year corporations whose 2021 extensions ran out on Oct. 17, 2022. Penalties on payroll and excise tax deposits due on or after July 25, 2022, and before August 9, 2022, will be abated as long as the tax deposits were made by August 9, 2022. Go to IRS Annnounces Tax Relief for Illinois Severe Storm and Flooding.
The IRS is reminding (IR-2022-199) taxpayers that the last day to file 2021 returns using the IRS Free File system is tomorrow, November 17.
Tip of the DayCapital hungry . . . Some businesses can be proiftable, but require large amounts of capital to get started. Getting started as a psychologist may require little capital; a dentist starting out has a big investment in tools, supplies, furniture, etc. Even the psychologist may require capital to live on while the practice grows enough to support itself. A significant number of businesses fail for lack of capital. And some businesses are only capital hungry during the start-up phase while some continue to require significant investments for many years. That can be particularly true for a fast growing enterprise. Such a business can require regular cash infusioons through equity capital or loans.
November 16, 2022
NewsThe IRS has authority to issue regulations, notices, etc., but it has to follow certain procedures including asking for public comment. In Green Valley Investors, LLC, Et Al., Bobby A. Branch, Tax Matters Partner (159 T.C. No. 5) the taxpayers petitioned the Tax Court challenging the IRS's adjustments in notices of final partnership administrative adjustment regarding charitable deductions related to syndicated conservation easement transactions listed under IRS Notice 2017-10. The parties filed Cross-Motions for Partial Summary Judgment seeking summary adjudication as to the imposition of penalties in these consolidated cases. The taxpayers principally contend that Sec. 6662A penalties cannot be imposed for two reasons: (1) the IRS seeks to improperly impose such penalties retroactively and (2) the IRS failed to comply with the notice-and-comment rulemaking procedures of the Administrative Procedure Act (APA) when issuing Notice 2017-10. The IRS contended that Notice 2017-10 was properly issued without notice-and-comment rulemaking and that he is entitled to partial summary judgment. The Court held Notice 2017-10 is a legislative rule, improperly issued by the IRS without notice and comment as required under the APA. The Court also held that Notice 2017-10 would be set aside by the Court and the taxpayers Cross Motions for Summary judgment granted in part pohibiting the imposition of Sec. 6662 penalties in the consolidated cases.
Tip of the DayWhat happened to tech stocks? . . . Too much optimism is one issue. Investors often price growth stocks based on future earnings. As the market heats up, the future can get further out. There can be so much optimism built in that on the first sign of weakness, the stocks collapse. The second factor working here is the pandemic, or rather the end of it. At the height of the pandemic all sorts of markets shifted--people worked from home, shopped on line, exercised at home, aioded restaurants, etc. Many companies assumed these trends would continue. Many did, but at a slower pace. Some fizzled. Many markets were misjudged. When your sales growth drops from 50 percent to 20 percent, forecasts go out the window. While prepandemic a company might be thrilled with 20 percent growth, the drop from 50 percent can be devastating.
November 15, 2022
NewsThe statute of limitations for most federal tax cases is three years. If the statute is about to run and there's still a dispute, the IRS may ask the taxpayer to sign a Form 872, Consent to Extend the Time to Assess Tax. In Christian Renee Evert (T.C. Memo. 2022-48) the period of limitations would be expiring soon and the IRS Appeals Officer advised the taxpayer that if she wanted her position considered she would have to provide additional documentation and it would be in her best interest to sign the Form 872 to extend the period because additional time allows [the taxpayer] to provide further documentation to support [his or her] position [or] request an appeal if [he or she does] not agree with the examiner's findings. The taxpayer signed the form but after her Tax Court cases was docketed, moved to amend her Petition to argue that she had signed the Form 872 under duress, that the Form 872 is accordingly invalid, and that the IRS failed to timely mail the notice of deficiency before the period of limitations for assessment of tax for tax year expired. The Court granted the taxpayer's motion, but found the taxpayer did not show the Form 872 was filed under duress. The Court also found the Appeals Officer did not speak with the taxpayer regarding the consent form, but mailed it along with the standard written explanation.
Tip of the DayEvaluate based on total price . . . While advertising a monthly payments for an item rather than the total cost is not new, it's becoming more common, particularly with products that have had more than nominal price hikes. Using the monthly amount as a guide to affordability is reasonable, but if you're comparing products or deciding whether or not to buy, you need to use the total price. That goes for personal as well as business purchases. And don't forget to include all the payments when analyzing your monthly cash outlay--any upfront money, the monthly payments and the number of months and any payments at the end. For business and large consumer purchases, check for any service fees, or additional charges.
November 14, 2022
NewsAnnouncement-2022-23 notifies taxpayers of new credit amounts for calendar year 2022 for the renewable electricity production credit under Sec. 45 in the case of any qualified facility placed in service after December 31, 2021. Because the Inflation Reduction Act changed the manner in which the Sec. 45 credit amounts are calculated in the case of any qualified facility placed in service after December 31, 2021, this announcement supplements the Sec. 45 credit amounts as originally published in Notice 2022-20. In the case of any qualified facility placed in service before January 1, 2022, the credit amounts published in Notice 2022-20 remain unchanged.
Tip of the DayConsumers cutting back . . . There's little doubt now that a broad range of consumers are cutting back on expenditures. Inflation is noticeable and being felt. Some are buying less, switching to cheaper brands, or simply doing without. While the effect has hit wealthier families too, the impact has been less drastic. Keep that in mind in your forecasts.
November 10, 2022
NewsThe IRS has announced (IR-2022-197) that in addition to the more than 4,000 people recently hired to fill critical customer service representative positions, the Service is now seeking over 700 new employees to help taxpayers at Taxpayer Assistance Centers across the country. This increase in staffing is part of much wider IRS improvements enabled by the Inflation Reduction Act funding approved in August 2022, and additional updates on the implementation of the landmark 10-year legislation will be provided soon. These important positions have highly competitive pay and benefits including on-the-job training, opportunities for advancement, health and life insurance, and a federal retirement.
Tip of the DayBoost your credit score . . . One of the negatives on your credit score is a high percentage of the credit used. For example, Sue has a $5,000 limit on her card. Normally her balance is less than $1,000 and she pays the full amount when due. But in November she buys a new stove and refrigerator bringing her balance to $4,300. That impacts her credit score. Paying off the balance in full when due will help. You could even improve your interim rating by making payments on the balance before you even receive the bill.
November 9, 2022
NewsYou may be able to avoid joint liability on a tax return with a spouse if you can meet certain requirements. Called innocent spouse relief it protects a spouse from being burdened with a tax liability for which he or she had no knowledge and did not benefit from. In Gregory J. Podlucky and Karly S. Podlucky (T.C. Memo. 2022-45) the Court found the husband extracted more than $30 million from a corporation he controlled to purchase for himself and his wife luxury jewelry and a mansion, among other things. In 2009 petitioners were indicted in the U.S. District Court for crimes including mail fraud, money laundering, and tax evasion. The Court found the wife knew, or had reason to know, about the understatement of tax. The test for reason involves a number of factors including the existence of expenditures that are lavish or unusual when compared to the family's past income levels. The wife was directly involved in some of the transactions and signed checks for more than $6 million. In addition, the jewelry purchases far exceeded the taxpayer's annual income. Finally, the Court also found the wife received significant benefit from the additional income.
Tip of the DayWhat's the cost of a bounced check? . . . Your bank may charge, $25 or $35 and the check recipient may charge you a similar amount. But the price can be considerably higher. The federal and some states can charge as much as $100 a check or 1 percent of the check amount. And giving your vendors a bad check will most likely reduce your credit standing. In some cases it can result in a lack of credit or, in the case of tight supply, having the vendor give priority to another customer. If the lack of funds was unintentional, explaing the situation to your suppliers as soon as possible. If you've had a good tack record, a first mistake is usually forgiven.
November 8, 2022
NewsThe Treasury Department and IRS have announced the expansion of one of their programs for approving retirement plans. The IRS will now allow 403(b) retirement plans, which are used by certain public schools, churches and charities, to use the same individually designed retirement plan determination letter program currently used by qualified retirement plans. Revenue Procedure 2022-40 details this expansion and includes other changes affecting individually designed retirement plans.
When it comes to following procedures, the IRS is usually pretty good. In Edgerton Might and Eulalee Mighty (T.C. Memo. 2022-44) the taxpayers failed to challenge a notice of deficiency in Tax Court. When the IRS attempted to collect the outstanding amount the taxpayers sought to dispute the amount of the liability. The case was assigned to a settlement officier (SO) where the SO verified that petitioners' tax liability for 2014 had been properly assessed, that the accuracy-related penalty had received the requisite supervisory approval, and that all other legal and administrative requirements had been satisfied. The SO gave the taxpayers time to complete a financial statement form and waited 4 months to hear from them. The Court sided with noting the taxpayers could not challenge their liability in a collection due process hearing. The Court noted the IRS mailed a valid notice of deficiency to the taxpayers' last known address and that all administrative procedures had been properly followed.
Tip of the DayScam or just heavy marketing? . . . This is the time of the year for open enrollment for Medicare and many insurance companies are seeking to get Medicare recipients to switch to advantage plans. While some of the calls are from insurance companies but some are from scammers. The problem is it can be hard to spot a scam seeking personal data including your Medicare information or your identity or looking to steal your money and a legitimate insurance company looking to make money. Advice that applies to other scams applies here as well-don't rush into any decision. And don't believe the info on yur caller ID. Spoofing is now virtually universal. For more information go to the Federal Trade Commission Consumer Advice site.
November 7, 2022
NewsThe IRS Independent Office of Appeals announced (IR-2022-195) the release of its focus guidePDF for fiscal year 2023. Appeals is taking important steps to expand communications with external stakeholders and to improve taxpayer access to Appeals. Promoting transparency and taxpayer access helps Appeals fulfill its mission to resolve tax disputes in a fair and impartial manner without the need for litigation. The focus guide outlines the taxpayer service initiatives you can expect over the coming year, including:
Partnerships and S corporations with foreign activities may be required to file Forms K-2 and K-3. The IRS has released draft instructions that contain exceptions that may allow some entities to avoid filing Forms K-2 and K-3.
Tip of the DayBusiness identity theft . . . Everyone is worried about their personal identity being stolen. But there are ways to steal your business identity. You want to make sure your website is protected. Check the status regularly and talk to your webmaster or hosting company. They should have specific ideas. You should also protect your name. If you're doing business under an assumed name e.g. Madison Company, you generally have to register the name with your county or state. If you incorporate or file as an LLC your name is registered with the state and if another company tries to use it, or something similar, the state will normally reject it in a filing. But there's no guarantee. You set up an LLC named Lakeside Occupational Therapy LLC. The state may allow someone to register Lakeside Physcial Therapy LLC. And there's nothing to prevent someone from registering Lakeside Occupational Therapy LLC in a bordering state. You might want to register in that state just to prevent someone from using the name. It could be cheap insurance. Some companies that didn't take the precaution found themselves paying hundreds of thousands of dollars to buy back the name. You can also protect yourself with a logo that you can register as a trademark. Just make sure you use the logo with your name regularly. Talk to your attorney.
November 4, 2022
NewsThe reporting threshold for when a third party settlement organization (e.g., credit card company, PayPal, etc.) is required to file a Form 1099-K is lowered to 1 transaction and $600. Since many more taxpayers will not receive these forms, the IRS has set up a webpage, Form 1099-K Frequently Asked Questions. This page was recently updated. The page also contains links to related topics.
The IRS Criminal Investigation division has released its FY 2022 Annual Report highlighting the results of the CI dvision. In fiscal year 2022, IRS Criminal Investigation initiated more than 2,550 criminal investigations, identified over $31 billion from tax and financial crimes, and obtained a 90.6% conviction rate on cases accepted for prosecution. The IRS-CI FY22 Annual Report, details these statistics, as well as important partnerships and significant criminal enforcement actions from the past fiscal year, which began Oct. 1, 2021, and ended Sept. 30, 2022. The division is involved in more than general tax fraud, it also investigates employment tax fraud, money laundering, public corruption, healthcare fraud, narcotics, and related crimes.
Tip of the DayFinancial disability . . . While the term can take on a number of meanings, the IRS imparts a specific one. Basically, you may be able to avoid penalties for late filing and some other penalties if you can show that you were temporarily or permanently disabled. But, what the IRS giveth, the IRS taketh away. If you're giving extra time to file, the statute you of limitations will also be extended. And qualifying is not as easy as it may sound. You've got to show more than a bad head cold. And you're going to need a doctor's sign off. Hospitalized for an extended period of time, undergoing debilitating chemo therapy, or severe mental issues. If you're married, it's assumed your spouse could file. If she was your primary caregiver that could sway the IRS. And the IRS is likely to take into account your tax situation. Got a W-2 and a couple of 1099s? Tough to argue you couldn't file. On the other hand, if your return is complex, such as including rental properties, a business, etc. you'll get more sympathy. Finally, if you're able to do other work, it's expected you'd be able to file your return. For example, you're getting chemotherapy, but you're also running your business or a number of rental properties. Talk to your tax adviser.
November 3, 2022
NewsThe tax Code definition of income is very broad, but there are some enumerated exceptions. In Tracy Renee Valentine (T.C. Memo. 2022-42) the taxpayer received two types of distributions from the Department of Veterans Affairs for her time in the Army. The first distribution was disability pay for a service-related injury. Section 104(a)(4) provides the general rule that amounts received as a pension, annuity, or similar allowance are not included in gross income when they arise from personal injuries or sickness resulting from active service in the armed forces of any country. Both the taxpayer and the IRS agreed that distribution was not taxable. The second distribution was in dispute. The Court noted A retired service member may receive both a disability pension from the VA (which is excludable from income) and retirement distributions (such as a service pension) from her respective branch of the armed forces; but payments under retirement plans should generally be included in income regardless of the existence of a VA disability determination, except where certain exceptions may apply. A retired service member who did not receive a disability determination from the VA and who is not currently receiving disability benefits may exclude from gross income a portion of her retirement benefits under Section 104 if he or she can prove that they would qualify for a disability determination from the VA. Similarly, a service member who receives a retroactive disability determination by the VA may exclude from gross income a portion of the retirement benefits they received during the retroactive period equal to the percentage of their disability determination (if she did not already exclude them prior to the determination). The Court noted the taxpayer did not show she had a "combat-related injury". The VA used the term service-connected disability. The Court held the retirement distributions could not be excluded from income.
Tip of the DayAudit may not involve all issues . . . The IRS just examined your tax return and made an adjustment to your charitable contributions, but didn't question your income and expenses on Schedule C, your consulting business. That doesn't mean you're off the hook on those deductions you took on your business. The IRS could question those expenses in a subsequent examination of the return. It's not unusual for an examination to focus on just one area and ignore others.
November 2, 2022
NewsRunning an illegal scheme can have tax as well as legal consequences. In Michael T.Sestak (T.C. Memo. 2022-41) the taxpayer worked for the U.S. Department of State and provided nonimmigrant visas to the U.S. in exchange for compensation. The amounts grew to the point where he purchased land in Thailand in order to use the cash. The scheme was uncovered and the tapayer pleaded guilty to several offenses. As part of the plea agreement he he executed a preliminary consent order of forfeiture imposing a forfeiture money judgment of some $6 million in favor of the United States, which included forfeiture of his real estate holdings in Thailand and other assets held by his co-defendants. Should the sale exceed a certain amount, 50 percent of the xcess was to be used to settle his tax debts. The taxpayer argued that the liquidation of his real estate holdings in Thailand was not a forfeiture, because the properties were located outside of the United States and, therefore, outside the jurisdiction of the U.S. court system. He contended that because the proceeds from the sales of his real estate holdings were voluntarily transferred at a loss to the United States as part of his plea agreement, he is entitled to deduct the loss from his bribery proceeds. Moreover, he claimed the holdings were an investment and since he planned to rent them out the liquidation should be a business loss. Neither the IRS or the Tax Court agreed with his position. First, if the loss were allowed it would be as a capital loss. Second, and more importantly, Federal courts consistently have disallowed loss deductions where the deduction would frustrate a sharply defined federal or state policy. Finally, the Court reasoned it could not be claimed as a business deduction. The Court also found the taxpayer liable for the fraud penalty. In addition, the Court found the taxpayer liable for the civil fraud penalty.
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.
November 1, 2022
NewsThe IRS has recently released a number of new or updated publications and forms. Here are some of interest:
The IRS has also released Publication 1415, Federal Tax Compliance Research Tax Gap Estimates, Publication 5364, Individual Income Tax Gap Estimates Executive Summary and Publication 5360, Tax Gap Map. Forms and publications are listed in numerical order (publications and forms are in the same database), but you can resort by clicking on the Revision Date or Posted Date column. The posted date is the more useful approach. Go to Forms, Instructions and Publications.
Tip of the DayS corporation losses . . . Just because you have a shareholder in an S corporation doesn't mean you can automatically take any losses on your personal return. First, you have to have sufficient basis--either equity or debt--and you must be "at-risk" with respect to that amount. Then you must materially participate in the activity. You can meet the final requirement in several different ways, but generally you must participate in the day-to-day management of the business. If you don't meet all the tests those losses are suspended until you do or you dispose of all of your interest in the stock. If you switch from S to C corporation status, the losses are suspended until the entity is once again an S corporation. Check with your tax advisor before making any switch. You may have other options.
October 31, 2022
NewsThe IRS has released (IR-2022-192) a new set of tax gap estimates on tax years 2014 through 2016 showing the estimated gross tax gap increased to $496 billion, a rise of over $58 billion from the prior estimate. The 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. As discussed below, it is important to note that the tax gap estimates cannot fully account for all types of evasion. After late payments and IRS efforts collected an additional $68 billion, the IRS estimated the net tax gap was $428 billion. This increase in the tax gap can be attributed to economic growth. Between the two periods, 2011-2013 and 2014-2016, the estimated tax liability increased by more than 23 percent. The gross tax gap comprises three components:
Tip of the DayFailed projects . . . It's happened to probably every company and every manager. You undertake a project--developing a new product, upgrading in-house software, etc.--but it turns out to be a failure. While it's tough to put a positive spin on the outcome, there are at least two steps you should take. First, conduct a review of the project. What went wrong? What went right? In all but rare instances, lessons learned from a failure can be put to use in future projects, products, etc. The project will really be a failure if you don't learn from it. Second, don't berate the team. Chances are they feel bad enough already. In most cases you want to keep the employees, so try to emphasize the good points. What was accomplished, what was learned, etc.v
October 28, 2022
NewsThe IRS is urging active tax return preparers to start the upcoming 2023 filing season smoothly by renewing their Preparer Tax Identification Numbers (PTINs) now. All current PTINs will expire December 31, 2022. Anyone who prepares or helps prepare a federal tax return for compensation must have a valid PTIN from the IRS before preparing returns, and they need to include the PTIN as the identifying number on any return filed with the IRS. The fee to renew or obtain a PTIN is $30.75 for 2023. The PTIN fee is non-refundable. You can get more information along with links to related sites at IR-2022-190.
The IRS has announced (IR-2022-191) significant progress to prepare for the 2023 tax filing season as the agency passed a milestone of hiring 4,000 new customer service representatives to help answer phones and provide other services. These assistors have been hired over the last several months and are being trained to provide help to taxpayers, including answering phone questions. This is part of a much wider IRS improvement effort tied to the Inflation Reduction Act funding approved in August. The IRS continues working hard on implementing the landmark 10-year legislation, and updates on other improvement areas will be provided in the near future. The intent is to train these individuals and have them available for the 2023 tax season with all in place by Presidents Day 2023. The goal is to add another 1,000 customer service representatives by the end of the year, bringing the total of new hires in this area to 5,000.
Tip of the DayBuy now, ship later . . . One of the hardest jobs a business owner has is to try and forecast sales. WEhile the customer may have just as much of a problem forecasting sales, they may have a better idea. In any event, you may be able to ask customers to order now and bill a nominal fee with shipment or the work being done sometime in the future. The details will vary from business to business
October 27, 2022
NewsThe IRS is reminding (IR-2022-189) taxpayers earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year. There is no change to the taxability of income; the only change is to the reporting rules for Form 1099-K. As before, income, including from part-time work, side jobs or the sale of goods, is still taxable. Taxpayers must report all income on their tax return unless it is excluded by law, whether they receive a Form 1099-NEC, Nonemployee Compensation; Form 1099-K; or any other information return. The IRS emphasizes that money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable. The American Rescue Plan Act of 2021 (ARPA) lowered the reporting threshold for third-party networks that process payments for those doing business. Prior to 2022, Form 1099-K was issued for third party payment network transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. Now a single transaction exceeding $600 can trigger a 1099-K.
Tip of the DayCheck before checking the box . . . The more involved your financial life, the more complex your tax return. When you file your return you may be making a number of elections and answering a number of questions that can be just as important as the numbers you put on the return. For example, for a number of years returns have contained the question do you have a foreign bank account. Most taxpayers don't but some who have emigrated to the U.S. may retain an overseas account. Or your business may have one. But the question is deeper than just ownership of an account. You might have signatory authority over an account for your company or for an account of an overseas relative. If you've got a rental property your software will probably ask a number of questions including, did you actively participate in the management of the property, did you fully dispose of the property during the year, do you want to elect the de minimis safe harbor, or the small taxpayer safe harbor. Software will sometimes flag a question you failed to answer, but not likely a missed election. Unsure? Ask a tax pro or take the time to read the IRS instructions and/or publications.
October 26, 2022
NewsIf you own rental properties your losses are restricted to no more than $25,000 per year. And even that limit is reduced by $0.50 for every dollar your modified AGI exceeds $100,000. While the losses may be carried forward, that may be of small comfort. However real estate professionals don't have such limits and can deduct the entire loss regardless of income or amount. A real estate professional here is defined by the IRS as a taxpayer who for a given taxable year if: (1) "more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates" and (2) "such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates." In the case of a joint return, these requirements are considered satisfied only if either spouse separately satisfies both requirements. Material participation is a lot tougher standard than the "active participation" required with the $25,000 limit. In Christian Sezonov and Francine M. Sezonov (T.C. Memo. 2022-40) the Court found the taxpayers' time logs contained estimates of the time worked. They were not contemporaneous. Instead they used various documents to assist in estmating the time spent. But, the Court noted, even if it accepted the logs, the husband amassed some 476 hours; the wife just over 405 for one year and less for another. But the rules require that, while either party may qualify, in this case neither the husband nor the wife had the required 750 hours by themself. The Court sustained the IRS's determination to disallow the deduction.
Tip of the DayStress test . . . Could you survive a major disruption by a client? You may have survived a slowdown during the pandemic, but things could be worse. A major county on the East Coast had a ransomware attack that shut down it's computers for several weeks. Consequences? Vendors have not been paid in over a month. That could be a real problem if that happens to a client that accounts for a substantial portion of your business. Unfortunately most business owners assume that while they may have to bid on a contract with a government agency, at least they'll get paid on time if they perform. But don't assume that's the case. When the Federal Reserve is looking at the condition of financial institutions, they perform a "stress" test. You should look at yur business the same way. If the worse happens (within reason) would the business survive? They figure out what you can change to insure you'll make it through the crisis.
October 25, 2022
NewsThe IRS has initiated a pilot program that now requires Practitioner Priority Service callers to repeat phrases before being transferred to an IRS assistor. This pilot uses speech recognition to help ensure a live person is calling and not a mechanical device. The new process is intended to improve customer service by reducing unnecessary wait times for professionals using the Practioner Priority Service.
The IRS has set up a separate webpage to provide additional information for victims of Hurricane Ian. The page containst the latest updates as well as providing links to other pages that contain details on which counties in Florida and Sourth Carolina qualify for relief. Some of the links take you to FEMA pages.
Tip of the DayEarly withdrawals from retirement plans . . . One of the reasons the tax Code is so maligned is that sections designed for ordinary taxpayers are unduly complex. That's the case with retirement plans. Many law changes over the years were designed to benefit taxpayers, but that simply added complexity. In the case of retirement plans it's even more complex because the rules, limitations, etc. vary from plan to plan. Distributions from plans before reaching a threshold age can be accompanied by a penalty. And there can be normal distributions, hardship distributions, loans, special distributions such as those related to COVID-19, and those related to divorce. COVID Tax Tip 2022-162 explains some of the issues involved. IRS Publication 590-B contains additional details.
October 24, 2022
NewsThe IRS has released the cost-of-living adjusted limites for 2023 for IRAs, 401(k)s, and other pension plans as well as certain related limits such as the amount for the definition of a control employee. The limits most people are interest in is the contribution limit for 401(k)s which increases to $22,600 and for IRAs which will be $6,500. You can find the complete details at Notice 2022-55).
Despite what you might read in some tax protester publications, don't argue that your W-2 or 1099 income isn't taxable because there's a problem with the tax Code. That issue has been well settled by the courts. In David Issac Bindel (T.C. Memo. 2022-39) the taxpayer received W-2s but claimed he did not receive wages as defined in the Internal Revenue Code and that he was entitled to a refund of all withholdings. The Court dismissed that argument but did not not impose the Section 6673. That penalty can be imposed on a taxpayer who, inter alia, institutes or maintains before this Court a proceeding primarily for delay or pursues a position that is frivolous or groundless and can be as much as $25,000. The Court noted that the taxpayer had not made these or similar frivolous return claims in previous cases.
Tip of the DayConsider local bank . . . If you live and do business in a rural area your choices for business (and personal) banking may be limited. And you may already be dealing with a smaller, local bank. But as you get closer to a big city, it's more likely even a small to mid-size business will be dealing with a big bank. That could be a mistake. Often a smaller bank will provide better service, lower fees, and be more responsive to any financing needs. If you're dealing with a small bank they may be more interested in keeping your business because to them you're important. Many credit unions are also getting into commercial banking, but the services available may be less than from a regular commercial bank. You may have to do some shopping to get the right fit, but it should be worth the effort. Make a list of the services you need, then shop the fees.
October 21, 2022
NewsEmployer classification issues, i.e. those determining whether a worker is an employee or independent contractor, can result in large amounts of tax and penalties. The Voluntary Classification Settlement Program (VCSP) provides partial relief from federal employment taxes for eligible taxpayers that agree to treat workers prospectively as employees.In Treece Advisory Corp. (T.C. Memo. 2022-38) the IRS contended that the Tax Court did not have jurisdiction to areview the Service's determination that the VCSP did not apply to the computation of the taxpayer's employment tax liabilities. The taxpayer argued that it met all the requirements of the VCSP and respondent does not have the discretion to deny its participation in the VCSP. The Court noted that it has jurisdiction under Section 7436(a) to determine: (1) whether an individual providing services to a person is that person's employee for purposes of subtitle C; (2) whether the person, if an employer, is entitled to relief under section 530 of the Revenue Act of 1978; and (3) the proper amounts of employment taxes which relate to the IRS's determination concerning worker classification. The Court found the taxpayer may have failed the third requirement, that is the firm, according to the IRS was under an employment tax audit at the time. The Tax Court denied the taxpayer's Motion for Summary Judgemtn.
Tip of the DayExcess business cash . . . Some businesses that hold significant amounts of cash want to put it to use by investing it. But if you have to provide financial statements to a lender and have to report your results on a GAAP basis, you might want to avoid stocks, crypto or similar volatile assets. Should these investments decline in value you'll have to report the impairment on your financials, even if you continue to hold them. And, unfortunately you can't recover any of the decrease if the assets increasae in value. Discuss the situation with your accountant.
October 20, 2022
NewsThe IRS has announced the 1040 Modernized e-File (MeF) production shutdown schedule. Shutdown begins on Saturday, November 26, 2022, at 11:59 p.m. Eastern time, to prepare the system for the upcoming Tax Year 2022 Filing Season. Only "Send Submissions" for 1040 (both State and Federal) will be affected by this shutdown, all other services such as "Get Acks" and all state services will not be affected by the shutdown and users should be able to continue to use those services. Business (BMF) returns are not impacted by this IMF Production Shutdown schedule. To check on the status of the MeF go to www.eitc.irs.gov/mef-status.
The IRS is warning (IR-2022-183) employers to be wary of third parties who are advising them to claim the Employee Retention Credit (ERC) when they may not qualify. Some third parties are taking improper positions related to taxpayer eligibility for and computation of the credit. These third parties often charge large upfront fees or a fee that is contingent on the amount of the refund and may not inform taxpayers that wage deductions claimed on the business' federal income tax return must be reduced by the amount of the credit. If the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction. Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.
Tip of the DayDefinition of income . . . It's not as simple as it sounds. Skipping the accounting defintion and the tax one for businesses, it's still complicated. For individuals income is wages, dividends, etc. as well as income and losses from rental properties, S corporations, sole proprietorships, LLCs, etc. Add all that up and you get "total income". Then add or substract adjustments to income such as educator expenses, IRA deduction, etc. to arrive at "adjusted gross income". That's an important number because many limitations for benefits such as deduction for student loan interest is based on the number. Some benefits such as the $25,000 allowance for rental losses are based on "modified adjusted gross income". That's basically adjusted gross income with a small modification such as the add back of an item. Subtract your standard or itemized deductions from adjusted gross income to arrive at "taxable income".
October 19, 2022
NewsThe IRS has announced (Rev. Proc. 2022-38) the tax year 2023 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. Rev. Proc. 2022-38 provides details about these annual adjustments. For 2023 The Inflation Reduction Act extended certain energy related tax breaks and indexed for inflation the energy efficient commercial buildings deduction beginning with tax year 2023. Hare are some highlights:
35% for incomes over $231,250 ($462,500 for married couples filing jointly);
32% for incomes over $182,100 ($364,200 for married couples filing jointly);
24% for incomes over $95,375 ($190,750 for married couples filing jointly);
22% for incomes over $44,725 ($89,450 for married couples filing jointly);
12% for incomes over $11,000 ($22,000 for married couples filing jointly).
The lowest rate is 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).
Tip of the DayState compliance . . . First, the IRS isn't hiring 87,000 agents. And your chances of your business getting a visit from the IRS will continue to be, for most taxpayers, pretty remote. And compliance with IRS rules for many small business is fairly easy. File income tax returns, information returns, and payroll tax returns on time and keep good records and most businesses will be on safe ground. But that's less true with respect to state compliance. There could be filings with the town and the county. At the state level add in income tax reporting, sales taxes, and possible separate information reporting. And there can be taxes unique to just your, or a few states. Things get even more complicated if you have sales in more than one state. You could be filing income and sales taxes in a number of states. Consider sitting down with your accountant and reviewing your business for possible missed requirements on at least an annual basis.
October 18, 2022
NewsThe IRS announced (IR-2022-180) its continued support by joining international efforts to fight fraud during Charity Fraud Awareness Week, October 17-21. The IRS partners in this effort as part of its ongoing commitment to fight fraud against charities, businesses and individuals. It's estimated that charitable organizations will lose 5% of their revenue each year to fraud, according to the Fraud Advisory Panel, a UK-based organization leading the effort by organizing this week of awareness. Experts say cybercrime is on the rise, including attacks on charities, their supporters and beneficiaries. Charities, regulators, agencies, law enforcement and other not-for-profit stakeholders around the world are working together to raise awareness about fraud and cybercrime that affects charities. These efforts resulted in seven days when supporters actively discuss fraud, share best practices and offer helpful resources. Click on the link above for more information and links to additional resources.
Tip of the DayDon't nickle and dime employees . . . You've got to control costs. But think it through before cutting expenses. Yes, you can save by cutting out free coffee and donuts in the break room. But how much will that save a year? While it depends on what you spend, not much. And you could create a lot of employee ill will. For small businesses that could be especially true if the employees see you pull into the parking lot in a new top-of-the-line German car. You should also be aware that most employees will know how the company's doing, at least from a sales standpoint. On the other hand, they'll also know when the company is hurting. Then they're less likely to take offense to freebie cutbacks.
October 17, 2022
NewsThe IRS has issued temporary and proposed regulations (T.D. 9667 and NPRM REG-113068-22) that address the average income test for the low-income housing credit. The regularions finalize proposed regulations that were issued almost two years ago.
Today, October 17, is the deadline for filing individual federal, and in most cases state, income tax returns for 2021.
Tip of the DayPass on that client . . . Before taking on a major job or client for the first time, do some research on the client. Do they have a habit of paying late? Making unreasonable requests such as changes in the job without paying for them? Accelerating or delaying the time frame? Claiming the work was shoddy and refusing to pay the full amount? Or any of the agree price? Or are the up-front specifications or requirements in the contract likely to be difficult to meet or costly? Is the client unusually intrusive in questioning progress on the job? You should expect a client to ask questions and view progress, but there is a limit. Is the client known to be litiguous? All are signs the job isn't worth pursueing.
October 14, 2022
NewsStarting this week, the IRS is sending letters to more than 9 million individuals and families who appear to qualify for a variety of key tax benefits but did not claim them by filing a 2021 federal income tax return. Many in this group may be eligible to claim some or all of the 2021 Recovery Rebate Credit, the Child Tax Credit, the Earned Income Tax Credit and other tax credits depending on their personal and family situation. The special reminder letters, which will be arriving in mailboxes over the next few weeks, are being sent to people who appear to qualify for the Child Tax Credit (CTC), Recovery Rebate Credit (RRC) or Earned Income Tax Credit (EITC) but haven't yet filed a 2021 return to claim them. The letter, printed in both English and Spanish, provides a brief overview of each of these three credits. For more information, see IR-2022-178. The News Release contains additional information on the credits and how to claim them as well as links to other sources.
The IRS has announced that the Free File program will remain open for an extra month this year, until November 17, 2022, midnight Eastern time. Available only at IRS.gov/FreeFile, Free File enables people whose incomes are $73,000 or less to file a return online for free using brand-name software. Free File is sponsored by the Free File Alliance, a partnership between the IRS and the tax-software industry. For individuals with income below $12,500 and couples with income below $25,000 they can go to ChildTaxCredit.gov/file for an even easier solution.
Tip of the DayLooking to buy a home? . . . In some areas prices have declined. In some others they're soft. Bidding wars are less frequent. But real drops in prices are generally limited to certain markets and/or certain price ranges. Waiting a little longer is a trade off between almost assuredly higher mortgage rates and a possible drop in home prices. You've got to weigh one against the other and it's not easy. If you just need more space, just adding a room might be the best approach. If you don't need to move, don't. If you really need a home it might make sense to buy now and hope to refinance the mortgage at a lower rate. While rates may not go down to 3 percent, there's a good chance in a year or two they will ease off. Home prices may not drop much and may actually firm up again if interest rates decline.
October 13, 2022
NewsThe IRS has issued final regulations (T.D. 9968) under Section 36B of the Code that amend the regulations regarding eligibility for the premium tax credit (PTC) to provide that affordability of employer-sponsored minimum essential coverage (employer coverage) for family members of an employee is determined based on the employee's share of the cost of covering the employee and those family members, not the cost of covering only the employee. The final regulations also add a minimum value rule for family members of employees based on the benefits provided to the family members. The final regulations affect taxpayers who enroll, or enroll a family member, in individual health insurance coverage through a Health Insurance Exchange (Exchange) and who may be allowed a PTC for the coverage.
If you own an interest in a partnership, LLC or S corporation and materially participate in the activity, you can generally deduct losses, but only up to the amount of your basis in the entity. Computing basis can be relatively easy for some entities and business operations. But if your business is complicated and the entity involved is a partnership, particularly with multiple partners, calculating your basis requires complete records. In Todd Kohout and Lisa M. Kohout (T.C. Memo. 2022-37) the taxpayer's records were on a computer that crashed with several years' of records. The Court found the taxpayers did not present credible evidence that the entity's receipts were overstated nor that the taxpayers had sufficent basis to take the losses.
Tip of the DayCOVID and recordkeepig . . . COVID created new problems for business owners as well as a number of recovery programs. Not a few of those programs spawned abuse by some. We mentioned about two months ago that the SBA is auditing PPP loan recipients because of widespread fraud. Now the IRS has announced they're going to audit Employee Rentention Credit recipients. It's suggested you be especially careful in retaining any documentation for any of the recovery programs--both federal and state--for the required period. That's 10 years in the case of PPP loans.
October 12, 2022
NewsAs a result of Hurricane Ian, the IRS (IR-2022-177) expanding it's relief on diesel fuel related to Hurricane Ian, and will not impose a penalty when dyed diesel fuel with a sulfur content that does not exceed 15 parts-per-million is sold for use or used on the highway in the state of Florida. This penalty relief expands previously issued penalty relief that applied only to emergency vehicles. This relief is retroactive to September 28, 2022 and will remain in effect through October 19, 2022. This penalty relief is available to any person that sells or uses dyed diesel fuel for highway use. In the case of the operator of the vehicle in which the dyed diesel fuel is used, the relief is available only if the operator or the person selling such fuel pays the tax of 24.4 cents per gallon that is normally applied to diesel fuel for highway use. The IRS will not impose penalties for failure to make semimonthly deposits of tax for dyed diesel fuel sold for use or used in diesel powered vehicles on the highway in the state of Florida during the relief period. IRS Publication 510, Excise Taxes, has information on the proper method for reporting and paying the tax. Ordinarily, dyed diesel fuel is not taxed, because it is sold for uses exempt from excise tax, such as to farmers for farming purposes, for home heating use, and to local governments.
The IRS is serious about financial crimes and virtual currency. The Financial Crimes Enforcement Network (FinCEN) announced it has assessed a civil money penalty in the amount of $29,280,829.20 against Bittrex, for violations of the Bank Secrecy Act (BSA) and FinCEN's implementing regulations. FinCEN's action is part of a global settlement with the Office of Foreign Assets Control (OFAC). FinCEN's investigation found that, from February 2014 through December 2018, Bittrex failed to maintain an effective AML program. Bittrex's program failed to appropriately address the risks associated with the products and services it offered, including anonymity-enhanced cryptocurrencies. (For more information, go to FinCEN Announces $29 Million Enforcemnt Action
Tip of the DayIf it seems like income, it probably is . . . The legal definition of income in the tax code and starts out very broad and provides for certain exceptions. If there's no exception, it's probably income. For example, all tips are income, whether they're reported on a W-2 or not. Office freebies are income unless they come under an exception. Just because you didn't receive a 1099 for work you did your brother-in-law's business, doesn't mean it's not reportable. And that $600 threshold is a reporting threshold for Form 1099 purposes; it doesn't mean you don't have to report smaller amounts of income on your tax return. .
October 11, 2022
NewsThe IRS has issued several notices providing guidance on recent law changes. The Secure Act changed the rules with respect to inherited IRAs and pension plans, requiring distribution of the plan amount within ten years. The law provides and exception for a minor child. The IRS has issued regulations requiring annual required minimum distributions (RMD) during the ten year period. Notice 2022-53 provides relief for taxpayers who did not take an RMD in 2021 will not be liable for an excise tax and, if the tax has already been paid, the taxpayer can obtain a refund.
Notice 2022-46 announces the IRS plans to issue guidance under Sec. 30D (plug-in electric vehicle credit) and 25E (previously owned clean vehicles). The notice describes some of the requirements for the the plug-in electric vehicle credit such as U.S. manufacturing content, the details of a transfer election, and the rules for previously owned vehicles.
Notice 2022-51 deals with the increased credit amounts under a number of Code sections if certain prevailing wage and apprenticeship requirements are satisfied. Taxpayers who satisfy the requirements may claim an increased credit amount under Sec. 45L and 45U.
Cash for estate taxes . . . Despite the high exemption amount for federal estate taxes ($12,060,000 for 2022), there are taxpayers that could be liable. If you live in a state with an estate tax, you should be particularly careful since the threshold could be much lower. While the tax isn't due immediately, some estates are left with few liquid assets. You don't want to have to sell real estate or stocks at the wrong time in order to raise the cash. Tax to your tax advisor or attorney to determine your potential exposure.
October 7, 2022
NewsThe IRS is reminding (IR-2022-174) U.S. citizens, resident aliens and domestic legal entities that the extension deadline to file their annual Report of Foreign Bank and Financial Accounts (FBAR) is October 15. For additional information about filing deadlines, filers should look to Financial Crimes Enforcement Network's (FinCEN) website. Filers who missed the April 15 annual due date earlier this year received an automatic extension until October 15, 2022, to file the FBAR. They did not need to request the extension. The FBAR has to be filed by U.S. persons who have a financial interest in or signature or other authority over one or more accounts, such as a bank account, brokerage account, mutual fund or other financial account located outside the United States, and where the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year 2021.
The IRS announced (IR-2022-170) Independent Office of Appeals is taking important steps to improve how taxpayers interact and communicate with the IRS by revising their initial contact letters. Appeals has made two key revisions to these initial contact letters in response to feedback from taxpayers and practitioners. First, the revised initial contact letter will clarify that generally, taxpayers and representatives can choose how they meet with Appeals through conferences that can be held by telephone, video or in-person. In addition, Appeals can work with taxpayers and representatives through the mail or secure electronic messaging. Appeals employees can successfully resolve disputes in every type of conference and the type of conference does not impact Appeals' decision. Second, in addition to the Appeals Officer's contact information, the initial contact letter will now provide the name and phone number of the Appeals Officer's manager. While the Appeals Officer remains the primary contact for all their assigned cases, the addition of the manager's contact information will ensure an appeal stays on track in the rare instance additional help is needed.
Tip of the DayDrop asking rent? . . . Unless the market around you is decreasing, dropping the asking rent for space you want to lease out can be risky. You could alienate current tenants. But empty space is costly. You're paying taxes and maintenance without any income. Consider this, dropping the rent on space by 10% to get it leased immediately is similar in cost to having the space vacant for six months if leases run for five years. If the space is vacant longer than that, the percentage rent drop increases. A smarter approach can be to give a month's free rent every year for five years while keeping the base rent the same. There are some other options that can create a lower effective rent while keeping the asking rent the same. How much you give in concessions will depend on how long it would take to get the space rented without them.
October 6, 2022
NewsThe IRS has announced (IR-2022-173) hurricane Ian victims throughout both North Carolina and South Carolina now have until February 15, 2023, to file various federal individual and business tax returns and make tax payments. This is similar to relief announced last week for Ian victims in Florida.The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). This means that individuals and households that reside or have a business anywhere in both the Carolinas and Florida qualify for tax relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov. The tax relief postpones various tax filing and payment deadlines that occurred starting on September 25, 2022 in South Carolina and September 28 in North Carolina. As a result, affected individuals and businesses will have until February 15, 2023, to file returns and pay any taxes that were originally due during this period. This means individuals who had a valid extension to file their 2021 return due to run out on October 17, 2022, will now have until February 15, 2023, to file. The IRS noted, however, that because tax payments related to these 2021 returns were due on April 18, 2022, those payments are not eligible for this relief. The February 15, 2023, deadline also applies to quarterly estimated income tax payments due on January 17, 2023, and the quarterly payroll and excise tax returns normally due on October 31, 2022, and January 31, 2023. Businesses with an original or extended due date also have the additional time including, among others, calendar-year corporations whose 2021 extensions run out on October 17, 2022. Similarly, tax-exempt organizations also have the additional time, including for 2021 calendar-year returns with extensions due to run out on November 15, 2022. In addition, in South Carolina, penalties on payroll and excise tax deposits due on or after September 25, 2022, and before October 11, 2022, will be abated as long as the deposits are made by October 11, 2022. In North Carolina, penalties on payroll and excise tax deposits due on or after September 28, 2022, and before October 13, 2022, will be abated as long as the deposits are made by October 13, 2022.
Tip of the DayBorrowing from relatives for home? . . . It's not a bad idea with interest rates at the current level. You can set an interest rate on the mortgage that's lower than market to save you some money yet higher than market for what your relative would earn if he invested it in a virtually risk-free investment. There's some additional reporting on your tax return, but it's not enough for an inconvenience and the lender has to report the income. You must set an interest rate at least as much as the IRS Applicable Rate that varies with the term of the loan, and you must record the loan with county or state agency where mortgagaes are normally recorded. Talk to a real estate attorney for other requirements.
October 5, 2022
NewsOne of the perks of working for some companies is employee discounts, or, in some cases, free goods or services. But since this area is ripe for providing "compensation" to employees that's not taxed, tax law has a lot to say about it. In the case of property, any discount is limited to the company's gross profit percentage. In the case of services, the limit is a flat 20 percent discount. As always, there's an exception to those rules. One is de minimis benefits, a benefit so small you wouldn't account for it. For example, occassional free use of the copy machine. The second is a "no additional cost benefit". The best example is the one in the following case--free flights for employees of an airline. That was the issue in Douglas Mihalik and Wendi J. Mihalik (T.C. Memo. 2022-36). The taxpayer was a retired airline pilot who received for the taxpayers, their daughter and his two adult relatives. The IRS determined the taxpayers were required to include the value of the tickets provided to his adult relative3s in their 2016 income. The Court held the taxpayers were required to include in gross income the value of airline tickets provided by the former employer to the taxpayers adult relatives because the value does not qualify for exclusion under under Sec. 132. The Court noted the exclusion for the tickets is limited to the taxpayer (employed or retired), his or her spouse and dependent children. The taxpayer argued the value of the tickets should be excluded as a de minimis fringe. The Court countered that the tickets had a high enough value that it was not unreasonable or administratively impractible to account for them.
Tip of the DayProperty received for services . . . Bartering produces income just as if you sold property or services, only with complications. Often taxpayers don't think of it as such since it's not a formal transaction. For example, Fred is building his second gas station. A contractor who sepecializes in stations does the building and tanks. Fred's friend, Sue, has a landscaping business and agrees to do backhoe work and some plantings. No money changes hands but Fred allows Sue to fill her equipment tanks with up to 500 gallons of diesel. Sue has income equal to 500 times the current price per gallon of diesel. Fred will include the cost of the diesel as an asset, the land improvements. The tricky part here is valuing the transaction and making sure you keep good documentation.
October 4, 2022
NewsIf you have a corporation that's operating, you've got to have an officer who earns a salary. This issue frequently occurs with S corporations. And putting a zero for officers' compensation is sure to raise a flag. And claiming to work as an independent contractor is unlikely to pass muster. In The Redi Foundation (T.C. Memo. 2022-34) an individual who was a founder and officer of the corporation did not claim a salary. The entity, a nonprofit, gave seminars on real estate. The Court found the individual was a corporate officer, member of the board, and gave all the seminars as well as having complete control over them. At times he worked as much as 60 hours per week on the course. The entity issued a 1099-MISC to the individual but not a W-2, nor did the entity file employment tax returns. The Court rejected the entity's claim of dual status--employee and independent contractor--for the individual noting a holding in an earlier case that "fundamental decisions regarding the operation of the corporation . . . are customarily made my corporate officers or other employees". In another case the court noted that a corporation's sole full-time worker must be treated as an employee. The Court held the individual was an employee, and was not entitled to relief under sec. 530 of the Revenue Act of 1978. In addition, the Court found the taxpayer corporation liable for failure to file employment tax returns and for failure to pay the tax shown on the return. That penalty is 5 percent per month with a maximum of 25 percent.
Tip of the DayAllocation of real estate purchase price . . . When you purchase a house it's normally clean inside. You expect to find kitchen and laundry appliances and heating and cooling units, but that's about it. But that's not always the case. If you're buying a vacation home it might be partly or fully furnished. If you plan to rent the house, you need to make an allocation of the purchase price between the house and the furnishings. The best approach is to draft a separate contract for the purchase of the furnishings. The same is true if you're buying commercial property. That can happen if you're buying a professional office from a doctor or dentist. You may also need to talk to a tax professional if you're buying a house with a stable or farm land.
October 3, 2022
NewsIn response to disruptions resulting from Hurricane Ian, the IRS will not impose a penalty when dyed diesel fuel with a sulfur content that does not exceed 15 parts-per-million is sold for use or used by emergency vehicles on the highway in the state of Florida. This relief began on September 28, 2022, and will remain in effect through October 19, 2022. This penalty relief is available to any person that sells or uses dyed diesel fuel in an emergency vehicle for highway use. In the case of the operator of the emergency vehicle in which the dyed diesel fuel is used, the relief is available only if the operator or the person selling such fuel pays the tax of 24.4 cents per gallon that is normally applied to diesel fuel for highway use. The IRS will not impose penalties for failure to make semimonthly deposits of tax for dyed diesel fuel sold for use or used in an emergency vehicle on the highway in the state of Florida during the relief period. IRS Publication 510, Excise Taxes, has information on the proper method for reporting and paying the tax. Ordinarily, dyed diesel fuel is not taxed, because it is sold for uses exempt from excise tax, such as to farmers for farming purposes, for home heating use, and to local governments.
The IRS has revised Publication 904, Estate & Gift Tax Interrelated Computations. The publication explains and illustrates both the Trial and Substitution method and the Algebraic method that can be used to compute the Code 2055 charitable deduction or the Sec. 2056 marital deduction when an interrelated computation is necessary for Federal estate tax purposes.
Tip of the DayDon't pay off that mortgage . . . Even if you have extra cash. Well, that statement isn't totally true. We're assuming your mortgage is at 4 percent or less and you didn't win a lottery. Why keep0 paying? First, there's a good chance the interest is tax deductible. Second, there's little chance you'll be able to refinance at a lower rate for some time. Keeping an existing mortgage is even more important if you're retired, went into business for yourself, or your future income stream is vulnerable in some way. If that's the case you may have difficulty borrowing on the home (or other property) down the road. There have been times of easy money when lenders would provide funds with little documentation and there have been times when they've been very selective. You don't know what the times will be like when you need to borrow. Finally, home mortgages generally have one of the lowest interest rates. For example, a personal loan, credit cards, even a mortgage on a second home are almost sure to be higher. You might want to reconsider this advice if uncle Fred just left you $2 million and your kids are out of college. Or if you have a home equity variable rate loan. Talk to your financial adviser before making any big moves.
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