Congress needs to do more to protect taxpayers in the wake of the Supreme Court’s decision in the Commissioner of the Internal Revenue Service v. Zuch, National Taxpayer Advocate stated in a recent blog post.
Congress needs to do more to protect taxpayers in the wake of the Supreme Court’s decision in the Commissioner of the Internal Revenue Service v. Zuch, National Taxpayer Advocate stated in a recent blog post.
NTA Erin Collins noted in the post that Congress in 1998 created the collection due process (CDP) “to give taxpayers a meaningful opportunity to contest proposed levies and Notices of Federal Tax Lien,” allowing them to request a hearing with appeals and possibly petition the tax court.
The Supreme Court decision, according to Collins, “adopted a narrow view of the Tax Court’s review in a CDP case, holding that the Tax Court’s jurisdiction under IRC Sec. 6330(d)(1) terminates once the lien or levy is no longer at issue.” She cited Justice Neil Gorsuch’s dissent noting that “under this approach, the IRS can cut off Tax Court review by choosing when and how to collect. He also noted that telling taxpayers to file a refund suit instead is often unrealistic, especially when strict refund claim deadlines have expired while CDP and Tax Court proceedings are still pending.”
Collins noted that the Supreme Court decision and an earlier Tax Court order “reveal serious gaps in the protections Congress intended CDP to provide. They make CDP and Tax Court an unreliable path to a merits-based solution. A taxpayer can do everything right: request a CDO hearing, raise issues with Appeals, and timely petition the Tax Court yet still never receive a final determination on what they owe if, for example, the IRS fully collects through offsets or accepts an OIC and then declares that a levy is no longer warranted.”
She added that “the fallback remedy of refund litigation may not grant a taxpayer full relief … which is an unrealistic option for many small businesses and individuals. … Zuch raises due process concerns when collection action is withdrawn. A taxpayer typically receives only one CDP hearing for a given tax period and type of collection action. If the IRS abandons collection after that hearing and later restarts collection on the same liabilities, the taxpayer may not get a second CDP hearing with Tax Court review, but only an IRS ‘equivalent hearing,’ which does not provide a right to Tax Court review.”
Collins noted that Congress has begun to take steps to remedy this with the House of Representatives’ introduction of the Taxpayer Due Process Enhancement Act (H.R. 6506), including clarifying and expanding Tax Court jurisdiction in CDP cases, ensuring that jurisdiction over a properly underlying liability challenges whether the collection is abandoned, protects refund rights, and prohibits the IRS from crediting the overpayment against other liabilities without taxpayer consent.
However, she is calling for more Congressional action to address the “one hearing” limitation.
“Congress should create an exception to the ‘one hearing’ limitation for cases when the IRS withdraws or abandons collection,” Collins stated in the blog. “If the IRS has effectively reset the collection episode by withdrawing or abandoning the prior levy or lien and later initiates the same collection action for the same tax period, taxpayers should be entitled to a new CDP hearing with the full protections of IRC Sec. 6330, including Tax Court review.”
She added that Congress “should also ensure that taxpayers are not permanently barred from CDP when the IRS withdraws and later restarts collection and the Tax Court has clear authority to grant meaningful relief when the IRS has already collected more than the correct amount.”
The IRS has provided interim guidance addressing the special 100 percent bonus depreciation allowance for qualified production property enacted by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). The interim guidance provides the definition of qualified production property, qualified production activities, and other related terms. It also establishes a safe harbor for property placed in service in 2025, provides instructions for the time and manner for electing the 100-percent depreciation allowance, and addresses recapture and certain special rules. Taxpayers may rely on the interim guidance until the Treasury Department issues proposed regulations.
The IRS has provided interim guidance addressing the special 100 percent bonus depreciation allowance for qualified production property enacted by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). The interim guidance provides the definition of qualified production property, qualified production activities, and other related terms. It also establishes a safe harbor for property placed in service in 2025, provides instructions for the time and manner for electing the 100-percent depreciation allowance, and addresses recapture and certain special rules. Taxpayers may rely on the interim guidance until the Treasury Department issues proposed regulations.
Background
OBBBA enacted Code Sec. 168(n), which allows taxpayers to elect to take a 100 percent bonus depreciation allowance for qualified production property constructed after January 19, 2025, and before January 1, 2029, and placed in service after July 4, 2025, and before January 1, 2031.
Qualified Production Property Defined
Qualified production property is generally defined as new MACRS nonresidential real property that is (or will be once placed in service) as an integral part of a qualified production activity. Qualified production property must be placed in service in the United States, or its territories. Each building, including its structural components, is a single unit of property and any improvement of structural component that the taxpayer later places in service is a separate unit of property. A special rule is available for integrated facilities. For purposes of determining whether used property is acquired after January 19, 2025, and before January 1, 2029, a taxpayer applies rules consistent with Reg. § 1.168(k)-2(b)(5).
Under the interim guidance satisfies the integral part requirement if the qualified production activity takes place within the physical space of the property. The guidance provides a de minimis rule that permits a taxpayer to elect to treat the entire property as qualified production property if 95 percent or more of the physical space of a property satisfies the integral part requirement.
Although leased property that is owned by the taxpayer and used by a lessee does not qualify, the guidance provides an exception for consolidated groups, commonly controlled pass-through entities, and certain sole proprietorships, partnerships, or corporations of which 50 percent or more is owned, directly or by attribution by the lessor.
Under the guidance, a taxpayer may use any reasonable method to allocate a property’s unadjusted depreciable basis between eligible property and ineligible property. Each allocation method must be applied consistently and reflect the property’s facts and circumstances. In the case of property that contains infrastructure that serves both eligible property and ineligible property, a taxpayer may allocate the basis of such property between eligible property and ineligible property using any reasonable method.
Qualified Production Activity Defined
Generally, a qualified production activity means the manufacturing, production, or refining of a qualified product. The guidance provides specific definitions of production, qualified product, manufacturing, refining, agricultural production, chemical production, and substantial transformation of the property comprising a qualified product.
Under the guidance, a related business activity will not fail to be a qualified production activity if the related activity occurs within the same property. Such activities include: oversight and management of activities, material selection of vendors or materials related to the qualified product, developing product design and other intellectual property used in conducting a manufacturing, production, or refining activity that results in a substantial transformation of the property comprising the qualified product.
Safe Harbor for Qualified Production Property Placed in Service in 2025
For property placed in service after July 4, 2025, and on or before December 31, 2025, a taxpayer’s trade or business activity will be treated as a qualified production activity if the principal business activity code that the taxpayer, or the relevant trade or business of the taxpayer, used on its most recently filed Federal income tax return filed before February 19, 2026, is listed under sectors 31, 32, or 33, or under subsectors 111 or 112, that appear in the North American Industry Classification System (NAICS), United States, 2022, published by the Office of Management and Budget (OMB), Executive Office of the President. In addition, the activity must result in, or is otherwise essential to, the substantial transformation of the property comprising a qualified product.
Recapture
Recapture of the 100-percent bonus depreciation taken on qualified production property if a change in use occurs within 10 years after qualified production property is placed in service. Under the guidance a change in use occurs if the qualified production property ceases to satisfy the integral part requirement. A change in use has not occurred if a taxpayer begins to use qualified production property in a different qualified production activity. Property that has been placed in service but is temporarily idle does not cease to satisfy the integral part requirement.
Making the Election
A taxpayer may elect to treat property as qualified production property by attaching a statement to its Federal income tax return for the taxable year in which the eligible property is placed in service. The statement must include the following information: the name and taxpayer identification number of the taxpayer making the election; the street address, city, state, zip code, and a description of the property; the unadjusted depreciable basis of the property; the dollar amount of the unadjusted depreciable basis of eligible property the taxpayer is designating as qualified production property. Separate instructions are available for taxpayers applying the de minimis rule. A election may be revoked only by filing a request for a private letter ruling and obtaining the written consent of the IRS.
Request for Comments
The IRS requests comments on the interim guidance provided in Notice 2026-16. Comments must be submitted by the date, and in the form and manner, specified in Section 10.02 of Notice 2026-16.
Notice 2026-16
IR 2026-25
The Treasury Department and the IRS have extended the deadline for amending individual retirement arrangements (IRAs), SEP arrangements, and SIMPLE IRA plans to comply with the SECURE 2.0 Act of 2022. The new deadline is December 31, 2027. The extension does not apply to qualified plans such as 401(k) and 403(b) plans.
The Treasury Department and the IRS have extended the deadline for amending individual retirement arrangements (IRAs), SEP arrangements, and SIMPLE IRA plans to comply with the SECURE 2.0 Act of 2022. The new deadline is December 31, 2027. The extension does not apply to qualified plans such as 401(k) and 403(b) plans.
Under section 501 of the SECURE 2.0 Act (P.L. 117-328), retirement plans and contracts had until the end of the first plan year beginning on or after January 1, 2025, or by a later date prescribed by the Secretary, to adopt plan amendments reflecting changes made by the SECURE Act, the SECURE 2.0 Act, the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020. In the absence of model language from the IRS, IRA custodians have requested more time to ensure proper amendments. Notice 2026-9 gives stakeholders until the end of 2027 to complete the necessary changes.
The extension applies to governing instruments of IRAs under Code Sec. 408(a) and (h), annuity contracts under Code Sec. 408(b), SEP arrangements under Code Sec. 408(k), and SIMPLE IRA plans under Code Sec. 408(p). Further, the IRS is developing model language to be used by IRA trustees, custodians, and issuers to amend an IRA for compliance with the legislation.
Notice 2026-9
The IRS issued answers to frequently asked questions (FAQs) about the implementation of Executive Order 14247, Modernizing Payments to and from America’s Bank Account. The order described advancing the transition to fully electronic federal payments both to and from the IRS. The purposes of said order were to (1) defend against financial fraud and improper payments; (2) increase efficiency; (3) reduce costs; and (4) enhance the security of federal transactions.
The IRS issued answers to frequently asked questions (FAQs) about the implementation of Executive Order 14247, Modernizing Payments to and from America’s Bank Account. The order described advancing the transition to fully electronic federal payments both to and from the IRS. The purposes of said order were to (1) defend against financial fraud and improper payments; (2) increase efficiency; (3) reduce costs; and (4) enhance the security of federal transactions.
The FAQs discussed included:
Tax Refunds and Tax Filing
The IRS stopped issuing paper refund checks for individual taxpayers after September 30, 2025. The Service would publish all guidance for filing 2025 tax returns before opening the 2026 tax filing season.
Further, direct deposit into a bank account would remain the primary method for issuing refunds. Alternative electronic payment methods, mobile apps and prepaid debit cards, would also be available. Limited exceptions to the paper check phase-out would also be established.
Alternative to Providing Direct Deposit Information
It is not mandatory for taxpayers to provide electronic payment information. However, if no exception applies, their refunds could take longer to process.
Sunset of Enrollment to EFTPS
Effective October 17, 2025, individual taxpayers are no longer able to create new enrollments via EFTPS.gov. Individual taxpayers not enrolled in the Electronic Federal Tax Payment System (EFTPS).gov by October 17, 2025 can instead create an IRS Online Account for Individual taxpayers or use the IRS Direct Pay guest path.
FS-2026-2
IR 2026-13
The IRS has encouraged all taxpayers to create an IRS Individual Online Account to access tax account information securely and help protect against identity theft. It emphasized that this digital resource is available to anyone who can verify their identity. Thus, the IRS highlighted how taxpayers have used the account with the same convenience as online banking to view adjusted gross income, check refund statuses, and request identity protection PINs.
The IRS has encouraged all taxpayers to create an IRS Individual Online Account to access tax account information securely and help protect against identity theft. It emphasized that this digital resource is available to anyone who can verify their identity. Thus, the IRS highlighted how taxpayers have used the account with the same convenience as online banking to view adjusted gross income, check refund statuses, and request identity protection PINs.
Further, the IRS supported collaboration between taxpayers and tax professionals through the use of digital authorizations. When taxpayers utilize Individual Online Accounts, they are able to approve power of attorney and tax information authorization requests entirely online. This digital process has allowed tax professionals to use their own Tax Pro Accounts to complete authorized actions on their clients’ behalf more efficiently. Tax professionals have supported this effort by encouraging clients to receive and view over 200 digital notices.
Additionally, the IRS expanded the account’s capabilities in early 2025 to allow taxpayers to view and download certain tax documents. It has made forms such as the W-2, 1095-A, and various 1099s available for the 2023, 2024, and 2025 tax years. These documents provide essential information return data reported by employers and financial institutions to help taxpayers file their returns. Consequently, the IRS advised individuals to visit IRS.gov to learn more about accessing records and managing payment plans.
IR 2026-21
Proposals to reform retirement savings plans were highlighted during an April 2012 hearing by the House Ways and Means Committee. Lawmakers were advised by many experts to move slowly on making changes to current retirement programs that might discourage employers from sponsoring plans for their workers. Nevertheless, it is clear that Congress wants to make some bold moves in the retirement savings area of the tax law and that likely it will do so under the broader umbrella of general “tax reform.” While tax reform is gaining momentum, it is unlikely to produce any change in the tax laws until 2013 or 2014. Considering that retirement planning necessarily looks long-term into the future, however, now is not too soon to pay some attention to the proposals being discussed.
Proposals to reform retirement savings plans were highlighted during an April 2012 hearing by the House Ways and Means Committee. Lawmakers were advised by many experts to move slowly on making changes to current retirement programs that might discourage employers from sponsoring plans for their workers. Nevertheless, it is clear that Congress wants to make some bold moves in the retirement savings area of the tax law and that likely it will do so under the broader umbrella of general “tax reform.” While tax reform is gaining momentum, it is unlikely to produce any change in the tax laws until 2013 or 2014. Considering that retirement planning necessarily looks long-term into the future, however, now is not too soon to pay some attention to the proposals being discussed.
Testimony
The Chief of Actuarial Issues and Director of Retirement Policy for the American Society of Pension Professionals and Actuaries testified that current federal tax incentives can transform taxable bonuses for business owners into retirement savings contributions that benefit both owners and employees. “This incentive for the business owner to contribute for other employees results in a distribution of tax benefit that is more progressive than the current income tax structure," she observed.
An American Benefits Council representation warned at the hearing that the wisest course for lawmakers is to not enact new laws that would disrupt the success of the current system. Short-term retirement legislation designed to boost tax revenues generally do so by eliminating the existing savings incentives and eroding the amount that workers actually save.
Committee Chairman Dave Camp, R-Mich. questioned whether the large number of retirement plans now existing with their different rules and eligibility criteria leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings. Ranking member Sander Levin, D-Mich., questioned the value of making tax reform-inspired changes to retirement plans. "Tax reform should approach retirement savings incentives with an eye toward strengthening our current system and expanding participation, not as an opportunity to find revenue," Levin said.
JCT report
In advance of the hearing, the Joint Committee on Taxation (JCT) summarized the tax treatment of current-law retirement savings plans and described some recent reform proposals in a report, “Present Law and Background Relating to the Tax Treatment of Retirement Savings” (JCX-32-12). The report highlighted several of the recent proposals on retirement savings:
Automatic enrollment payroll deduction IRA. President Obama has proposed mandatory automatic enrollment payroll deduction IRA programs. An employer that does not sponsor a qualified retirement plan, SEP, or SIMPLE IRA plan for its employees (or sponsors a plan and excludes some employees) would be required to offer an automatic enrollment payroll deduction IRA program with a default contribution to a Roth IRA of three percent of compensation. An employer would not be required to offer the program if the employer has been in existence less than two years or has 10 or fewer employees.
Expand the saver's credit. The Administration has also proposed to make the retirement savings contribution credit, known as the saver's credit, fully refundable and for the saver’s credit to be deposited automatically in an employer-sponsored retirement plan account or IRA to which the eligible individual contributes. In addition, in place of the current credit ranging from 10 percent to 50 percent for qualified retirement savings contributions up to $2,000 per individual, the proposal would provide a credit of 50 percent of such contributions up to $500 (indexed for inflation) per individual.
Consolidate plans. The JCT also reviewed two retirement proposals from the Bush administration: Consolidating traditional and Roth IRAs into a single type of account called Retirement Savings Accounts (RSAs) and creating Lifetime Savings Accounts (LSAs) that could be used to save for any purpose with an annual limit for contributions of $2,000. The JCT explained that the tax treatment of RSAs and LSAs would be similar to the current tax treatment of Roth IRAs (contributions would not be deductible, and earnings on contributions generally would not be taxable when distributed). Additionally, the Bush Administration had proposed to consolidate various current-law employer-sponsored retirement arrangements under which individual accounts are maintained for employees and under which employees may make contributions into a single type of arrangement called an employer retirement savings account (ERSA).
The American Society of Pension Professionals and Actuaries (ASPPA) told the Ways and Means Committee that the large number of plans with different rules and criteria does not reduce the effectiveness of the incentives in increasing retirement savings. ”Consolidating all types of defined-contribution type plans into one type of plan would not be simplification,” the ASPPA cautioned. “It would disrupt savings, and force state and local governments and nonprofits to modify their retirement savings plans and procedures.”
The family partnership is a common device for reducing the overall tax burden of family members. Family members who contribute property or services to a partnership in exchange for partnership interests are subject to the same general tax rules that apply to unrelated partners. If the related persons deal with each other at arm's length, their partnership is recognized for tax purposes and the terms of the partnership agreement governing their shares of partnership income and loss are respected.
The family partnership is a common device for reducing the overall tax burden of family members. Family members who contribute property or services to a partnership in exchange for partnership interests are subject to the same general tax rules that apply to unrelated partners. If the related persons deal with each other at arm's length, their partnership is recognized for tax purposes and the terms of the partnership agreement governing their shares of partnership income and loss are respected.
Interfamily gifts
Because of the tax planning opportunities family partnerships present, they are closely scrutinized by the IRS. When a family member acquires a partnership interest by gift, however, the validity of the partnership may be questioned. For example, a partnership between a parent in a personal services business and a child who contributes little or no services is likely to be disregarded as an attempt to assign the parent's income to the child. Similarly, a purported gift of a partnership interest may be ignored if, in substance, the donor continues to own the interest through his power to control or influence the donee's business decision. When a partnership interest is transferred to a guardian or trustee for the benefit of a family member, the beneficiary is considered a partner only if the trustee or guardian must act independently and solely in the beneficiary's best interest.
Capital or services
The determination of whether a person is recognized as a partner depends on whether capital is a material income-producing factor in the partnership. Any person, including a family member, who purchases or is given real ownership of a capital interest in a partnership in which capital is a material income-producing factor is recognized as a partner automatically. If capital is not a material income-producing factor (for example, if a partnership derives most income from services, a family member is not recognized as a partner unless all the facts and circumstances show a good faith business purpose for forming the partnership.
If the family partnership is recognized for tax purposes, the partnership agreement generally governs the partners' allocations of income and loss. These allocations are not respected, however, to the extent the partnership agreement does not provide reasonable compensation to the donor for services he renders to the partnership or allocates a disproportionate amount of income to the donee. The IRS can re-allocate partnership income between the donor and donee if these requirements are not met.
Investment partnerships
The general rule for determining gain recognition for marketable securities does not apply to the distribution of marketable securities by an investment partnership to an eligible partner. An investment partnership is a partnership that has never been engaged in a trade or business (other than as a trader or dealer in the certain specified investment-type assets) and substantially all the assets of which have always consisted of certain specified investment-type assets (which do not include, for example, interests in real estate or real estate limited partnerships).
If a family limited partnership (FLP) qualifies as an investment partnership, the FLP could redeem the partnership interest of an eligible partner with marketable securities without the recognition of any gain by the redeemed partner. To qualify, substantially all the assets of the FLP must always have consisted of the eligible investment assets, and the holding of even totally passive real estate interests (real estate that does not constitute a trade or business), for instance, must be kept to a minimum. In addition, any eligible partner must have contributed only the specified investment assets (or money) in exchange for his or her partnership interest.
On February 22, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012. The new law extends the employee-side payroll tax holiday, giving wage earners and self-employed individuals 12 months of reduced payroll taxes in 2012.
On February 22, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012. The new law extends the employee-side payroll tax holiday, giving wage earners and self-employed individuals 12 months of reduced payroll taxes in 2012.
2011 payroll tax holiday
Until 2011, the Old-Age, Survivors and Disability Insurance (OASDI) tax rate for employees was 6.2 percent (12.4 percent for self-employed individuals who pay both the employee-share and the employer-share). These taxes help to fund Social Security.
In 2011, a payroll tax holiday took effect. The payroll tax holiday reduced the employee-share of OASDI taxes by two percentage points from 6.2 percent to 4.2 percent for calendar year 2011 up to the Social Security wage base of $106,800. The payroll tax holiday also gave a similar percentage reduction to self-employed individuals for calendar year 2011.
Two-month extension
The 2011 payroll tax holiday was originally enacted as a one-year tax break. It was scheduled to expire after December 31, 2011.
In December 2011, Congress approved a two-month extension of the payroll tax holiday for January and February 2012. The two-month extension provided for a 4.2 percent OASDI tax rate for individuals receiving wages and a comparable benefit for self-employed individuals through the end of February 2012.
Tough negotiations
In early 2012, lawmakers began negotiations over extending the two-month payroll tax holiday for the remainder of the year. The 2011 payroll tax holiday had not been offset; that is, the lost revenue had not been made up elsewhere. The two-month extension had been offset by higher fees on certain government-backed mortgages. Some lawmakers wanted any full-year extension of the payroll tax cut to be offset.
Several offsets were proposed and rejected, including a surtax on individuals with incomes over $1 million and repeal of certain business tax preferences. In the end, lawmakers could not agree on any offsets and decided to extend the payroll tax holiday without paying for it. They did agree to pay for extended unemployment benefits and the so-called Medicare “doc fix” with offsets.
The House passed the Middle Class Tax Relief and Job Creation Act of February 17 as did the Senate. President Obama signed the bill on February 22.
2012 payroll tax holiday
The 2012 payroll tax holiday is essentially an extension of the 2011 payroll tax holiday. This means that wage earners pay OASDI taxes at a rate of 4.2 percent for calendar year 2012 up to the Social Security wage base ($110,100 for 2012). Self-employed individuals also benefit from a two-percentage point reduction in OASDI taxes for calendar year 2012. The OASDI tax rate for employers, however, is not reduced and remains at 6.2 percent for calendar year 2012.
According to the White House, an “average” taxpayer should expect to see about $1,000 in savings in 2012. An individual who makes at or above the Social Security wage base for 2012 ($110,100) will see a $2,202 benefit.
No recapture rule
In good news for some taxpayers, the Middle Class Tax Relief and Job Creation Act repeals a recapture rule Congress had imposed on the two-month extension. The recapture rule was intended to prevent higher income individuals from enjoying too great a benefit from the payroll tax cut if it was not extended for all of 2012. Because the payroll tax cut has been extended through the end of 2012, the recapture rule is expressly removed in the new law.
Employers and payroll processors
Because the 2012 payroll tax cut holiday is essentially an extension of the 2011 payroll tax cut holiday, employers and payroll processors should expect few glitches. The IRS has reported it anticipates no problems in administering the extension through the end of 2012. It has already issued a revised 2012 Form 941, Employer’s Quarterly Federal Tax Return, for use by employers to cover their revised reporting responsibilities.
If you have any questions about the 2012 payroll tax holiday, please contact our office.
The new year brings a new tax filing season. Mid-April may seem like a long time away in January but it is important to start preparing now for filing your 2011 federal income tax return. The IRS expects to receive and process more than 140 million returns during the 2012 filing season. Early planning can help avoid any delays in the filing and processing of your return.
The new year brings a new tax filing season. Mid-April may seem like a long time away in January but it is important to start preparing now for filing your 2011 federal income tax return. The IRS expects to receive and process more than 140 million returns during the 2012 filing season. Early planning can help avoid any delays in the filing and processing of your return.
Records
Initially, you will need to gather your records for 2011. A helpful jumping-off point is to review your 2010 return. Your personal situation may be unchanged from when you filed your 2010 return or it may have changed significantly. Either way, your 2010 return is a good vantage point for assembling the materials you will need to prepare your 2011 return.
If you need a copy of your previous year(s) return information, you have several options. You can order a copy of your prior-year return. Alternatively, you may order a tax return transcript or a tax account transcript. A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules. However, a tax return transcript does not reflect any changes you or the IRS made after the return was filed. A tax account transcript shows any later adjustments you or the IRS made after the tax return was filed.
If you changed your name as a result of marriage or divorce since you filed your 2010 return, you must advise the IRS. Your name as it appears on your return needs to match the name registered with the Social Security Administration. A mismatch will likely delay the processing of your return.
Forms W-2
Many taxpayers cannot begin preparing their 2011 income tax returns until they have their Forms W-2, Wage and Tax Statement. Employers have until January 31, 2012 to send you a 2011 Form W-2 earnings statement. If you do not receive your W-2 by the deadline, contact your employer. If you do not receive your W-2 by mid-February, contact the IRS. You still must file your return or request an extension to file even if you do not receive your Form W-2. In certain cases, you may be able to file Form 4852, Substitute for Form W-2, Wage and Tax Statement.
Filing deadline
April 15, 2012 is a Sunday. Returns would normally be due the next day, April 16, 2012. However, April 16 is a holiday in the District of Columbia (Emancipation Day). As a result, the due date for 2011 returns is April 17, 2012. If the mid-April tax deadline clock runs out, you can get an automatic six-month extension of time to file through October 17. However, this extension of time to file does not give you more time to pay any taxes due. To obtain an extension, you need to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
Casualty losses
Many taxpayers experienced family, business and personal losses from hurricanes, tropical storms, wild fires, floods, and other natural disasters in 2011. For federal tax purposes, a casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a hurricane, tornado, fire, or other disaster.
Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally-declared disaster, you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened. This means you can deduct a 2011 loss on your 2011 return or amended return for that preceding tax year (2010). If you have any questions about a casualty loss, please contact our office.
Retirement savings
Just because the calendar moved from 2011 to 2012 doesn’t necessarily mean you missed out on contributing to a retirement savings plan. You can contribute up to $5,000 to a traditional IRA for 2011 and you can make the contribution as late as April 17, 2012. However, if you or your spouse is covered by an employer retirement plan, this will affect how much, if any, of your contribution is tax deductible. Individuals age 50 and older may qualify for a catch-up contribution of $1,000 on top of the $5,000 maximum. Different rules apply to other types of retirement savings plans. Our office can review these rules in detail with you.
IRS Fresh Start Initiative
In 2011, the IRS announced a new program, called the Fresh Start Initiative, to help distressed taxpayers. The IRS adjusted its lien policies, increased the dollar threshold when liens are generally issued, made it easier for taxpayers to obtain lien withdrawals, and extended the streamlined offer-in-compromise program. Previously, the IRS had given its employees greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances where a taxpayer has recently lost a job, is relying solely on Social Security, or is paying significant medical bills.
If you are experiencing hardship, the most important thing you can do is to remain in compliance with your tax obligations. If you owe back taxes, now is the time to pay them, if possible, or enter into an installment agreement, if you qualify, with the IRS. The IRS wants to see you making a good faith effort to pay your taxes.
Tax law changes
Along with assembling records and reviewing activities in 2011, it’s a good idea to review some of the tax law changes in 2011 that may affect your return. Our office can review your 2010 return and see which areas may have been affected by tax law changes for your 2011 return. In some cases, popular tax incentives that were available in 2010 were extended into 2011. You don’t want to miss out on any available tax breaks.
If you have any questions about preparing for the 2012 filing season, please contact our office.
2011 year end tax planning for individuals lacks some of the drama of recent years but can be no less rewarding. Last year, individual taxpayers were facing looming tax increases as the calendar changed from 2010 to 2011; particularly, increased tax rates on wages, interest and other ordinary income, and higher rates on long-term capital gains and qualified dividends.
2011 year end tax planning for individuals lacks some of the drama of recent years but can be no less rewarding. Last year, individual taxpayers were facing looming tax increases as the calendar changed from 2010 to 2011; particularly, increased tax rates on wages, interest and other ordinary income, and higher rates on long-term capital gains and qualified dividends.
Thanks to legislation enacted at the end of 2010, tax rates are stable for 2011 and 2012, although the uncertainty will return as 2013 approaches, as political pressure in Washington builds to do something quickly for the economy. Ordinary income tax rates for individuals currently are 10, 15, 25, 28, 33 and 35 percent; capital gains rates are zero and 15 percent.
President Obama has proposed to preserve these tax rates for taxpayers with income below $200,000 (individuals) and $250,000 (married couples filing jointly) and to raise the rates for taxpayers in these higher-income brackets. If Congress is gridlocked and takes no action, everybody’s rates will rise, but again, not until 2013.
Expiring tax breaks
Unfortunately, not all is quiet on the tax front despite no dramatic rate changes until 2013. There are some specific tax provisions that will terminate at the end of 2011, unless Congress and the President agree to extend them. These include the tuition and fees above-the-line deduction for high education expenses, which can be as high as $4,000. Another expiring provision is the deduction for mortgage insurance premiums, which covers premiums paid for qualified mortgage insurance.
Several other benefits (“extenders”) are also scheduled to expire after 2011:
- The state and local sales tax deduction;
- The classroom expense deduction for teachers;
- Nonbusiness energy credits;
- The exclusion for distributions of up to $100,000 from an IRA to charity;
- A higher deduction limit for charitable contributions of appreciated property for conservation purposes.
Retirement accounts
An old standby that makes sense from year-to-year is maximizing contributions to an IRA. The contribution is deductible up to $5,000 ($6,000 for taxpayers over 50), depending on some specific taxpayer income levels and circumstances. Taxpayers in a 401(k) plan can reduce their income by contributing to their employer plan, for which the limit in 2011 is $16,500.
In 2010, it was particularly important to consider whether to convert a traditional IRA to a Roth IRA, because the income realized on conversion could be recognized over two years. While a conversion continues to be worthwhile to consider (because distributions from a Roth IRA are not taxable), there are no longer any special break to defer a portion of the income from the conversion.
Alternative minimum tax
The AMT has been “patched” for 2011. The exemptions have been temporarily increased from the normal statutory levels to the “patched” levels:
- From $33,750 to $48,450 for single individuals;
- From $45,000 to $74,450 for married couples filing jointly and surviving spouses; and
- From $22,500 to $37,335 for married couples filing separately.
The amounts return to the “normal levels” of $33,750/$45,000/$22,500, respectively, in 2012 unless Congress takes action to maintain the patch. Elimination of the AMT is a goal of long-term tax reform, but the loss of revenue has been considered too high in the past. Without the “patch,” the Congressional Budget Office estimates that an additional 20 million middle-class taxpayers would suddenly become subject to an AMT once designed only for millionaires.
While planning for the AMT is difficult, taxpayers may want to consider realizing AMT income, such as capital gains, in 2011, when the patch is higher, rather than in 2012.
Conclusion
Taxpayers can take advantage of 2011 provisions to realize last-minute tax benefits. Some of these benefits may not be available in 2012. It is worthwhile to look at these planning opportunities as part of an overall year-year financial strategy.
Adoptive parents may be eligible for federal tax incentives. The Tax Code includes an adoption tax credit to help defray the costs of an adoption. Recent changes to the adoption tax credit make it very valuable.
Adoptive parents may be eligible for federal tax incentives. The Tax Code includes an adoption tax credit to help defray the costs of an adoption. Recent changes to the adoption tax credit make it very valuable.
Temporary increase
In 2010, Congress temporarily increased the dollar limitation for the adoption tax credit (and the income exclusion for employer-provided adoption expenses) by $1,000 (from $12,170 to $13,170 for 2010 and indexed for inflation for tax years beginning after December 31, 2010). Congress also made the adoption tax credit refundable for 2010 and 2011. These enhancements, however, are scheduled to expire after December 31, 2011 unless Congress extends them.
Your income is another factor to take into account. You may not receive the full amount of the adoption tax credit for 2010 if your modified adjusted gross income (MAGI) is $182,520 or more. The adoption tax credit is completely phased out if your MAGI is $222,520 or more. These amounts may be adjusted for inflation by the IRS in 2011. Additionally, to prevent double benefits, the adoption tax credit is coordinated with the exclusion for employer-provided adoption assistance
Qualified expenses
A number of adoption-related expenses may qualify for the tax credit. These expenses include, but are not limited to, reasonable and necessary adoption fees, travel expenses, fees paid to attorneys, and court costs. The IRS has identified on its website some expenses that are excluded, such as expenses related to the adoption of the child of a taxpayer’s spouse, the costs of a surrogate parenting arrangement, and expenses that violate state or federal law. Additionally, expenses related to a foreign adoption qualify only if the taxpayer actually adopts the child. That rule is different if a domestic adoption is unsuccessful.
Eligible child
An eligible child for purposes of the adoption tax credit is an individual who has not attained the age of 18 at the time of the adoption, or is physically or mentally incapable of caring for himself or herself. A child has special-needs if the child otherwise meets the definition of eligible child, the child is a U.S. citizen or resident, a state determines that the child cannot or should not be returned to his or her parent's home, and a state determines that the child probably will not be adopted unless assistance is provided.
Form 8839
Taxpayers file Form 8839, Qualified Adoption Expenses, to claim the adoption tax credit. At this time, Form 8839 cannot be filed electronically; it must be filed on paper because the IRS requires you to attach supporting documentation.
The IRS requires different documents if the adoption is foreign or domestic, final or not final, and if the adoption is of a child with special needs. The IRS has issued special safe harbor rules for certain foreign adoptions. The home country of the child may be included in the safe harbors which streamline some of the documentation requirements.
The IRS recommends that taxpayers keep the following records: Receipts for qualified adoption expenses, final decree, certificate or order of adoption, home study by an authorized placement agency, child placement agreements or court orders, and determination of special needs status by a State or the District of Columbia.
Processing Form 8839 can take some time. One of the most common mistakes taxpayers make is failing to attach supporting documents. After the IRS conducts an initial review of Form 8839, it notifies taxpayers explaining any additional steps they need to take, such as providing certain documentation to establish whether they are eligible for the credit.
If you have any questions about the adoption tax credit, please contact our office.
Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.
Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.
Business travel
You are considered “traveling away from home” for tax purposes if your duties require you to be away from the general area of your home for a period substantially longer than an ordinary day's work, and you need sleep or rest to meet the demands of work while away. Taxpayers who travel on business may deduct travel expenses if they are not otherwise lavish or extravagant. Business travel expenses include the costs of getting to and from the business destination and any business-related expenses at that destination.
Deductible travel expenses while away from home include, but are not limited to, the costs of:
- Travel by airplane, train, bus, or car to/from the business destination.
- Fares for taxis or other types of transportation between the airport or train station and lodging, the lodging location and the work location, and from one customer to another, or from one place of business to another.
- Meals and lodging.
- Tips for services related to any of these expenses.
- Dry cleaning and laundry.
- Business calls while on the business trip.
- Other similar ordinary and necessary expenses related to business travel.
Business mixed with personal travel
Travel that is primarily for personal reasons, such as a vacation, is a nondeductible personal expense. However, taxpayers often mix personal travel with business travel. In many cases, business travelers may able to engage in some non-business activities and not lose all of the tax benefits associated with business travel.
The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business.
Let’s look at an example. Amanda, a self-employed architect, resides in Seattle. Amanda travels on business to Denver. Her business trip lasts six days. Before departing for home, Amanda travels to Colorado Springs to visit her son, Jeffrey. Amanda’s total expenses are $1,800 for the nine days that she was away from home. If Amanda had not stopped in Colorado Springs, her trip would have been gone only six days and the total cost would have been $1,200. According to past IRS precedent, Amanda can deduct $1,200 for the trip, including the cost of round-trip transportation to and from Denver.
Weekend stayovers
Business travel often concludes on a Friday but it may be more economical to stay over Saturday night and take advantage of a lower travel fare. Generally, the costs of the weekend stayover are deductible as long as they are reasonable. Staying over a Saturday night is one way to add some personal time to a business trip.
Foreign travel
The rules for foreign travel are particularly complex. The amount of deductible travel expenses for foreign travel is linked to how much of the trip was business related. Generally, an individual can deduct all of his or her travel expenses of getting to and from the business destination if the trip is entirely for business.
In certain cases, foreign travel is considered entirely for business even if the taxpayer did not spend his or her entire time on business activities. For example, a foreign business trip is considered entirely for business if the taxpayer was outside the U.S. for more than one week and he or she spent less than 25 percent of the total time outside the U.S. on non-business activities. Other exceptions exist for business travel outside the U.S. for less than one week and in cases where the employee did not have substantial control in planning the trip.
Foreign conventions are especially difficult, but no impossible, to write off depending upon the circumstances. The taxpayer may deduct expenses incurred in attending foreign convention seminar or similar meeting only if it is directly related to active conduct of trade or business and if it is as reasonable to be held outside North American area as within North American area.
Tax home
To determine if an individual is traveling away from home on business, the first step is to determine the location of the taxpayer’s tax home. A taxpayer’s tax home is generally his or her regular place of business, regardless of where he or she maintains his or her family home. An individual may not have a regular or main place of business. In these cases, the individual’s tax home would generally be the place where he or she regularly lives. The duration of an assignment is also a factor. If an assignment or job away from the individual’s main place of work is temporary, his or her tax home does not change. Generally, a temporary assignment is one that lasts less than one year.
The distinction between tax home and family home is important, among other reasons, to determine if certain deductions are allowed. Here’s an example.
Alec’s family home is in Tucson, where he works for ABC Co. 14 weeks a year. Alec spends the remaining 38 weeks of the year working for ABC Co. in San Diego. Alec has maintained this work schedule for the past three years. While in San Diego, Alec resides in a hotel and takes most of his meals at restaurants. San Diego would be treated as Alec’s tax home because he spends most of his time there. Consequently, Alec would not be able to deduct the costs of lodging and meals in San Diego.
Accountable and nonaccountable plans
Many employees are reimbursed by their employer for business travel expenses. Depending on the type of plan the employer has, the reimbursement for business travel may or may not be taxable. There are two types of plans: accountable plans and nonaccountable plans.
An accountable plan is not taxable to the employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and federal employment taxes. Accountable plans have a number of requirements:
- There must be a business connection to the expenditure. The expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his or her individual income tax return.
- There must be adequate accounting by the recipient within a reasonable period of time. Employees must verify the date, time, place, amount and the business purpose of the expenses.
- Excess reimbursements or advances must be returned within a reasonable period of time.
Amounts paid under a nonaccountable plan are taxable to employees and are subject to all employment taxes and withholding. A plan may be labeled an accountable plan but if it fails to qualify, the IRS treats it as a nonaccountable plan. If you have any questions about accountable plans, please contact our office.
As mentioned, the tax rules for business travel are complex. Please contact our office if you have any questions.
Americans donate hundreds of millions of dollars every year to charity. It is important that every donation be used as the donors intended and that the charity is legitimate. The IRS oversees the activities of charitable organizations. This is a huge job because of the number and diversity of tax-exempt organizations and one that the IRS takes very seriously.
Americans donate hundreds of millions of dollars every year to charity. It is important that every donation be used as the donors intended and that the charity is legitimate. The IRS oversees the activities of charitable organizations. This is a huge job because of the number and diversity of tax-exempt organizations and one that the IRS takes very seriously.
Exempt organizations
Charitable organizations often are organized as tax-exempt entities. To be tax-exempt under Code Sec. 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes in Code Sec. 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization; that is, it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Churches that meet the requirements of Code Sec. 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.
Tax-exempt organizations must file annual reports with the IRS. If an organization fails to file the required reports for three consecutive years, its tax-exempt status is automatically revoked. Recently, the tax-exempt status of more than 200,000 organizations was automatically revoked. Most of these organizations are very small ones and the IRS believes that they likely did not know about the requirement to file or risk loss of tax-exempt status. The IRS has put special procedures in place to help these small organizations regain their tax-exempt status.
Contributions
Contributions to qualified charities are tax-deductible. They key word here is qualified. The organization must be recognized by the IRS as a legitimate charity.
The IRS maintains a list of organizations eligible to receive tax-deductible charitable contributions. The list is known as Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986. Similar information is available on an IRS Business Master File (BMF) extract.
In certain cases, the IRS will allow deductions for contributions to organizations that have lost their exempt status but are listed in or covered by Publication 78 or the BMF extract. Additionally, private foundations and sponsoring organizations of donor-advised funds generally may rely on an organization's foundation status (or supporting organization type) set forth in Publication 78 or the BMF extract for grant-making purposes.
Generally, the donor must be unaware of the change in status of the organization. If the donor had knowledge of the organization’s revocation of exempt status, knew that revocation was imminent or was responsible for the loss of status, the IRS will disallow any purported deduction.
Churches
As mentioned earlier, churches are not required to apply for tax-exempt status. This means that taxpayers may claim a charitable deduction for donations to a church that meets the Code Sec. 501(c)(3) requirements even though the church has neither sought nor received IRS recognition that it is tax-exempt.
Foreign charities
Contributions to foreign charities may be deductible under an income tax treaty. For example, taxpayers may be able to deduct contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada. Before donating to a foreign charity, please contact our office and we can determine if the contribution meets the IRS requirements for deductibility.
The rules governing charities, tax-exempt organizations and contributions are complex. Please contact our office if you have any questions.
Many more retirees and others wanting guarantee income are looking into annuities, especially given the recent experience of the economic downturn. While the basic concept of an annuity is fairly simple, complex rules usually apply to the taxation of amounts received under certain annuity and life insurance contracts.
Many more retirees and others wanting guarantee income are looking into annuities, especially given the recent experience of the economic downturn. While the basic concept of an annuity is fairly simple, complex rules usually apply to the taxation of amounts received under certain annuity and life insurance contracts.
Amounts received as an annuity are included in gross income to the extent that they exceed the exclusion ratio, which is determined by taking the original investment in the contract, deducting the value of any refund features, and dividing the result by the expected yield on the contract as of the annuity starting date. In general, the expected return is the product of a single payment and the anticipated number of payments to be received, i.e., the total amount the annuitant(s) can expect to receive. In the case of a life annuity, the number of payments is computed based on actuarial tables.
If the annuity payments are to continue as long as the annuitant remains alive, the anticipated number of payments is based on the annuitant's (or annuitants') life expectancy at the birthday nearest the annuity starting date. The IRS provides a variety of actuarial tables, within unisex tables generally applicable to all contracts entered into after June 1986. The expected return multiples found in the actuarial tables may require adjustment if the contract specifies quarterly, semiannual or annual payments or if the interval between payments exceeds the interval between the annuity starting date and the first payment.
In connection with annuity calculations, one recent tax law change in particular is worth noting. Under the Creating Small Business Jobs Act of 2010, enacted on September 27, 2010, if amounts are received as an annuity for a period of 10 years or more or on the lives of one or more individuals under any portion of an annuity, endowment, or life insurance contract, then that portion of the contract will now be treated as a separate contract for tax purposes. As result, a portion of such an annuity, endowment, or life insurance contract may be annuitized, while the balance is not annuitized. The allowance of partial annuitization applies to amounts received in tax years beginning after December 31, 2010.
If you need help in "crunching the numbers" on an annuity, or if you'd like advice on what annuity options might best fit your needs, please do not hesitate to contact our office.
A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.
A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.
The main advantage of an LLC is that in general its members are not personally liable for the debts of the business. Members of LLCs enjoy similar protections from personal liability for business obligations as shareholders in a corporation or limited partners in a limited partnership. Unlike the limited partnership form, which requires that there must be at least one general partner who is personally liable for all the debts of the business, no such requirement exists in an LLC.
A second significant advantage is the flexibility of an LLC to choose its federal tax treatment. Under IRS's "check-the-box rules, an LLC can be taxed as a partnership, C corporation or S corporation for federal income tax purposes. A single-member LLC may elect to be disregarded for federal income tax purposes or taxed as an association (corporation).
LLCs are typically used for entrepreneurial enterprises with small numbers of active participants, family and other closely held businesses, real estate investments, joint ventures, and investment partnerships. However, almost any business that is not contemplating an initial public offering (IPO) in the near future might consider using an LLC as its entity of choice.
Deciding to convert an LLC to a corporation later generally has no federal tax consequences. This is rarely the case when converting a corporation to an LLC. Therefore, when in doubt between forming an LLC or a corporation at the time a business in starting up, it is often wise to opt to form an LLC. As always, exceptions apply. Another alternative from the tax side of planning is electing "S Corporation" tax status under the Internal Revenue Code.
