Internal Revenue Service Commissioner Daniel Werfel is looking to build on the successes the agency has experienced with the first year of supplemental funding provided to the agency by the Inflation Reduction Act.
Internal Revenue Service Commissioner Daniel Werfel is looking to build on the successes the agency has experienced with the first year of supplemental funding provided to the agency by the Inflation Reduction Act.
"I look at yeartwo through the lens of what do we need to do with the next filing season to build on the successes of the previous filing season," Werfel said during an August 15 teleconference with press as he highlighted a couple of key objectives he has for the second year of supplemental funding.
"First of all, we had a really strong filing season," he said. "It could be stronger. We want to achieve the highest level of service we can achieve."
Among the improvements he wants to see are a further reduction in wait times on calls to the IRS; expanding the number of self-service options that taxpayers can engage in when they call so they don’t have to wait to be connected to an agency representatives; and getting more people to sign up for an online account with the agency, as well as improving the online account functionality.
"The idea would be from a service standpoint, the filing features should feel very different than the previous year," he said.
Werfel also wants to see more expansion in the walk-in service centers, including hiring more workers to allow for more Saturday hours to help people who might not be able to get there during the week due to work, as well as utilizing more pop-up walk-in centers to help reach people in more remote areas of the United States.
On the enforcement side, Werfel wants to see the "anemic" audit rates of high-wealth individuals, large corporations and complex partnerships continue to rise.
"We started to see real meaningful results there," he noted. "I want to be able to report to the American people that we’re putting the Inflation Reduction Act to work to create and drive a more equitable tax system that’s returning money to the government’s bottom line."
Werfel also said the IRS will continue with reporting the "dirty dozen" tax scams and will continue to be looking at ways to help taxpayers avoid these scams as well as helping the victims of those scams. He highlighted the recent action of ending nearly all unannounced visits by IRS representatives to homes and businesses as a way that taxpayers are being protected.
"My hope is that in each successive year, we’re putting tools out there that taxpayers are leveraging and saying, ‘this is helpful,’ and are appreciative of the fact that the IRS is functioning better than it did in previous years," Werfel said.
Recapping The First Year
Much of the press call focused on highlighting the successes of the first year, with Werfel highlighting that the agency provided better service, including providing assistance to more than 7 million taxpayers over the phone, an increase of 3 million over the previous tax filing season and increased face-to-face help to more than 500,000 people at the taxpayer assistance centers, a 30 percent increase. Werfel also mentioned the use of call-back technology so taxpayers don’t have to wait on the phone on hold and can receive a call-back without losing their place in the queue to talk to an agency representative.
He reiterated gains in enforcement as well as improvements on the technology side such as highlighting the recent announcement of more forms being able to be filed electronically and improvements to document scanning of tax forms.
Another aspect of the Inflation Reduction Act that was highlighted during the law’s one year anniversary was by Treasury Secretary Janet Yellen, who highlighted the green energy tax provisions at a recent speech in Las Vegas.
She noted a variety of ways the IRA is helping to spur investment in clean energy, including in buildings and in clean vehicles and is helping the nation meet international climate standards.
"The IRA is helping re-shape some of the production that is critical to our clean economy," Yellen said, according to prepared remarks that were published on the Treasury Department website.
She also highlighted that earlier this summer, "Treasury also released proposed guidance that would make it easier for these tax credits to reach a broad range of institutions. We are implementing innovative tools that will enable states, cities, towns, and tax-exempt organizations – like schools and hospitals – to directly access these credits."
By Gregory Twachtman, Washington News Editor
The Financial Crimes Enforcement Network is seeing a "concerning" increase in state and federal payroll tax evasion and workers’ compensation fraud in the U.S. residential and commercial real estate construction industries.
The Financial Crimes Enforcement Network is seeing a "concerning" increase in state and federal payroll tax evasion and workers’ compensation fraud in the U.S. residential and commercial real estate construction industries.
"FinCEN is committed to combating fraud by shedding light on how illicit actors within the construction industry are using shell corporations and other tactics to commit workers’ compensation fraud and avoid payroll taxes," FinCEN Acting Director Himamauli Das said in a statement.
The agency in a FinCEN Notice issued August 15, 2023, highlighted how companies evade payroll taxes. Step one has construction contractors writing checks payable to the shell corporation, which creates the façade that the shell company is performing construction projects. Step two sees the shell company operator deposit cash the checks at a check cashing facility or deposit them into a shell company bank account. Step three sees the shell company return the cash to the construction contractor, minus a fee, for renting the workers’ compensation insurance policy and conducting payroll-related transactions. The final step is the construction contractors using the cash to pay the workers without withholding appropriate payroll-related taxes or paying any workers’ compensation premiums.
The notice also draws attention "a range of red flags to assist financial institutions in detecting, preventing, and reporting suspicions transactions associated with shell companies perpetrating payrolltax evasion and workers’ compensation fraud in the construction industry." Among the 11 red flags highlighted are:
- The customer is a new (i.e., less than two years old) small construction company specializing in one type of construction trade (e.g., framing, drywall, stucco, masonry, etc.) with minimal online presence and has indicators of being a shell company;
- Beneficial owners of the shell company have no known prior involvement with, or in, the construction industry, and the individual opening the account provides a non-U.S. passport as a form of identification;
- A customer receives weekly deposits in their account that exceed normal account activity from several construction contractors involved in multiple construction trades;
- Large volumes of checks for under $1,000 are drawn on the company’s bank account and made payable to separate individuals (i.e., the workers) which are subsequently negotiated for cash by the payee, and
- The company’s bank account has minimal to no tax- or payroll-related payments to the Internal Revenue Service, state and local tax authorities, or a third-party payroll company despite a large volume of deposits from client.
The statement did not provide any statistical data that reflect the rise in payroll tax evasion or workers’ compensation fraud, but said that every year, "state and federal tax authorities lose hundreds of millions of dollars to these schemes, which are perpetrated by illicit actors primarily through banks and check cashers."
The notice also reminds financial institutions’ obligations to file a suspicious activity report if a transaction could be conducted with the intent for fraud or tax evasion, and it provides instructions on how to file the SAR.
By Gregory Twachtman, Washington News Editor
NATIONAL HARBOR, Md.—National Taxpayer Advocate Erin Collins is hoping that collections notices from the Internal Revenue Service will resume in the coming months.
NATIONAL HARBOR, Md.—National Taxpayer Advocate Erin Collins is hoping that collections notices from the Internal Revenue Service will resume in the coming months.
The agency suspended automated collections notices in response to the backlog of unprocessed mail correspondence that resulted from the shutdowns due to the COVID-19 pandemic and have yet to resume sending notices out.
Collis said that the agency is developing a plan on how those collections notices will resume and she said it is an important piece of information that taxpayers with balances due need.
Speaking here August 9, 2023, at the IRS Nationwide Tax Forum event, Collins expressed concern that people are saying "hey, the IRS probably forgot about me because it’s been 18 months. And I am concerned that people do not realize that interest and the failure to pay [penalty] is kicking in."
And while she urged IRS to resume collections notices, she also cautioned that it needs to be done in a staggered fashion so that the agency, as well as tax professionals are not simultaneously inundated with calls about these notices all at once, potentially creating another backlog as the agency continues to clear backlog pandemic inventories.
"So what they’re trying to do is stagger them," Collins said. "Have then come out in different timeframes so that all of them don’t hit at the same time, … because if they turn the spigot on, how many phone calls are they going to get that next day? They won’t be able to handle that volume."
Collins said the agency is looking at how to prioritize which notices should be going out first as well as possibly changing the notices to make them more informative for taxpayers.
"So, stay tuned on that," he told attendees. "I don’t think it’ll be tomorrow, but I’m hoping that it’ll be months from now, not two years from now that we turn it back on."
Another area Collins expressed concerns about is the changing of the 1099-K threshold to $600. She said that her office has been in touch with "the Venmos of the world" to try to get them to put systems in place that will help their customers differentiate between personal transactions and business transactions to help ensure that 1099-Ks that will be issued because of the new threshold will accurate.
"I don’t know what’s going to happen between now and January, but the IRS, and our office as well, has been trying to work on this so it’s not as big a problem," she said. "But I am a little concerned because there’s going to be a lot of 1099 cases, potentially."
Collins also offered a "spoiler alert" that the online accounts for tax professionals "will become useful." She suggested it will not be the fully functioning portal she has been calling for, but there will be more functions added to it to make it a useful tool for tax practitioners.
"It will no longer be just a glorified Power of Attorney form, or the ability to file one,” she said. “It will actually have some usefulness. … Stay tuned."
By Gregory Twachtman, Washington News Editor
Taxpayers, by the 2024 filing season, will be able to digitally submit all correspondence, non-tax forms, and notice responses electronically to the Internal Revenue Service, the agency announced.
Additionally,"by Filing Season 2025, the IRS is committing to digitally process 100 percent of tax and information returns that are submitted by paper, as well as half of all paper correspondence, non-tax forms, and notice responses,"Department of the Treasury Secretary Janet Yellen said August 2, 2023. "It will also digitalize historical documents that are currently in storage at the IRS."
Taxpayers, by the 2024 filing season, will be able to digitally submit all correspondence, non-tax forms, and notice responses electronically to the Internal Revenue Service, the agency announced.
Additionally,"by Filing Season 2025, the IRS is committing to digitally process 100 percent of tax and information returns that are submitted by paper, as well as half of all paper correspondence, non-tax forms, and notice responses,"Department of the Treasury Secretary Janet Yellen said August 2, 2023. "It will also digitalize historical documents that are currently in storage at the IRS."
Taxpayers will still have the option of mailing in paper-based correspondence.
Yellen cited the supplemental funding provided by the Inflation Reduction Act to the IRS for giving the agency the ability to transition from "a paper-based agency" to a "digital-first agency."
"This ‘PaperlessProcessing’ initiative is the key that unlocks other customer service improvements," Yellen said. "It will enable taxpayers to see their documents, securely access their data, and save time and money. And it will allow other parts of the IRS to rely on these digital copies to provide faster refunds, reduce errors in tax processing, and delivery a more seamless and responsive customer service experience."
According to a fact sheet issued by the IRS, the agency estimates that "more than 94 percent of individual taxpayers will no longer ever need to send mail to the IRS," and will enable up to 152 million paper documents to be submitted digitally per year.
Additionally, taxpayers will be able to e-file 20 additional tax forms, enabling up to 4 million additional tax forms to be filed digitally each year, including amendments to Forms 940, 941, 941SSPR.
"At least 20 of the most used non-tax forms will be available in digital, mobile-friendly formats that make them easy for taxpayers to complete and submit," the fact sheet continues. "These forms will include a Request for Taxpayer Advocate Service Assistance, making it easier for taxpayers to get the help they need."
The fact sheet also outlines some more targets for the 2025 filing season, including:
- making an additional 150 of the most used non-tax forms available in digital, mobile-friendly formats;
- digitally processing all paper-filed tax and information returns;
- processing at least half of paper-submitted correspondence, with all paper documents – correspondence, non-tax forms, and notice responses – to be processed digitally by Filing Season 2026; and
- digitizing up to 1 billion historical documents.
"When combined with an improved data platform, digitization and data extraction will enable data scientists to implement advanced analytics and pattern recognition methods to pursue cases that can help address the tax [gap], including wealthy individuals and large corporations using complex structures to evade taxes they owe," the fact sheet states.
By Gregory Twachtman, Washington News Editor
An IRS Notice provides a transition rule that generally allows taxpayers to claim the Code Sec. 25C energy efficient home improvement credit for home energy audits conducted in 2023 even if the auditor is not certified. The Notice also describes regulations the IRS intends to propose for qualified home energy audits.
An IRS Notice provides a transition rule that generally allows taxpayers to claim the Code Sec. 25C energy efficient home improvement credit for home energy audits conducted in 2023 even if the auditor is not certified. The Notice also describes regulations the IRS intends to propose for qualified home energy audits.
Taxpayers may rely on the Notice until the proposed regs are issued. The proposed regs are expected to apply to tax years ending after December 31, 2022 .
Energy Efficient Home Improvement Credit for Home Energy Audits
The energy efficient home improvement credit is generally equal to 30 percent of amounts paid or incurred for qualified energy efficiency improvements, residential energy property expenditures, and home energy audits placed in service after 2022. The credit is generally limited to $1,200 per year, but different annual limits apply to particular types of expenses.
The annual credit for home energy audits is limited to $150 per year. For example, if a taxpayer pays $900 for a home energy audit, the credit is limited to $150 rather than 30 percent of the expense ($300).
A qualified home energy audit must:
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(1)
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be for a dwelling unit in the United States that the taxpayer owns or uses as a principal residence;
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(2)
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be prepared by a home energy auditor that meets certification or other requirements specified by the IRS; and
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(3)
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include a written report that identifies the most significant and cost-effective energy efficiency improvements with respect to the home, and estimates the energy and cost savings with respect to each of those improvements.
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Transition Rule for 2023
A transition rule applies to home energy audits conducted on or before December 31, 2023, during a tax year ending after December 31, 2022. An audit during this transition period may qualify for the credit even if it is not conducted by a certified home energy auditor. However, an audit conducted after December 31, 2023, will not qualify for the credit unless the auditor is certified.
Proposed Regs: Certified Home Energy Auditor
The proposed regs will define a "qualified home energy audit" as an inspection conducted by or under the supervision of a qualified home energy auditor. The audit must be consistent with the Jobs Task Analysis led by the Department of Energy (DOE) and validated by the industry.
A qualified home energy auditor will have to be certified by a Qualified Certification Program at the time of the audit. DOE maintains a list of qualified certified programs on its website at https://www.energy.gov/eere/buildings/25c-energy-efficient-home-improvement-credit. These are the only programs that may certify a qualified home energy auditor.
Proposed Regs: Written Report
Under the proposed regs, a qualified home energy audit must include a written report prepared and signed by the qualified home energy auditor. The report must include:
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(1)
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the auditor’s name and employer identification number (EIN) or other relevant taxpayer identifying number;
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(2)
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an attestation that the auditor is certified by a qualified certification program; and
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(3)
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the name of the certification program.
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Proposed Regs: Substantiation
Finally, the proposed regs will require the taxpayer to substantiate the home energy audit expenditure by maintaining the certified home energy auditor’s signed written report as a tax record. The taxpayer must also comply with the instructions for Form 5695, Residential Energy Credits, or any successor form.
The Internal Revenue Service will end, except in very limited circumstances, the practice of making unannounced visits to taxpayers’ homes and businesses."This change is effective immediately,"IRS Commissioner Daniel Werfel said during a July 24, 2023, teleconference with reporters. Werfel said the change is being made in reaction to an increase in scam activity as well as for IRS employee safety."With a growth in scam artists, taxpayers are increasingly uncertain who was knocking on their doors," Werfel said. "For IRS employees, there were fears about their own personal safety on these visits. I also learned that these concerns were shared by our partners as the National Treasury Employees Union."
The Internal Revenue Service will end, except in very limited circumstances, the practice of making unannounced visits to taxpayers’ homes and businesses."This change is effective immediately,"IRS Commissioner Daniel Werfel said during a July 24, 2023, teleconference with reporters. Werfel said the change is being made in reaction to an increase in scam activity as well as for IRS employee safety."With a growth in scam artists, taxpayers are increasingly uncertain who was knocking on their doors," Werfel said. "For IRS employees, there were fears about their own personal safety on these visits. I also learned that these concerns were shared by our partners as the National Treasury Employees Union."
Unannounced visits will be replaced with scheduled visits. If the IRS needs to meet with a taxpayer, that taxpayer will receive an appointment letter, known as a 725-B letter, to schedule a time for a revenue officer to meet with the taxpayer."This will help taxpayers feel more prepared when it is time to meet," Werfel said."“Taxpayers whose cases are assigned to a revenue officer will now be able to schedule face-to-face meetings at a set place and time. They will have the necessary information and documents in hand to reach a resolution of their cases more quickly."
In addressing what the IRS will do if a taxpayer is not reachable by mail or is not responding to a meeting scheduling letter, Werfel stated that there are other actions that the agency can take to help drive compliance, such as imposing a lien or a levy, which can be done remotely. He also stressed that in past cases where revenue officers made unannounced visits, they were in situations where the revenue officer was attempting to collect a sizable debt with a median in these cases of $110,000."These homevisits were not occurring for small tax debt," Werfel said. "These are for big tax debts." Werfel outlined what he described as "rare instances" when unannounced visits will continue to occur, including service of a summons and subpoena as well as in the conduct of sensitive enforcement activities such as the seizure of assets."These activities are just a drop in the bucket compared to the number of visits that have taken place in the past," Werfel said, noting that there were a few hundred each year compared to the tens of thousands of other visits that occurred each year under the decades-old policy.
Werfel said that this policy will not impact activities conducted by the Criminal Investigations division, which operates under its own rules and protocols."Today’s decision is part of a broader plan that will help us work smarter and be more efficient," he said, noting this action is part of the larger IRS transformation effort taking place with the help of the supplemental funding provided by the Inflation Reduction Act.
By Gregory Twachtman, Washington News Editor
The IRS has released a revenue ruling providing additional guidance concerning receipt of cryptocurrency. If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the tax year in which the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and receives additional units of cryptocurrency as rewards as a result of the validation
The IRS has released a revenue ruling providing additional guidance concerning receipt of cryptocurrency. If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the tax year in which the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and receives additional units of cryptocurrency as rewards as a result of the validation
Scenario in the Ruling
The revenue ruling presents a scenario in which transactions in a cryptocurrency that is convertible virtual currency are validated by a proof-of-stake consensus mechanism. A cash-method taxpayer validates a new block of transactions on the cryptocurrency blockchain, receiving two units of the cryptocurrency as validation rewards. Pursuant to the cryptocurrency protocol, during a brief period ending on Date 2, the taxpayer lacks the ability to sell, exchange, or otherwise dispose of any interest in the two units of cryptocurrency in any manner. On the following day (Date 3), the taxpayer has the ability to sell, exchange, or otherwise dispose of the two cryptocurrency units.
Analysis and Holding
Cryptocurrency that is convertible virtual currency is treated as property for Federal income tax purposes and general tax principles applicable to property transactions apply to transactions involving cryptocurrency. For example, a taxpayer who receives cryptocurrency as a payment for goods or services or who mines cryptocurrency must include the fair market value of the cryptocurrency in the taxpayer's gross income in the tax year the taxpayer obtains dominion and control of the cryptocurrency.
In the scenario, two units of cryptocurrency represent the taxpayer's reward for staking units and validating transactions on the blockchain. On Date 3, the taxpayer has an accession to wealth as the taxpayer gains dominion and control through the taxpayer's ability, as of this date, to sell, exchange, or otherwise dispose of the two units of cryptocurrency received as validation rewards. Accordingly, the fair market value of the two units of cryptocurrency is included in taxpayer's gross income for the tax year that includes Date 3.
Problems with the Internal Revenue Service’s handling of the Employee Retention Tax Credit took center stage before a House committee hearing, with tax professionals airing issues they have experienced and ongoing concerns they have.
Problems with the Internal Revenue Service’s handling of the Employee Retention Tax Credit took center stage before a House committee hearing, with tax professionals airing issues they have experienced and ongoing concerns they have.
Testifying at a July 28, 2023, hearing of the House Ways and Means Subcommittee on Oversight, Larry Gray, partner at AGC CPA, said that as the pandemic started and he started to make educational YouTube videos to help other practitioners navigate the tax law, he found issues with the ERTC, including the growing industry of ERTC mills and the potential for fraud that comes with them.
He noted that many of these mills are simply taking their fee for providing essentially clerical assistance. However, Gray noted that in these ERTC mills, the agreements stated that"they don’t do audit," but they might be able to help find someone of a business does get audited because of the ERTC filing. And unfortunately, as was discussed throughout the hearing, people are falling for these ERTC mills and putting their businesses at risk.
And Gray put the problems that have arisen squarely on the IRS.
"We are getting no guidance," Gray said. "There should have been an ERTC implementation team to coordinate from the top down. We need education. We need guidance."
To that end, the IRS did issue a legal advice memorandum on July 20, 2023, that shows the application of the statutory requirements of the ERTC across five different scenarios.
Gray also took a subtle dig at Congress, acknowledging in his testimony that part of the issues could be related to an IRS that was "understaffed, and they were underfunded" when the COVID-19 pandemic began three years ago.
Roger Harris, President of accounting and tax firm Padgett Advisors, also highlighted issues, starting with the first which was "how we submitted claims to the IRS," which was exclusively on paper at a time when no one was present to handle the processing of paper correspondence because of the pandemic, creating a significant backlog.
"And it’s still ongoing," he continued, causing a "delay in getting the money out to the people who need it."
And with all the moving parts related to potential people who need to amend returns depending on how the business is structured, a mistake in any of these forms could be generating penalties and interest, a problem that is magnified when combined with Gray’s observation of the lack of available guidance to help taxpayers who are trying to do the right thing and collect money they are legitimately owed.
Ahead of the subcommittee hearing, the IRS announced in a July 26, 2023, statement that it received more than 2.5 million claims since the ERTC program began and it has "made substantial progress on these claims this year, with 99 percent of claims approximately three-months old as of mid-July."
However, throughout the hearing, witnesses and committee members questioned the integrity of that figure, noting that IRS has changed numbers on its website as to how many claims remain in the backlog. There also were question on how the figure itself is determined.
Harris also pointed out the problems the ERTC mills are causing with his business and for other tax professionals looking to do the right thing by their clients.
"We have had clients that we have dealt with for many years who have trusted our advice," Harris testified. "But all of a sudden when someone is telling them, ‘Your advisor doesn’t know what they are doing, and if you listen to me, I can give you a half million dollars,’ it’s very hard for as the people who are working with these small businesses to win that argument, in many instances, just because of the sheer amount of money that is being dangled in front of them."
Harris continued: "And as we have heard, the IRS has no choice but to begin enforcement actions to try and correct this."
He said he is asking the IRS "for some help [with] a real-world solution to give us the ability to try to bring these people back into compliance. … [It] is going to take a concerted effort by our industry, the tax practitioner community, to help solve this problem," especially when people may have already spent the money because they were unaware that the weren’t entitled to under the ERTC program and fell for the fraud being perpetrated by the ERTC mills. And that does not even account for the fees that were paid to the ERTC mills that will never be recovered.
He did note that IRS Commissioner Daniel Werfel, at last week’s IRS-sponsored tax forum in Atlanta did ask tax practitioners what they needed in regard to the ERTC.
In its July 26 statement, the IRS offered a series of recommendations on how to avoid ERTC scams. At the tax forum, Werfel said that the "amount of misleading marketing around this credit is staggering, and it is creating an array of problems for taxprofessionals and the IRS while adding risk for businesses improperly claiming the credit. A terrible scenario is unfolding that hurts everyone involved – except the promoters" of the misleading ERTC marketing.
By Gregory Twachtman, Washington News Editor
The IRS announced substantial progress in the ongoing effort related to the dubious Employee Retention Credit (ERC) claims. The IRS successfully cleared the backlog of valid ERCs. The period of eligibility for the credit for affected businesses is very limited, covering only between March 13, 2020, and December. 31, 2021. Under the current law, businesses can typically continue to file claims for the credit until April 15, 2025.
The IRS announced substantial progress in the ongoing effort related to the dubious Employee Retention Credit (ERC) claims. The IRS successfully cleared the backlog of valid ERCs. The period of eligibility for the credit for affected businesses is very limited, covering only between March 13, 2020, and December. 31, 2021. Under the current law, businesses can typically continue to file claims for the credit until April 15, 2025.
"The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining," IRS Commissioner Danny Werfel told attendees at the IRS Nationwide Tax Forum in Atlanta. "Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area," he added.
Taxpayers should be wary of certain signs including (1) unsolicited calls or advertisements mentioning an easy application process; (2) statements that the promoter or company can determine ERC eligibility within minutes; and (3) large upfront fees to claim the credit. Eligible employers who need help claiming the credit should work with a trusted tax professional. Finally, taxpayers can report ERC abuse by submitting Form 14242, Report Suspected Abusive Tax Promotions or Preparers and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations.
The Internal Revenue Service is looking for ways get its post-filing alternative dispute resolution programs greater exposure and use.
The agency recently issued a public call for comment on a variety of topics related to the use of ADR, including learning why taxpayers choose not to use ADR; issues that keep taxpayers from using ADR that should be changed to allow for inclusion; how best to improve ADR; how best to education about ADR; feedback on when ADR proved particularly useful; and ideas on how to achieve tax certainty or resolution sooner beyond existing ADR programs, including ideas for new programs.
The Internal Revenue Service is looking for ways get its post-filing alternative dispute resolution programs greater exposure and use.
The agency recently issued a public call for comment on a variety of topics related to the use of ADR, including learning why taxpayers choose not to use ADR; issues that keep taxpayers from using ADR that should be changed to allow for inclusion; how best to improve ADR; how best to education about ADR; feedback on when ADR proved particularly useful; and ideas on how to achieve tax certainty or resolution sooner beyond existing ADR programs, including ideas for new programs.
A list of specific issues the IRS has outlined can be found here, though comments submitted about the ADR should not necessarily be limited to the subject areas listed.
Indu Subbiah, supervisory appeals officer and acting senior advisor in the IRS Independent Office of Appeal, explained the genesis of this request for comment.
"We had a sense the ADR [programs] weren’t being used quite as robustly as we would have liked,” she said in an interview with Federal Tax Daily, adding that a recently issued U.S. Government Accountability Office report “really brought that to our attention."
According to the report, “IRS Could Better Manage Alternative Dispute Resolution Programs To Maximize Benefits,"IRS Could Better Manage Alternative Dispute Resolution Programs To Maximize Benefits," GAO found that while the agency offers six alternative dispute resolution programs,"IRS used ADR programs to resolve disputes in less than half of one percent of all cases reviews by its Independent Office of Appeals"from fiscal year 2013 to 2022. In this time period, the number of cases closed using ADR annually peaked in 2014 (429 cases closed) and then steadily declined during the review period, reaching a low point of 119 cases closed in 2022.
"Beyond these data on ADR usage, IRS does not have the data necessary to manage the ADR programs, such as data on taxpayer requests to use ADR; IRS’ acceptance or rejection of those requests; and the results from using ADR, including rate of resolution, time, and costs," the GAO report states. "Although IRS does not know definitively why ADR usage has declined, potential reasons include taxpayers do not perceive the benefits of using ADR, according to IRS officials"
The report continues: "IRS is missing opportunities to use several management practices for its ADR programs to help increase taxpayers’ willingness to use ADR as well as maximize the programs’ benefits. IRS does not have clear and measurable objectives for its ADR programs that contribute to achieving IRS’s strategic goals and objectives, such as its ability to resolve disputes over specific tax issues and reduce the investment of time and money to do so. IRS does not analyze data to assess whether ADR is achieving benefits. … IRS has not regularly monitored the taxpayer experience with ADR to address problems in real-time."
With these critical observations about the ADR programs being put forth by GAO, the Independent Office of Appeals is now proactively looking at what is going on to make the ADR programs work better for taxpayers and the agency, the first step being this request for comments.
"The whole point of ADR programs is so that taxpayers and the IRS can use ADR to resolve issues, potentially at a lower cost," Subbiah said. "I think everybody would agree that when the process works, the IRS and the taxpayer can avoid costly litigation."
"The question for us is how can we is how can we even improve the ability to resolve a case with Appeals, and to me, it’s maybe can we resolve those cases sooner," Andrew Keyso, chief of the IRS Office of Independent Appeals, said during the interview.
"I think this is a good time to reconsider how we do alternative dispute resolution and mediation because of the" supplemental funding the agency received as part of the Inflation Reduction Act, Keyso said, noting that there are more resources to apply to appeals officers and mediators.
Keyso said that one of the ways the Office of Appeals measures success of ADR "based on how many people are coming in to use ADR and those numbers are fairly small. So I think we’d like to see those numbers increase."
One thing that the IRS will be looking for in the questions is the need for education as a potential way to increase the use of ADR. In fact, one of the questions the agency asked is directly focused on education.
"One of the questions we really focused on was education," Subbiah said, noting that they are looking for stakeholders to "tell us [and] to help us understand whether it is [lack of] education [on ADR and its benefits] or is it something else. I think it will be very telling and very interesting to us to really get at the heart of why it isn’t being used."
Elizabeth Askey, deputy chief of the Office of Independent Appeals, noted, anecdotally, that larger businesses and wealthier taxpayers seem to be a lot more aware of the various tools at their disposal, including ADR. However, the Office also is hearing situations where there is a reluctance on the part of compliance officers to use ADR tools.
Keyso added that while larger businesses and wealthier taxpayers might be more aware of ADR, there needs to be more education for smaller businesses and lower income taxpayers, in addition to education across the IRS itself.
"So, in those cases, it may be a matter of us getting to the root of why some compliance personnel are less inclined to go this route than others," Askey said during the interview. "It’s not just the education of taxpayers and their practitioners, but of our own compliance personnel."
Keyso stressed that this effort was broad, not only in the scope of which taxpayers and practitioners might need education about the availability and use of ADR, but also within the agency. And he remains optimistic that this effort to request commentary from the public will help that.
"We’re optimistic that the public will come in and tell us why we don’t make use of more ADR. We don’t find it productive, for instance, or we can’t get the agency to cooperate," he said. And with the additional IRA funding in hand, the agency can respond and look to see how ADR can be restructured to make it more useful for everyone to help get more issues resolved in a more timely and cost-efficient manner.
"I hope that mindset is shared across the agency," Keyso said."I think it is and is becoming more so in the effort to help resolve cases quickly." He noted there will always be cases where resolution needs a more traditional path, but when this process is complete, there will be a greater recognition where ADR can be and is used.
IRS is asking the public to submit its comments on the ADR programs by August 25, 2023, via email at ap.adr.programs@irs.gov.
By Gregory Twachtman, Washington News Editor
National Taxpayer Advocate Erin Collins is reiterating her call for the Internal Revenue Service to stop automatically assessing penalties related to international information returns.
National Taxpayer Advocate Erin Collins is reiterating her call for the Internal Revenue Service to stop automatically assessing penalties related to international information returns.
In an August 22, 2023, blog post, she also called on the agency to "provide taxpayers due process by affording them the opportunity to administratively present their reasonable cause defense and request FTA [first time abatement] and consideration by the Independent Office of Appeals prior to any assessment."
The blog post noted that relief was needed because there is "a misconception that IIRpenalties affect primarily bad-faith, wealthy taxpayers who are experiencing consequences of their own making."
However, that is not the case. Collins wrote that the automatic penalty regime "disproportionately affects individuals and businesses of more moderate resources, and is by no means just a rich person’s problem. Wealthy individuals and large businesses tend to have knowledgeable and well-informed representation and as a result have fewer foot faults. Immigrants, small businesses, and low-income individuals may not be as well-informed about IIRpenalties and may not have return preparers with the same technical expertise on international penalties."
NTA noted that from 2018-2021, 71 percent of the penalties were assessed to taxpayers with incomes of $400,000 or less, with an average penalty to these people being more than $40,000.
One example of how penalties can be triggered is when an immigrant who is a U.S. citizen starts a small business and includes family members who live abroad. This arrangement could trigger the need for an IIR and if it is not filed, the taxpayer could be automatically assessed penalties, which are defined in Internal Revenue Code Sec. 6038 and 6038A. The blog goes through a number of other scenarios which would require an IIR and penalties for failure to do so.
However, when "taxpayers voluntarily correct their failure to file, this good-faith action can sometimes have the unexpected effect of causing the IRS to automatically assess the penalty,"the blog states. "If the IRS does not administratively abate the penalty, taxpayers will need to pay the penalty in full before challenging by filing suit refund in the United States District Court or the United States Court of Federal Appeals."
Collins continues to advocate for legislative changes that would allow for changes in due process that would allow for cases to be heard in court before any penalties are paid, as well as providing a more "efficient and equitable regime governing the initial imposition of IIRpenalties and the mechanisms by which they can be challenged by taxpayers while also protecting their rights."
By Gregory Twachtman, Washington News Editor
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.
