US Tax Alerts
Identity thieves now targeting businesses, IRS warns
The IRS recently reported good news about tax-related identity theft. Since 2015, the IRS has seen a decrease in identity theft of individuals. However, identity thieves are stepping up their scams against businesses in their search for information about taxpayers. Criminals have one objective: to steal taxpayer information. With Social Security numbers, bank account numbers, employment and health records, and so on, cybercriminals can use this data to e-file fraudulent tax returns and obtain refunds. Often, victims are unaware their identities have been stolen until they file their legitimate return and discover the fraud.
“It’s especially difficult to identify any tax return as fraudulent when criminals are using information stolen from tax preparers,” IRS Commissioner John Koskinen said in Washington, D.C. in July. “The stolen data allows criminals to better impersonate the legitimate taxpayers.” Koskinen added that while the IRS is making progress to protect individuals, more work remains, especially in the business area.
Koskinen reported that in the first five months of 2017, about 107,000 individual taxpayers reported being victims of identity theft, compared to the same period in 2016, when 204,000 individuals filed victim reports. "That’s about 97,000 fewer victims, representing a drop of 47 percent," he said.
Identity thieves have not abandoned their goal. Rather, they have changed targets. So far for 2017, the IRS has identified approximately 10,000 business returns as potential identity theft. Last year, the IRS identified around 4,000 business returns as potential identity theft. In 2015, the number was just 350 business returns. Cybercriminals are e-filing fraudulent corporate returns and fraudulent S corporation returns, among other business returns. Ten thousand returns may seem to be a small number in comparison to the millions of returns filed every year. However, the IRS reported that the potential dollar losses were significant: almost $140 million.
Please contact our office if you have any questions about-tax related identity theft.
401(k) loan taxable when payments missed
A loan from a 401(k) plan can be a valuable source of funds, especially when most other avenues for quick cash are unavailable. Aside for the admonition that retirement savings need to be kept for retirement if at all possible, borrowers in these circumstances should be aware of the terms of the loan, especially the schedule of re-payments.
If an account holder misses even one scheduled payment and then doesn’t make it up during a relatively-short “cure” period, the entire loan is considered a taxable distribution in which immediate income tax, and typically a 10 percent early withdrawal penalty, will be due. A recent taxpayer, who missed payments while on maternity leave, faced such a situation in which the IRS demanded payment and the Tax Court could not provide relief.
IRS examiners given instructions on handling partnership audit elections
The IRS has provided interim guidance to its examiners on handling early "opt-in" elections for the new centralized partnership audit regime, for tax periods beginning after November 2, 2015, and before January 1, 2018. Specifically directed toward Large Business and International Division and Small Business/Self-Employed Division employees, the guidance covers the mechanics of what examiners must do during the initial phase of handling an "early elect-in" election.
Temporary regulations (TD 9730, August 2016) already spelled out for taxpayers rules regarding the time, form and manner for making the election. The latest guidance reflects these regulations from the IRS examiner’s perspective, with step-by-step instruction on required paperwork and deadlines.
No “direct entry” allowed into less onerous offshore disclosure program
The D.C. Circuit Court of Appeals has affirmed that the Anti-Injunction Act (AIA) bars a taxpayer from switching from the earlier Offshore Voluntary Disclosure Program (OVDP) to the more favorable Streamlined Procedures without first following IRS’s transition rules. Although the IRS won on procedural grounds—the court lacked jurisdiction to force a switch, which it found sought to restrain the assessment and collection of unpaid tax liability in light of the AIA—it was a resounding IRS victory nonetheless in pursuing foreign accounts that avoid U.S. income tax.
Not all penalties/interest may be suspended for disaster victims
IRS Chief Counsel has clarified that taxpayers affected by disasters, who had taxes due prior to the start of the postponement period granted for disaster relief, and who did not pay before that due date, do not get the benefit of the Tax Code’s suspension of penalties and interest for failure to pay penalties and interest. Chief Counsel, however, advised that as a fallback position, taxpayers should consider a reasonable-cause argument.
Supreme Court upholds ERISA exemption for church-affiliated pension plans
The U.S. Supreme Court, in Advocate Health Care Network v. Stapleton, SCt., June 5, 2017,has held that a defined benefit (DB) plan maintained by a principal-purpose organization, one controlled by or associated with a church for the administration or funding of a plan for the church's employees, qualifies as a "church plan," regardless of who established it under ERISA. The IRS and other federal agencies have long-exempted plans like the plans in this case from ERISA, the Court observed. Justice Kagan delivered the Court’s unanimous opinion.
In the case before the Supreme Court, several church-affiliated nonprofits operated hospitals and other healthcare facilities and offered defined benefit (DB) pension plans to their employees. The DB plans were established by the hospitals and managed by internal employee benefits committees. Some current and former employees of the hospitals argued that the DB plans were outside of ERISA’s church-plan exemption. According to the employees, the DB plans were not established by a church as required by ERISA.
Over- and underpayment interest rates remain same for third quarter 2017
Although the Federal Reserves’ gradual interest rate increases may eventually impact the interest rates that the IRS uses to bill underpayments and pay on overpayments, they have not yet reached the baseline established with the Tax Code, when lower interest rates were not considered. As a result, the IRS has once again announced that the interest rates on overpayments and underpayments of tax for the calendar quarter beginning July 1, 2017, will remain unchanged. The rates will be:
4 percent for overpayments, other than corporations;
3 percent for overpayments by corporations (except 1.5 percent of the portion of a corporate overpayment exceeding $10,000);
4 percent for underpayments (except large corporations); and
6 percent for large corporate underpayments.
Software engineer denied deductions for Executive MBA degree
Expenses for an MBA degree may or may not be deductible depending upon a taxpayer’s current employment situation. Take two close cases with opposite results:
In Creigh, TC Summary Opinion 2017-26, a software engineer, who worked as a project manager, was not entitled to deduct expenses related to her executive masters of business administration (EMBA). The Tax Court found that the education qualified her for a new trade or business. One determining factor was that the taxpayer’s employment was largely unrelated to her EMBA coursework.
In contrast, in Long, TC Summary Opinion 2016-88, the cost of an MBA degree was deductible since the court reasoned that the degree did not qualify that taxpayer for a new trade or business but further developed skills he was already using in his current trade or business.
President directs IRS to exercise discretion in enforcement of “Johnson amendment”
An Executive Order, issued on May 4, directs the IRS to exercise maximum discretion in its enforcement of the "Johnson amendment" concerning Code Sec. 501(c)(3) charitable/religious organizations. The Johnson amendment (passed by Congress in the 1950s) and subsequent IRS regulations generally prohibit Code Sec. 501(c)(3) organizations from directly or indirectly participating in, or intervening in, a political campaign on behalf of (or in opposition to) any candidate. This prohibition is known as the Johnson amendment, named after the sponsor of the original legislation, President Lyndon Johnson, while he served in the House of Representatives.
Under current rules, political intervention is defined to include any campaign and any activity that favors or opposes a candidate for office. Leaders of exempt organizations can generally voice their opinions on political matters as long as they are speaking for themselves and not on behalf of the organization. When a candidate is invited to speak at an exempt organization’s event, the IRS has set out factors to determine if the organization participated in, or intervened in, a political campaign.
The White House explained that the Executive Order instructs the IRS "to exercise maximum enforcement discretion to alleviate the burden of the Johnson amendment, which prohibits religious leaders from speaking about politics and candidates from the pulpit." The White House added that the Executive Order is effective immediately. However, until either further guidance is provided either by the Executive Branch, Congress or the courts, most observers forecast that not much likely will change as a practical matter for impacted organizations.
IRS updates FAQs on passport certification
In 2015, Congress added Code Sec. 7345 as part of the Fixing America’s Surface Transportation Act of 2015 (FAST Act). Upon receiving certification of seriously delinquent tax debt from the IRS, the FAST Act directs the State Department to deny an individual’s passport application and/or to revoke the individual’s current passport. Although authorized at the end of 2015, the IRS’s passport certification program has only lately gotten up and running. Recently, it has updated its website www.irs.gov to expand on the applicable rules.
“Seriously delinquent tax debt” for this purpose is an individual's unpaid, legally enforceable federal tax debt totaling more than $50,000 (including interest and penalties) for which a notice of federal tax lien has been filed and all administrative remedies under Code Sec.6320 have lapsed or been exhausted; or levy has been issued. The $50,000 threshold is indexed for inflation after 2016.
Comment. Some tax debt is excluded from determining seriously delinquent tax debt, such as tax liabilities being paid in a timely manner under an installment agreement or offer in compromise. Tax debt for which a collection due process hearing is timely requested in connection with a levy to collect the debt or for which collection has been suspended because a request for innocent spouse relief has been made also is excluded from determining seriously delinquent tax debt.
No equitable relief from missing tax court deadline for innocent spouse review
The Third Circuit Court of Appeals has found that the Tax Court properly dismissed for lack of jurisdiction an individual’s petition for review of the IRS’s denial of innocent spouse relief, which was submitted outside of the 90-day deadline specified by Code Sec. 6015(e)(1)(A). Any equitable reasons for missing the 90-day deadline under Code Sec. 6015(e)(1)(A) were irrelevant.
Generally, when spouses file a joint tax return, each spouse is jointly and severally liable for under Code Sec. 6015(c). However, a jointly filing spouse may seek relief from joint and several liability for a tax deficiency if the couple is legally separated, no longer married, and not living together. In addition, for taxpayers who do not satisfy §6015(c), the IRS has discretion to grant relief where it would be “inequitable to hold the individual liable for any … deficiency.” These avenues for relief are referred to as the innocent spouse relief provisions. If the IRS denies relief, then the taxpayer may file a petition with the Tax Court.
In this case, the taxpayer submitted additional information to the IRS before the 90-day deadline was to expire on April 12. The IRS, however, did not change its original determination and reminded the taxpayer that the original 90-day deadline still applied. However, in its correspondence, it noted April 19 rather than April 12 as the end of the 90-day deadline. The taxpayer filed her petition on April 19. Too late, said the Tax Court, the 90-days were up.
Stock broker proves real estate professional status for rental losses
Winning real estate professional status –and the benefits gained from taking business deductions and losses from an “active” rather than “passive” business-- often depends upon good recordkeeping. As shown in a recent Tax Court decision, the ability of a taxpayer to provide precise hours devoted to a number of real estate properties as well as what time the taxpayer spends on other business pursuits is critical in meeting the 750-hours test for real property trades or businesses; and the related more-than-half personal services test.
In the most recent case before the Tax Court, the taxpayer worked part-time as an investment manager, for reported wage income of $285,437. She claimed that she worked sufficiently in her real estate business, however, to be characterized as a real estate professional for purposes of not being subject to the passive activity loss rules under Code Sec. 469. She therefore claimed net losses from her real estate business ($103K sales less $307K losses) against her wage income. The IRS denied her status as a real estate professional, as well as related meals, entertainment, vehicle and cell phone expenses.
CBO reports on top tax incentives/expenditures
The Congressional Budget Office (CBO) issued a report in mid-March about current tax incentives. Tax expenditures, CBPO explained, reduce the amount of revenue that is collected for any given set of statutory tax rates. Tax incentives also affect the distribution of the tax burden in ways that may not always be recognized, both among people at different income levels and among people who have similar income but differ in other ways, CBO reported.
CBO identified the top five largest tax expenditures in 2017 as:
The exclusion from workers’ taxable income of employers’ contributions for health care, health insurance premiums, and premiums for long-term care insurance;
The exclusion of contributions to and the earnings of pension funds (minus pension benefits that are included in taxable income);
Preferential tax rates on dividends and long-term capital gains;
The deferral for profits earned abroad, which certain corporations may exclude from their taxable income until those profits are returned to the U.S.; and
The deductions for state and local taxes (on nonbusiness income, sales, real estate, and personal property).
Other significant tax expenditures include the earned income tax credit (EITC), the deduction for mortgage interest, the immediate deduction for investments in certain business property, and the deduction for charitable contributions, according to CBO. Watch for all of these scores to play a role in the upcoming debate on tax reform.
Employee consent requirements for employer refund claims released
The IRS recently issued the employee consent requirements that an employer need to adhere to in order to support a claim for refund of overpaid taxes under the Federal Insurance Contributions Act (FICA) and the Railroad Retirement Tax Act (RRTA). The guidance clarifies the basic requirements for both a request for employee consent and the content needed for the employee consent. It also permits employee consent to be requested, furnished and retained in electronic format. In addition, the procedure contains guidance concerning what constitutes “reasonable efforts” if employee consent is not secured in order to permit the employer to claim a refund of the employer share of overpaid FICA and RRTA taxes.
The new guidance applies to employee consents requested as of June 5, 2017. It does not require employers to solicit new employee consents and will not affect the validity of any employee consent received pursuant to a request made prior to June 5, 2017, that was provided in accordance with existing law. For employee consents requested before June 5, 2017, employers may rely on the proposed revenue procedures set forth in Notice 2015-15.
New Offers in Compromise policy starts April 27
The IRS informed taxpayers and tax professionals of its updated policy with regards to the Offer in Compromise (OIC) application process. OIC applications received on or after March 27, 2017, will now be returned without further consideration in instances where the taxpayer has not filed all required tax returns, the Service explained. In addition, the associated application fee will also be returned. Further any required initial payment submitted with the OIC will be applied to the outstanding tax debt. The agency also noted that taxpayers continue to be required to make nonrefundable partial payments with the submission of any OIC, the IRS noted. The new policy will not apply to current year tax returns so long as a valid extension is on file.
The new policy can be read on the Offer in Compromise page located on the IRS website and the newly updated Offer in Compromise Booklet, Form 656-B, available as of March 27.