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August

 

Properly classifying workers remains a major problem

By Roger Russell

 

Worker misclassification is a perennial issue for the Internal Revenue Service and state taxing authorities due to the perception that many employers are not properly classifying their workers.

By avoiding labeling their workers as employees, employers also avoid paying minimum wages, overtime, payroll taxes, worker’s compensation, unemployment, Social Security contributions, health benefits, paid leave, 401(k) benefits and unpaid leave under the Federal Family and Medical Leave Act. And workers have some benefits to being considered independent contractors, such as the ability to deduct certain business expenses that are not available to employees, the ability to set up their own retirement plans, and the fact that they are not subject to withholding. Of course, many workers want to be considered employees so they can get the benefits due employees, such as vacation pay, overtime pay and health insurance.

 

It’s easy for an accountant to make a mistake because there is no bright-line test to judge whether a worker is an employee or an independent contractor. The IRS has used a 20-factor test based on common law principles, which it has also shortened into a three-part test focusing on behavioral control, financial control, and the relationship of the parties. The IRS still uses both tests, and states may follow the federal tests or have their own, more restrictive rules.

 

“Accountants may be unfamiliar with the distinction, and if the IRS or Department of Labor comes in and disputes the decision to label them as independent contractors, they can land in trouble,” said John Raspante, a CPA and director of risk management for CPA Protector Plan, a division of insurance intermediary Brown & Brown. “The rules are complex, and they are subject to multiple reviews,” he said. “The IRS, the DOL or the state workers’ compensation board can object to the status of a worker. The IRS has been successful in these situations, and the claim against the CPA can be significant.”

 

“It’s a hot-button issue with the IRS, and the DOL and state workers compensation boards are becoming more involved,” said Edgar Gee, a Knoxville, Tenn.-based CPA who specializes in employee classification issues. “They have agreements to share information. When you settle with one, you think it’s over, but it may be just beginning.”

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If a business classifies a worker as an independent contractor and the worker is found to be an employee, the business is responsible for the taxes it failed to withhold, as well as the employee’s share, plus interest and penalties over the years the misclassification was claimed. “With several employees over several years, this can quickly become a nightmare,” said Gee.

 

Remediation

For those employers losing sleep over the potential consequences of a misclassification, the IRS still has a Voluntary Classification Settlement Program. The mechanics are simple: The employer files Form 8952, Application for Voluntary Classification Settlement Program, and sends it to the IRS, which does an eligibility check and prepares a closing agreement. The taxpayer signs it and sends it back with the amount owed, and begins prospectively treating the workers in question as employees.

 

“It allows the employer to pay a reduced fine or penalty if they agree to reclassify and start to withhold and pay tax on a prospective basis,” said Gee. Under the program, the amount owed is just over 1 percent of the wages paid to the reclassified workers for the past year, with no interest or penalties and no admission of guilt.

 

Gee noted that the prerequisites to filing Form 8952 include consistency in treating the workers and any similar workers as independent contractors, and filing all required 1099s for them in prior years. “These are the first two prongs of the Section 530 safe harbor,” he said. (Section 530 of the Revenue Act of 1978, which is not a part of the Internal Revenue Code, provides a safe harbor for employers. Originally intended as a temporary measure, it was made permanent in 1982.) “The third step is finding a reasonable basis to treat them as independent contractors,” Gee said. “If you’ve met the first two prongs already, it’s pretty certain that you meet the third step, which is having a reasonable basis for treating them as independent contractors.”

 

To add to the complexity in dealing with the issue, DOL standards, and some state rules, are stricter than IRS rules, Gee observed.

 

One of the states with its own set of rules is Massachusetts, which adds a particularly burdensome requirement, according to Kenneth Brier, a CPA and partner at Needham, Mass.-based law firm Brier & Ganz LLP.

 

“Massachusetts is particularly onerous,” he said. “Under Massachusetts law, an independent contractor not only has to meet the federal test, but in addition the worker must not be performing services in an area which is intrinsic to the employer’s own business. For example, if a CPA firm hires accountants on a per diem basis to help during busy season, they are clearly hired to do something intrinsic to the firm’s business. They have to be employees, even if they’re hired for a short term.”

 

“It can become a confusing mishmash,” he added. “You could have a bona fide independent contractor for federal tax purposes and for Massachusetts tax purposes, but nonetheless an employee for other Massachusetts [purposes] such as wage and hour laws.”

 

There is risk from a number of areas, said Scott Connolly, head of the employment law group at Waltham, Mass.-based Morse Barnes-Brown Pendleton PC. “The employer should be concerned about misclassification claims from the workers themselves,” he said. “Many service providers want to be classified as independent contractors, but companies run the risk because later there might be disharmony in the relationship. A plaintiff’s counsel might advise the worker that they may have a claim for misclassification. The worker could potentially have a claim for triple the amount at issue, and most rules provide for recovery of attorney fees and costs. That makes these claims very popular for plaintiff-side lawyers.”

 

Startup companies are vulnerable to misclassification, according to Connolly. “They like to employ independent contractors who would not pass the test,” he said. “The worker may want it that way, and the business perceives it as a less expensive way to start the business. But down the line when they want to sell, investors or potential acquirers who do their due diligence will have a reduced interest in investing or will seek a reduction in the price due to the risk of claims by workers or audits by agencies.”

 

A helpful case

For employers faced with proving their workers were independent contractors, a recent ruling by the Tax Court might help: Mescallero Apache Tribe v. Commissioner, 148 T.C. No. 11. Where the employer was unable to locate the former workers, the court ruled that such employers can access IRS records of the reclassified workers’ tax returns to ascertain whether the workers themselves had paid income tax on their earnings. Such information is generally confidential, but in a case of first impression, the court ruled that an exception under Code Section 6103(h)(4) applied.

 

If the worker has paid income tax, the employer’s liability would be reduced by the amount the employee paid. The court noted that one of the factors in worker classification cases is whether or not the workers in question viewed themselves as independent contractors or employees. The fact that they paid taxes would be evidence that they viewed themselves as independent contractors. And, of course, to the extent that they paid taxes, it would absolve the employer from liability on the employee’s income tax withholding, and on a host of other liabilities: FICA, FUTA, workers’ compensation, vacation and sick pay, minimum wage violations, and overtime pay.

 

 

 

Starting a Business This Summer?  Here’s Five Tax Tips

If summer plans include starting a business, be sure to visit IRS.gov. The IRS website has answers to questions on payroll and income taxes, credits and deductions plus more.

New business owners may find the following five IRS tax tips helpful:

 

1. Business Structure.  An early choice to make is to decide on the type of structure for the business. The most common types are sole proprietor, partnership and corporation. The type of business chosen will determine which tax forms to file.

 

2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax a business pays depends on the type of business structure set up. Taxpayers may need to make estimated tax payments. If so, use IRS Direct Pay to make them. It’s the fast, easy and secure way to pay from a checking or savings account.

 

3. Employer Identification Number (EIN).  Generally, businesses may need to get an EIN for federal tax purposes. Search “EIN” on IRS.gov to find out if the number is necessary. If needed, it’s easy to apply for it online.

 

4. Accounting Method.  An accounting method is a set of rules used to determine when to report income and expenses. Taxpayers must use a consistent method. The two most common are the cash and accrual methods:

 

a. Under the cash method, taxpayers normally report income and deduct expenses in the year that they receive or pay them.

 

b. Under the accrual method, taxpayers generally report income and deduct expenses in the year that they earn or incur them. This is true even if they get the income or pay the expense in a later year.

 

 

 

Moving Expenses May Be Deductible

Taxpayers may be able to deduct certain expenses of moving to a new home because they started or changed job locations. Use Form 3903, Moving Expenses, to claim the moving expense deduction when filing a federal tax return.

 

Home means the taxpayer’s main home. It does not include a seasonal home or other homes owned or kept up by the taxpayer or family members. Eligible taxpayers can deduct the reasonable expenses of moving household goods and personal effects and of traveling from the former home to the new home.

 

Reasonable expenses may include the cost of lodging while traveling to the new home. The unreimbursed cost of packing, shipping, storing and insuring household goods in transit may also be deductible.  

 

Who Can Deduct Moving Expenses?

  1. The move must closely relate to the start of work. Generally, taxpayers can consider moving expenses within one year of the date they start work at a new job location.
  2. The distance test. A new main job location must be at least 50 miles farther from the employee’s former home than the previous job location. For example, if the old job was three miles from the old home, the new job must be at least 53 miles from the old home. A first job must be at least 50 miles from the employee’s former home. 
  3. The time test. After the move, the employee must work full-time at the new job for at least 39 weeks in the first year. Those self-employed must work full-time at least 78 weeks during the first two years at the new job site.

 

Different rules may apply for members of the Armed Forces or a retiree or survivor moving to the United States.  

 

Here are a few more moving expense tips from the IRS: 

  • Reimbursed expenses. If an employer reimburses the employee for the cost of a move, that payment may need to be included as income. The employee would report any taxable amount on their tax return in the year of the payment.  
  • Nondeductible expenses. Any part of the purchase price of a new home, the cost of selling a home, the cost of entering into or breaking a lease, meals while in transit, car tags and driver’s license costs are some of the items not deductible.  
  • Recordkeeping. It is important that taxpayers maintain an accurate record of expenses paid to move. Save items such as receipts, bills, canceled checks, credit card statements, and mileage logs. Also, taxpayers should save statements of reimbursement from their employer.
  • Address Change. After any move, update the address with the IRS and the U.S. Post Office. To notify the IRS file Form 8822, Change of Address.

 

 

 

IRS penalizes more taxpayers for underpayment of estimated taxes

By Michael Cohn

The Internal Revenue Service has seen a surge in recent years of taxpayers underpaying their estimated taxes and paying the penalty for it.

 

The number of taxpayers who were penalized increased nearly 40 percent from 7.2 million to 10 million filers between 2010 and 2015, according to IRS data analyzed by The Wall Street Journal, or nearly 33 percent from almost 7.5 million to nearly 10 million filers between fiscal years 2007 and 2016, according to a similar analysis by USA Today. Both reports relied on figures from Table 17 of the IRS’s Data Book for 2015 and 2016, according to IRS officials.

 

“If you’re looking at notices issued in FY 2016, which are primarily 2015 returns, you see roughly about 10 million notices, and total assessments of about $1.3 billion,” said IRS spokesman Eric Smith. “Then there were some abatements too.”

 

The abatements were about $118 million for approximately 145,000 taxpayers in fiscal 2016.

It isn’t clear why more taxpayers and their accountants are underestimating the quarterly tax payments, but the rise of the so-called “gig economy,” or “sharing economy,” could be one factor.

 

“The summer of most years is prime time for our notice project on assessing estimated tax penalties,” said Smith. “A lot of people who are affected by the penalty are getting notices.”

 

A sample copy of the CP 30 notice and more information about responding to it is available here, he added. However, he pointed out that many taxpayers can qualify for exceptions to avoid the underpayment penalties, and the annualized income installment method can help.

 

“For starters, the annualized income method is the one that will help a person if they received all of their income during the last part of the year and made a fourth-quarter payment to cover it,” said Smith. “Likewise, it will reduce the penalty if a person made no payments at all.”

 

The IRS has information on its website that can help guide taxpayers and preparers through the method. The publication also covers how to use the method for reducing or eliminating any penalty.

 

“If perhaps you receive income unevenly throughout the year, and if you receive a substantial portion of it late in the year, there are waiver options for those who are in casualty and death situations, or if they recently retired or became disabled and are now getting a surprise this year,” said Smith. “They can either change their withholding or make sure they have adequately taken care of an estimated tax payment. We know that in the middle of the year you can do something to make sure you don’t face this situation next year or at the very least that any penalty is minimized. You can do that in a couple of different ways. Everybody’s situation is different, but there are definitely a lot of people who have a substantial amount of outside income from the gig economy, but at the same time are working for an employer.”

 

In that case, they can increase their withholding and adjust the number of withholding allowances being claimed. If that’s still not enough, they can tell their employer to withhold a flat dollar amount for each pay period, he suggested.

 

“For many people that can help resolve the issue,” said Smith. “For somebody who is not working for an employer or doesn’t have a spouse working for an employer, you’re looking at making quarterly payments. There are things people can do now, but the trend line indicates people don’t realize they could make estimated tax payments, or avoid a penalty situation by changing their withholding. Because of the number of people affected, it is particularly important to let people know they have options at this point.”

 

The gig economy has opened up new ways for people to make some extra money, but just because they don’t receive a tax form from a company like Uber or Airbnb, that doesn’t mean their earnings are tax free.

 

“They are in a situation where they have to think about how they’re doing this as a side business,” said Smith. “If they’re trying this as a side gig, maybe look at doing quarterly payments, so they don’t get an unpleasant surprise at the end of the year.”

 

To avoid unpleasant surprises in the future, there are some steps taxpayers and preparers can take. "Looking ahead, 10 million taxpayers now face the estimated tax penalty each year," Smith advised. "Here’s how to avoid it for 2017. Most of those affected can easily reduce or eliminate it for the coming year by increasing their withholding or estimated tax payments for the rest of the year. Usually, the penalty applies when you pay too little in during the year. The penalty calculation is based on the interest factor used by the IRS. To avoid it, most people need to make sure they have at least 90 percent paid in during they year. Exceptions apply to some people, including farmers, fishers and those who base their payments on last year’s tax. There is also an exception for those who receive income unevenly during the year, and reasonable cause waivers are available to casualty and disaster victims, and those who recently became disabled and recent retirees."

 

People who receive a penalty notice or had a big balance due when they filed for 2016 may want to consider increasing their withholding by filling out a new W-4, Smith noted. Similarly, recipients of pensions and annuities can make this change by filling out Form W-4P and giving it to their payer.

 

"In either case, you can typically increase your withholding by claiming fewer allowances on your withholding form," said Smith. "If that’s not enough, also ask employers or payers to withhold an additional flat dollar amount each pay period. The Withholding Calculator on IRS.gov can help. By the way, there’s also a voluntary withholding option for those who receive Social Security benefits, unemployment compensation and certain other government payments, but the process is a little different and more restrictive. Use Form W-4V. For some, withholding of any kind is not an option. In that case, use Form 1040-ES. Payments can be made electronically through IRS Direct Pay or Treasury’s EFTPS [Electronic Federal Tax Payment System] or, of course, by check. Payments are due April 15, June 15, September 15 and January 15, unless any of these fall on a weekend or holiday."

 

 

 

Truckers take note: Highway use tax returns due Aug. 31

By Daniel Hood

The Internal Revenue Service issued a reminder that, for many truckers and owners of heavy highway vehicles, their federal highway use tax return is due at the end of August.

 

Vehicle owners who are due to file a Form 2290 and pay the accompanying tax must submit them by Aug. 31 for the tax year that began July 1, 2017 and ends on June 30, 2018.

 

Vehicles with a taxable gross weight of 55,000 pounds or more are subject to the highway use tax, which can range of to $550 per vehicle based on weight and a variety of special rules. While the tax usually includes trucks, truck tractors and buses, it does not usually affect vans, pickups and panel trucks.

 

Any taxpayer reporting on 25 or more vehicles is required to file electronically, but the IRS is recommending e-filing for any vehicle owner, regardless of the size of their fleet. Tax-suspended vehicles – those that will log less than certain threshold mileage amounts over the year – do not count toward the 25-vehicle requirement.

 

 

 

States eye amnesty for Amazon sellers

By Roger Russell

With states looking to expand their sales tax reach to include remote sellers, accountants and tax professionals should advise any clients who engage in “marketplace sales” through Amazon or other online marketplaces that there will be a short-lived amnesty period during which they can come into compliance with state sales tax laws, according to Scott Peterson, vice president of U.S. tax policy and government relations at Avalara.

 

Nexus is the minimum amount of contact between a taxpayer and a state allowing the state to tax the business on its activities. With Amazon warehouses spread across the country, states are eyeing the concept of “inventory nexus” as a means to get at their share of sales tax from the more than $1 trillion generated annually by marketplace sellers.

 

Peterson, who was the first executive director of the Streamlined Sales Tax Commission Governing Board, observed that retailers participating in marketplaces may be required to pay sales taxes in more states because of where their goods are stored.

 

A recently drafted plan by the Multistate Tax Commission’s Nexus Committee may alleviate the pain for online sellers, suggested Peterson. It provides a voluntary disclosure program, or amnesty, that would be in effect for 60 days from Aug. 17, 2017. Seventeen states are planning to join the program, with the objective of enticing remote sellers to begin collecting sales and use tax, according to Peterson.

 

The Multistate Tax Commission is an intergovernmental state tax agency founded 50 years ago as an effort by states to protect their tax authority. The participating states are Alabama, Arkansas, Colorado, Connecticut, Idaho, Iowa, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, Oklahoma, South Dakota, Texas, Utah, Vermont, and Wisconsin.

 

States set their own nexus standards, with the result that sellers whose primary presence is in a non-participating state -- say, New York or California -- may nevertheless be found to have nexus in multiple other states, and so be subject to tax in those states.

 

These states will consider applications for voluntary disclosure received by the MTC staff during the period from Aug. 17, 2017 through Oct. 17, 2017. The taxpayer may choose which state and which tax type (sales/use tax, income/franchise tax, or both) to seek relief for. The taxpayer can also withdraw the application with any time prior to execution of the voluntary disclosure agreement.

 

The amnesty would forgive remote sellers that may be subject to “inventory nexus,” as the result of inventory stored in an online marketplace fulfillment center, Peterson observed. Most of the states involved would waive not only penalties and interest but also back taxes for sales and use, income, and franchise taxes, with these caveats:

  • At press time, Colorado’s participation is pending final approval;
  • South Dakota imposes sales and use tax but does not impose income tax; and,
  • Wisconsin will require payment of back tax and interest for a lookback period beginning Jan. 1, 2015 for sales and use tax.

 

“This would be only the second time in history that states have created an amnesty that forgave back taxes,” Peterson noted. “They typically have had programs that forgave penalties and interest, but have stayed away from waiving back taxes. People think the program will be repeated down the line, so they would be tempted to wait and get more back taxes forgiven. So states don’t do it.”

 

The program is aimed at sellers that participate in Amazon’s “Fulfillment by Amazon” program, but would apply to any remote seller with inventory in a marketplace warehouse, Peterson observed.

 

 “It applies to all fulfillment retailers, but it started out with people that principally use Fulfillment by Amazon,” he said. “Lots of markets use the same process, and the same procedure would apply.”

 

The program was born at a conference earlier this summer, when MTC Nexus Program director Richard Cram explained the concept of inventory nexus to Amazon sellers, according to Peterson.

 

“A number of people in the audience came up afterward and said that the states have to help them,” explained Peterson. “Members of the committee got together and drafted the agreement.”

 

 “A lot of people will argue that that isn’t nexus to begin with, since the Quill decision requires ‘substantial’ presence,” he added. “They say that $2,000 of product stored in a fulfillment center is not substantial. That may be true, but the only way to find out is for the remote seller to litigate up to the state’s supreme court to get the answer.”

 

“Everyone can make the argument that they have so little presence in the state that it’s de minimis, but the cost of determining what de minimis is would be outrageous. Not many people want to make that kind of business decision,” he said.

 

“This all happened in the last six weeks,” emphasized Peterson. “States have until August 14, when the conference call finalizing the agreement is made, to decide their terms of participation.”

 

 

 

State corporate tax policies adapt to digital economy

By Rebecca Newton-Clarke & Melissa Oaks

President Trump’s recent tweet about “internet taxes” reignited debate about sales tax liabilities for businesses that sell products online. Internet sellers have been grappling with the murky sales tax implications of online sales for well over a decade.

 

Increasingly, though, they are also beginning to focus on the uncertainty surrounding state corporate income taxes. This area is particularly fraught for businesses that sell electronic products and services—such as apps, streaming video, cloud computing, gaming, online research and so forth—to customers in states where the business lacks a physical footprint. These “pure e-commerce” sellers face uncertain obligations and immense potential liability, and yet most states provide little, if any, guidance. A wave of litigation is sure to result.

 

For sellers of pure e-commerce seeking to pin down their corporate income tax responsibilities, two questions are paramount. The first is whether a state can and does assert jurisdiction to impose tax on a seller of pure e-commerce (and, if so, whether the U.S. Constitution and federal law provide any additional protections for the seller). The Supreme Court and federal law establish that a company must have certain contacts with a state in order to establish tax “nexus” there.

 

Few states have considered the nexus implications of pure e-commerce transactions specifically. Some states have “economic nexus” laws asserting jurisdiction to tax based on the amount of sales, property or payroll in the state. These laws, based purely on dollar amounts, would sweep in sales of pure e-commerce goods and services to customers in the state. The constitutionality of economic nexus is uncertain, but the U.S. Supreme Court has consistently declined to hear challenges to the concept.

 

If the seller does have nexus with a state, the next question is how the seller apportions its pure e-commerce sales under the state’s law. This inquiry involves two main issues: how a state classifies a particular transaction (as a sale of tangible personal property, a service, or intangible property) and how to source a transaction for purposes of the sales factor. A handful of states have provided detailed guidance, but most have offered little to no guidance concerning apportionment of pure e-commerce transactions.

 

To assist businesses in navigating this uncertain landscape, we put together a detailed survey and sent it to state taxing agencies. We received responses from a robust group of nineteen. Fourteen of these indicated that engaging in a purely electronic transaction with a customer in the state may—on its own—create corporate income tax nexus.

 

Agencies for many states, such as California, Connecticut, Florida and Georgia, all of which have a large tax base and are home to significant multistate players, made a good faith effort to complete the survey but repeatedly emphasized the importance of “facts and circumstances” in making a nexus determination.

 

More clarity emerged from other agencies, including the five indicating that engaging in a purely electronic transaction with a customer in the state will not—on its own—create corporate income tax nexus. These agencies were from Indiana, Kansas, Nebraska, New Jersey and Texas. The New Jersey Division of Taxation cited the New Jersey Tax Court’s decision to this effect in Quark, Inc. v. Director, a rare case on point.

 

For apportionment, we first asked how the state would classify and source each pure e-commerce transaction for purposes of the state’s sales factor. While many states have issued guidance on the classification of software for sales and use tax purposes, the corporate income tax treatment of software, online services and licensing agreements is still largely unsettled. Our other apportionment questions delved even more deeply into pure e-commerce sourcing, and into computation of apportionment factors (figures used to determine ultimate tax liability). As in the nexus responses, the states frequently emphasized “facts and circumstances” without specifying what facts and circumstances would be determinative.

 

The survey responses underscored our sense that businesses engaged in pure e-commerce transactions are navigating a highly uncertain state income tax landscape. Most states lack guidance on the complex nexus and apportionment issues that arise in the context of these transactions. These questions will inevitably lead to litigation in the coming years, particularly as more states adopt economic nexus and market-based sourcing laws. Pure e-commerce continues to be a large growth segment of our economy and the questions and complexities surrounding these transactions will only continue to mount. We hope our survey will help states realize the need to be proactive on these issues.

 

For more information, download our free special report, State Corporate Income Tax E-Commerce Study.

 

 

 

Tax Court tells Dolphins owner to sleep with the fishes

By Roger Russell

The Tax Court has denied a claimed charitable deduction of $33,019,000 by RERI Holdings, whose principal investor is Miami Dolphins owner Stephen Ross.

 

On its 2003 tax return, RERI Holdings claimed a charitable contribution deduction for the transfer of a noncash asset—a remainder interest in property—to the University of Michigan. RERI had paid $2.95 million in March 2002 to acquire the remainder interest, with an agreement that provided covenants intended to preserve the value of the property, but which also limited the remedy available to the holder of the remainder interest for a breach of those covenants to immediate possession of the property.

 

The covenants provided that in no event would the holder of the corresponding term interest be liable for damages to the holder of the remainder interest. The Form 8283, Noncash Charitable Contributions, that RERI attached to its return provided the date and manner of its acquisition of the contributed remainder interest but left blank the space for the “donor’s cost or other adjusted basis.”

 

In its FPAA (final partnership administrative adjustment), the IRS reduced RERI’s claimed charitable contribution deduction on the ground that the contributed property was worth only $3,900,000. In an amendment, the IRS asserted that RERI was not entitled to any deduction for its contribution because the transaction was a sham or lacked economic substance or, alternatively, that RERI’s deduction should be limited to the amount, $1,940,000, which the university realized on its sale of the contributed property. In a second amendment to its answer, the IRS asserted RERI’s claimed deduction resulted in a “gross valuation misstatement” within the meaning of Code section 6662(h)(2).

 

The Tax Court held in the case, RERI Holdings I, LLC v. CIR, 149 T.C. No. 1, that RERI’s omission from its Form 8283 of its cost or other adjusted basis in the contributed remainder interest violated the substantiation requirement of Reg. section 1.170A-13(c(4)(ii)(E).

 

“Congress intended the new substantiation requirements [in the Deficit Reduction Act of 1984] to alert the Commissioner to potential overvaluations of contributed property and thus deter taxpayers from claiming excessive deductions,” the Tax Court stated. Because omission of that information prevented the Form 8283 from achieving its intended purpose, the Tax Court said the omission could not be excused on the grounds of substantial compliance. And since RERI failed to comply, either strictly or substantially, with the requirements of Reg. sec. 1.170A-13(c)(2), the court denied the claimed deduction in full.

 

 

Why tax reform is so fiendishly difficult in the U.S.

By Bloomberg News

President Donald Trump has been talking about tax reform for months, but true to form, his administration is moving away from a specific proposal, rather than toward one. And that’s fine with Democrats: They’ve just set conditions for cooperating on taxes that are as much about gaining political advantage as advancing the prospects of reform.

 

What a shame. The U.S. tax system is such an atrocity of self-defeating complexity that it offers enormous scope for improving both fairness and efficiency -- an overhaul that should please liberals and conservatives alike. But to grasp this possibility, both parties need to start looking for ways to agree, not disagree.

 

The key to this win-win opportunity is simplification. A needlessly complex Tax Code hurts businesses and economic growth, because it makes firms and households worry more about minimizing tax liabilities than maximizing economic gain. But it’s also unfair, because the rich and their advisors can game the system so much more effectively than ordinary taxpayers.

The core of successful tax reform -- last achieved in the U.S. more than 30 years ago -- must be an effort to limit, and as much as possible eliminate, deductions and other preferences from personal and corporate taxes, while using the proceeds to lower tax rates.

 

This basic strategy could address multiple defects in the current code: unintended spikes in tax rates due to small changes in income; vastly different tax rates paid by companies and households with similar incomes; the subsidy that flows from low-income renters to high-income homeowners with mortgages; the mountain of profits parked in low-tax jurisdictions abroad; the bias in favor of debt finance over equity finance; the carried-interest loophole; and on and on.

 

The Republicans aren’t opposed to this approach -- they typically pay lip service to it -- but they seem completely incapable of producing a plan. Earlier this year they had one specific idea, to apply so-called border adjustment to corporate taxes, but their latest vapid declaration on taxes withdrew even that suggestion. So they’re back to zero actual proposals.

 

Senate Democrats, meanwhile, have revealed their rules of engagement for tax reform: They can’t support a plan unless it’s revenue-neutral, avoids cutting taxes for the wealthy, and moves through regular order rather than being fast-tracked to avoid a filibuster. These demands, if offered in good faith, are not unreasonable -- and the Republicans were wrong to reject them. But why set conditions for negotiations at this stage?

 

In principle, making the Tax Code more fair and efficient isn’t hard. If tax reform fails to happen, it will be partly because of the power of special interests, which jealously guard the status quo. But it will be mostly because of Washington’s dysfunctional parties, which want to embarrass their opponents more than they want to help their constituents.

-- By the editors of Bloomberg News

 

 

 

Tax pros doubt reforms this year

By Michael Cohn

 

Nearly three-quarters of tax, finance and business professionals are not confident that comprehensive tax reform will be passed in Congress in 2017, according to a recent Deloitte poll, while nearly half are doubtful about tax reform’s prospects.

 

When asked how confident they are that a comprehensive tax reform bill will be enacted this year, 49.1 percent said they are doubtful, while 24.6 percent said they are not at all confident. Republican leaders in Congress and the Trump administration, as well as Senate Democrats, released some of their broad tax reform principles late last month, but the details are still under discussion (see Republican leaders release tax reform update and Senate Democrats lay out bipartisan tax reform principles).

 

Nearly two-thirds of the survey respondents (63.5 percent) said compromise in Congress is most needed to ensure passage of tax reform. For the survey, Deloitte polled more than 3,100 attendees during a webinar last month.

 

Nearly half the respondents (48.2 percent) indicated lowering the corporate tax rate is the feature of corporate tax reform most likely to boost economic growth in the U.S., while 15.5 percent said it was simplifying the tax code. Only 5.7 percent thought a border-adjusted tax would boost economic growth. Only 5.7 percent thought a border-adjusted tax would boost economic growth. Seventy percent of the respondents said a top corporate tax rate of 20 or 25 percent is the most likely to be in a tax reform bill.

Tax reform prospects

 

 

 

 

 

Protecting clients from their families

By John P. Napolitano

 

Most prospective clients come to you thinking about protection against unnecessary investment risk, taxation, estate planning, etc. But for many, one important element of being your fiduciary is protection from being a target for other family members, especially if it involves joint investments or loans using their money and moving it out of their control.

 

Sometimes, clients are so eager to help their children, extended family and friends that they need to be reminded of the methods that can be utilized to protect themselves, and perhaps their family members, from unexpected harm.

 

The best way to help prevent this from happening is to discover from your clients any situations where they have invested with or on behalf of a family member, where they lent money, or co-signed a loan, or have any other financial dealings with any family member or close friend.

The reason for probing so deeply here is that in most of the cases where I have discovered intra-family financial dealings, they were usually undocumented, with no plan for an endgame or ultimate resolution.

 

If there are past dealings, your first piece of advice is to document those transactions to memorialize the intention of the arrangement. Even if it is ultimately planned to be a complete or partial gift, documenting it as soon as possible may be helpful under many possible scenarios — many of which we’ll address later in this article.


How it begins

Usually intra-family business dealings start with a story or a request for assistance. A family member starts talking about deals or successful ventures in which they’ve participated or would like to participate. Sometimes these are conversations that have grown over the years and sometimes these are ideas out of the blue.

 

Regardless of the history of your clients’ conversations, approach each opportunity as a pure business opportunity and start with gaining a deep understanding of the offering or opportunity.

If it is a brother-in-law coming to your client to fund his real estate project, he should be treated like a bank would treat him. Do some due diligence to determine the quality of the loan. For a loan to fund something speculative, backed by someone who really needs the money, your client should have premium pricing and security. Security should be in the form of a promissory note with personal guarantees along with a lien or mortgage on the project real estate — and maybe other property to the extent that it is available and worth the effort. If this type of loan wasn’t available from a traditional lender, then your client’s interest rate on the loan should reward them with a higher rate than for a safer loan, and possibly some participation in the profits generated from the project.

 

A similar posture is often advisable when lending money to children for a home or a business venture. Even if the intention is to ultimately forgive the loan, there are very good reasons to approach these types of transactions with some common-sense business acumen. Some of these reasons include:

  • The client may want or need the money back someday.
  • The child may get divorced and the lien may protect some of the home or business equity from going to a former spouse.
  • The child may get gravely ill or pass away before the client, and the client may recover from the ultimate sale of the underlying asset.
  • The client can forgive smaller portions of the loan each year, thereby avoiding any gift tax implications.
  • The client hasn’t yet documented an estate plan to reflect either lifetime gifts or loans to offspring


Due diligence

Family approaching other family members to help fund a new business idea is very common. Many people want to help their family in this situation, but there is a right way and a wrong way to do it.

 

The wrong way is to simply write a check and get nothing back to evidence their investment other than a canceled check. If it is a loan, it needs to be documented, secured and guaranteed personally by the creator of this new business. Just like a bank would underwrite a loan, the client needs to understand the business plan and feel good that the idea has viability. Not all startups work. In fact, more fail than make it.

 

The initial assessment should include meeting the people or person who will run the show. Have they done this before? The client (or the advisor) needs to assess their likelihood of success. This isn’t easy for professionals to do, let alone emotionally invested family members. Even successful private equity firms don’t succeed on all of their deals.

 

Ask for the forecasts, and make sure that they are realistic and believable. See how the cash flow will afford your client the luxury of loan and interest payments and/or a profit from their ownership interest. Maybe the worst of all worlds for your client is to be a minority owner in a small business in which they have little control or say over how their investment will again turn back to cash.

 

If they are getting ownership in the entity, they need to understand what type of entity they are investing in. Is it something that will generate a K-1, like a partnership interest or a share in a subchapter S corporation? There should also be legal agreements behind any entity in which they would invest. This agreement would stipulate all of the important moving parts as it relates to the governance of this new business — issues such as management, decision-making, valuation to determine your client’s equity share, and what happens if there are capital calls or other potentially dilutive decisions made by management. Also, they need to evaluate what happens to their investment if the founder passes away prematurely or is disabled and unable to work.

 

Also, they should stay on top of their investment. It isn’t a good idea to invest and then only think about it each year as they are waiting for a K-1 to arrive for an uneventful but necessary part of their personal tax filing each year. You should visit the business, talk to management and, in general, ask your clients to inspect what they expect from the company and its management. Attempt to get frequent and realistic valuations of the investment, and be mindful of the endgame and when this investment is likely to benefit from a gain and a liquidity event.


Housing relatives

Another common scenario is to “lend” real estate to a family member in need. It may be an elderly grandmother or a disabled cousin — but many clients do, in fact, have real estate with family or close friends living in the property at a rate far below fair market rental value. I’m not here to tell your clients to raise the rents to fair market value, but I am here to suggest that this transaction be handled no differently than any other real estate rental situation. You need to make sure that everyone is properly protected.

 

There should be a lease, which clearly sets up the landlord/tenant relationship. Regardless of the amount of rent on the lease, the business relationship needs to be established. If your client is the owner of the property, you may well advise them to own that property in a protected entity such as an LLC for asset protection purposes. Done properly, this ownership structure will limit any liabilities arising from the real estate from permeating any of their other assets owned outside of that real estate LLC.

 

And lastly, make sure that the house or apartment is properly insured as rental property. If the client doesn’t inform their insurer that the property is being used for rental purposes, they may not be covered in the event of a large claim.

 

Even if the tenant can’t afford it, make sure that they have renter’s insurance. If the client has to, they should pay for it themselves, because in the long run that may still cost them less should there be a problem.

 

For many families inclined to invest with or on behalf of their adult children, particular attention should be paid to the wealthy family’s estate plan. On the most basic side, to the extent that there are already loans, homes or whatever other financial benefits that may have already been provided to one or more of the adult children, there should be equalization provisions in their current estate documents. The current documents would also need to make reference as to how prior transactions shall be reconciled upon the passing of the parents.

 

It is also possible that the parents would be well-advised to consider more permanent gifting as a part of the estate tax reduction strategy. Most estates will avoid the federal death tax with the current exemption level at $5.49 million, but many will still pay substantial death taxes to their state. Passing in one of the high-tax states would cost the estate up to 14 percent in taxes — maybe even higher than 20 percent if you include legal fees from a poorly established estate plan fraught with messy probate, sloppy documents and no trust ownership of assets. For most of us, that’s still real money.

 

 

Divorce or Separation May Affect Taxes

 

Taxpayers who are divorcing or recently divorced need to consider the impact divorce or separation may have on their taxes. Alimony payments paid under a divorce or separation instrument are deductible by the payer, and the recipient must include it in income. Name or address changes and individual retirement account deductions are other items to consider.

IRS.gov has resources that can help along with these key tax tips:

·      Child Support Payments are not Alimony.  Child support payments are neither deductible nor taxable income for either parent.

·      Deduct Alimony Paid. Taxpayers can deduct alimony paid under a divorce or separation decree, whether or not they itemize deductions on their return. Taxpayers must file Form 1040; enter the amount of alimony paid and their former spouse's Social Security number or Individual Taxpayer Identification Number.

·      Report Alimony Received. Taxpayers should report alimony received as income on Form 1040 in the year received. Alimony is not subject to tax withholding so it may be necessary to increase the tax paid during the year to avoid a penalty. To do this, it is possible to make estimated tax payments or increase the amount of tax withheld from wages.

·      IRA Considerations. A final decree of divorce or separate maintenance agreement by the end of the tax year means taxpayers can’t deduct contributions made to a former spouse's traditional IRA. They can only deduct contributions made to their own traditional IRA. For more information about IRAs, see Publications 590-A and 590-B.

·      Report Name Changes.  Notify the Social Security Administration (SSA) of any name changes after a divorce. Go to SSA.gov for more information. The name on a tax return must match SSA records. A name mismatch can cause problems in the processing of a return and may delay a refund.

 

For more on this topic, see Publication 504, Divorced or Separated Individuals. Get it on IRS.gov/forms at any time.

 

 

 

Job Search Expenses Can be Tax Deductible

 

Taxpayers who are looking for a new job that is in the same line of work may be able to deduct some job-hunting expenses on their federal income tax return, even if they don’t get a new job.

Here are some important facts to know about deducting costs related to job searches:

1.   Same Occupation. Expenses are tax deductible when the job search is in a taxpayer’s current line of work. 

2.   Résumé Costs. Costs associated in preparing and mailing a résumé are tax deductible.

3.   Travel Expenses. Travel costs to look for a new job are deductible. Expenses including transportation, meals and lodging are deductible if the trip is mainly to look for a new job. Some costs are still deductible even if looking for a job is not the main purpose of the trip.

4.   Placement Agency. Job placement or employment agency fees are deductible.

5.   Reimbursed Costs. If an employer or other party reimburses search related expenses, like agency fees, they are not deductible.

6.   Schedule A. Report job search expenses on Schedule A of a 1040 tax return and claim them as miscellaneous deductions. The total miscellaneous deductions cannot be more than two percent of adjusted gross income.

Taxpayers can’t deduct these expenses if they:

·      Are looking for a job in a new occupation,

·      Had a substantial break between the ending of their last job and looking for a new one, or

·      Are looking for a job for the first time.

For more on job hunting, refer to Publication 529, Miscellaneous Deductions. IRS tax forms and publications are available any time on IRS.gov/forms.

 

 

 

Trump says in tweet Amazon does ‘great damage’ to retailers

By Giles Turner

 

President Donald Trump once again unloaded on Amazon.com Inc., tweeting that the company is hurting other retailers and implying that it’s killing industry jobs across the U.S.

 

Amazon is causing "great damage to tax paying retailers," Trump said in a Twitter post Wednesday, causing shares in the online retailer to fall.

 

“Towns, cities and states throughout the U.S. are being hurt - many jobs being lost!” Trump said in the tweet.

 

Trump’s reference to “great damage” echoes chatter in Washington and academic circles that Amazon and other technology companies may have become too big and powerful. Apple Inc. Alphabet Inc., Microsoft Corp., Facebook Inc. and Amazon are the biggest companies in the world by market cap and dominate many facets of everyday life. Some critics have even suggested that they should be broken up.

 

Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt - many jobs being lost!

 

During the presidential campaign, Trump claimed Amazon was a monopoly that he would go after for antitrust violations if he were elected. Amazon takes about 70 percent of all e-book sales and 30 percent of all U.S. e-commerce. “Believe me, if I become president, do they have problems. They’re going to have such problems,” Trump said in February 2016. In the U.S. it isn’t illegal to have a large market share.

 

In June, Amazon agreed to buy Whole Foods Market Inc. Experts and analysts have largely dismissed antitrust threats for the world’s largest online retailer, though a U.S. lawmaker has called for hearings on the proposed deal to consider its ramifications for shoppers and workers.

While it’s unclear what prompted Trump’s tweet, The Washington Post ran a scathing editorial about Trump in the paper Wednesday, and there were also pro-tax reform advertisements that ran on early morning talk shows. Amazon’s shares fell less than 1 percent to $975.19 at 10:18 a.m. in New York.

 

Trump’s tweet about jobs lands amid one of the most tumultuous years in the industry’s history. Brick-and-mortar chains, especially apparel sellers, are suffering from sluggish mall traffic and an exodus of shoppers to e-commerce.

 

A rash of chains have filed for bankruptcy this year, including Payless Inc., Gymboree and HHGregg Inc. and RadioShack. And the biggest department-store companies, such as Macy’s Inc., Sears Holdings Corp. and J.C. Penney Co., are shuttering hundreds of locations. The total number of store closings is expected to hit a record in the U.S. this year, with Credit Suisse Group AG analyst Christian Buss estimating that the number could exceed 8,000.

 

On the other hand, Amazon is hiring rapidly. The online behemoth has pledged to hire more than 100,000 workers by 2018 and has been holding job fairs all over the U.S. In some cases, fired department store workers are ending up at Amazon fulfillment centers.

 

In his tweet, Trump also hammered Amazon again on tax-related allegations. It’s unclear exactly what he means since the company now collects sales tax in each state that has one. There is one loophole left: Shoppers don’t have to pay sales tax when they buy from one of Amazon’s many third-party vendors. Such sales make up about half of the company’s volume.

 

Trump’s relationship with Corporate America has frayed since his inauguration and several company executives resigned this week from a business council to protest the president’s response to the violent demonstrations in Charlottesville, Virginia.

 

But Trump has often taken particular aim at Amazon and the Washington Post, owned by Amazon founder Jeff Bezos, for its coverage. In June, the president posted a tweet attacking “AmazonWashingtonPost, sometimes referred to as the guardian of Amazon not paying internet taxes.”

 

In December 2015, Trump also described the Washington Post as a tax shelter that Bezos uses to keep Amazon’s taxes low. Without these arrangements, Trump argued, Amazon’s stock would “crumble like a paper bag.” Bezos actually owns the Washington Post via a holding company separate from Amazon. Amazon did not respond to a request for comment.

 

Amazon has been battling a number of politicians from both the U.S. and Europe about its stance on tax. In the U.S., Amazon previously fought to only collect sales taxes for purchases in states where it doesn’t have a physical presence. Now it has a legion of distribution centers and collects sales tax in every state that has one.

 

The U.S. retailer is currently fighting the European Union over its tax bill, while in March it won a $1.5 billion tax dispute with the IRS.

—With assistance from Nick Turner

 

 

 

IRS penalizes more taxpayers for underpayment of estimated taxes

By Michael Cohn

 

The Internal Revenue Service has seen a surge in recent years of taxpayers underpaying their estimated taxes and paying the penalty for it.

 

The number of taxpayers who were penalized increased nearly 40 percent from 7.2 million to 10 million filers between 2010 and 2015, according to IRS data analyzed by The Wall Street Journal, or nearly 33 percent from almost 7.5 million to nearly 10 million filers between fiscal years 2007 and 2016, according to a similar analysis by USA Today. Both reports relied on figures from Table 17 of the IRS’s Data Book for 2015 and 2016, according to IRS officials.

“If you’re looking at notices issued in FY 2016, which are primarily 2015 returns, you see roughly about 10 million notices, and total assessments of about $1.3 billion,” said IRS spokesman Eric Smith. “Then there were some abatements too.”

 

The abatements were about $118 million for approximately 145,000 taxpayers in fiscal 2016.

It isn’t clear why more taxpayers and their accountants are underestimating the quarterly tax payments, but the rise of the so-called “gig economy,” or “sharing economy,” could be one factor.

 

“The summer of most years is prime time for our notice project on assessing estimated tax penalties,” said Smith. “A lot of people who are affected by the penalty are getting notices.”

A sample copy of the CP 30 notice and more information about responding to it is available here, he added. However, he pointed out that many taxpayers can qualify for exceptions to avoid the underpayment penalties, and the annualized income installment method can help.

 

“For starters, the annualized income method is the one that will help a person if they received all of their income during the last part of the year and made a fourth-quarter payment to cover it,” said Smith. “Likewise, it will reduce the penalty if a person made no payments at all.”

The IRS has information on its website that can help guide taxpayers and preparers through the method. The publication also covers how to use the method for reducing or eliminating any penalty.

 

“If perhaps you receive income unevenly throughout the year, and if you receive a substantial portion of it late in the year, there are waiver options for those who are in casualty and death situations, or if they recently retired or became disabled and are now getting a surprise this year,” said Smith. “They can either change their withholding or make sure they have adequately taken care of an estimated tax payment. We know that in the middle of the year you can do something to make sure you don’t face this situation next year or at the very least that any penalty is minimized. You can do that in a couple of different ways. Everybody’s situation is different, but there are definitely a lot of people who have a substantial amount of outside income from the gig economy, but at the same time are working for an employer.”

 

In that case, they can increase their withholding and adjust the number of withholding allowances being claimed. If that’s still not enough, they can tell their employer to withhold a flat dollar amount for each pay period, he suggested.

 

“For many people that can help resolve the issue,” said Smith. “For somebody who is not working for an employer or doesn’t have a spouse working for an employer, you’re looking at making quarterly payments. There are things people can do now, but the trend line indicates people don’t realize they could make estimated tax payments, or avoid a penalty situation by changing their withholding. Because of the number of people affected, it is particularly important to let people know they have options at this point.”

 

The gig economy has opened up new ways for people to make some extra money, but just because they don’t receive a tax form from a company like Uber or Airbnb, that doesn’t mean their earnings are tax free.

 

“They are in a situation where they have to think about how they’re doing this as a side business,” said Smith. “If they’re trying this as a side gig, maybe look at doing quarterly payments, so they don’t get an unpleasant surprise at the end of the year.”

 

To avoid unpleasant surprises in the future, there are some steps taxpayers and preparers can take. "Looking ahead, 10 million taxpayers now face the estimated tax penalty each year," Smith advised. "Here’s how to avoid it for 2017. Most of those affected can easily reduce or eliminate it for the coming year by increasing their withholding or estimated tax payments for the rest of the year. Usually, the penalty applies when you pay too little in during the year. The penalty calculation is based on the interest factor used by the IRS. To avoid it, most people need to make sure they have at least 90 percent paid in during they year. Exceptions apply to some people, including farmers, fishers and those who base their payments on last year’s tax. There is also an exception for those who receive income unevenly during the year, and reasonable cause waivers are available to casualty and disaster victims, and those who recently became disabled and recent retirees."

 

People who receive a penalty notice or had a big balance due when they filed for 2016 may want to consider increasing their withholding by filling out a new W-4, Smith noted. Similarly, recipients of pensions and annuities can make this change by filling out Form W-4P and giving it to their payer.

 

"In either case, you can typically increase your withholding by claiming fewer allowances on your withholding form," said Smith. "If that’s not enough, also ask employers or payers to withhold an additional flat dollar amount each pay period. The Withholding Calculator on IRS.gov can help. By the way, there’s also a voluntary withholding option for those who receive Social Security benefits, unemployment compensation and certain other government payments, but the process is a little different and more restrictive. Use Form W-4V. For some, withholding of any kind is not an option. In that case, use Form 1040-ES. Payments can be made electronically through IRS Direct Pay or Treasury’s EFTPS [Electronic Federal Tax Payment System] or, of course, by check. Payments are due April 15, June 15, September 15 and January 15, unless any of these fall on a weekend or holiday."

 

 

 

 

 

IRS revokes hospital’s tax exemption

By Michael Cohn

 

The Internal Revenue Service revoked an unidentified hospital’s tax exemption in February for failing to conduct a community health needs assessment, in a sign of possible trouble for other nonprofit health care organizations.

 

In the letter, which the IRS posted online this month, an IRS official cited the reason for the “adverse determination” revoking the hospital’s tax exempt status as being connected with section 501(r) of the tax code, part of the Affordable Care Act. “You are a hospital organization which failed to comply with the requirements of IRC section 501(r), to conduct a community health needs assessment, adopt an implementation strategy and make it widely available to the public,” said the final adverse determination letter. “Contributions to your organization are not deductible under section 170 of the Internal Revenue Code. You are required to file Federal income tax returns on Form 1120.”

 

Laura Kalick, tax consulting director for BDO’s Healthcare and Nonprofit & Education practices, sees wider implications for other exempt organizations in the IRS determination letter. “A significant number of hospitals are being examined on the issue of 501(r),” she said. “After they issued the regulations, the IRS decided they would train 30 agents to do examinations of the hospitals. They are examining the 2014 year, which is before the date that the regulations became final, but all hospitals at this point are supposed to be in compliance with the final regulations.”

 

Complying with the final regulations means that certain information is supposed to be put on the hospital’s website, including an application for financial assistance, a plain language summary of the hospital’s financial assistance policies, and a community health needs assessment, which identifies local health issues and how the hospital plans to address them.

 

“The IRS is surfing the web and finding out whether a hospital is in compliance or not in compliance,” Kalick noted. “Those things might be on the website, but if they dig deeper the actual policy might not have all the elements required by the final regulations. Suffice to say the hospital in question did not have a community health needs assessment, nor did they put one on the website. For the hospitals I see examined, they all have a community health needs assessment and for the most part they have it on the website.”

 

The determination letter released by the IRS didn’t give the name of the hospital, but Kalick said it appears to be a government hospital.

 

“The hospital was unusual in that it was a government hospital, so they had a dual status for their exemption,” she said. “On the one hand being a government hospital they are exempt from tax, but then they went and got a 501(c)3 status, which also made them exempt from tax. A lot of hospitals went ahead and got the 501(c)3 status even though they didn’t need it, so they could get certain pension plans that were only available to 501(c)3 organizations, and it’s a little easier to get contributions and fundraise when you have the 501(c)3.”

 

The hospital might still be able to do fundraising, though, despite the revocation of its status.

“In the letter the IRS says your exemption is revoked and you have to file an 1120, and contributions to you are not tax deductible,” said Kalick. “Those are the standard rules they would say, but because it’s a government hospital, it’s a different story. The other thing is that many of these hospitals have foundations that are fundraising arms, and this has no effect on the foundation they might have. It’s exclusive to the hospital. I don’t know that this hospital has a foundation, but we do know that many hospitals have foundations that raise money for them.”

The hospital has not yet been identified, but Kalick anticipates it will be at some point. “Usually what happens is that the IRS does list organizations that have been revoked in addition to hospitals,” she said. “They’re notifying the public that the contributions are no longer tax deductible, but it takes time for them to make that publication. The organization has a right to go to court and appeal this decision. It’s hard to know when it will be published, but eventually it will be published.”

 

In this case, the hospital appears to have decided that the community health needs assessment was unnecessary.

 

“The IRS examined the hospital and found they didn’t have the community health needs assessment,” said Kalick. “The hospital said we really don’t want to spend the money on it and indicated they didn’t need the 501(c)3 status.”

 

The IRS revocation could provide a lesson to other tax-exempt hospitals not to overlook the regulations.

 

“The hospital didn’t feel it was particularly harmed by the action, but it’s significant in that it shows what’s a more than minor compliance [issue], and what is considered not inadvertent but willful,” said Kalick. “There are many hospitals out there that are not completely in compliance with the rules. They might think they’re sort of in compliance, but they really need to be in complete compliance to be safe, especially when they do need their 501(c)3 status. I’ve seen situations where hospitals say they’re going to be merging with another hospital so they don’t need to worry about this.”

 

However, if a hospital’s tax-exempt status is revoked, its merger partner could end up with a big tax liability, and the merger might be called off.

 

 “The caution is that the IRS is really serious, plus now they’re doing the data analytics with the Form 990,” she said. “Certain things are going to key off an audit, and everybody needs to be mindful. One area that we’ve been told about—it won’t necessarily be an audit but it will be a second look—is when an organization checks the box that there’s been a significant diversion of assets. The IRS is going to take a second look to see if there’s something going on with the institution and if there are more things that are incorrect.”

 

She pointed out that when an organization discloses on the Form 990 a significant diversion of assets, it often means some fraud has occurred, such as an employee or officer who has stolen money.

 

 

 

 

A radical proposal for fighting tax-related ID theft

By Roger Russell

 

Tax experts Roger Harris and Jeff Trinca have an idea to drastically cut down tax refund fraud -- by making stolen taxpayer information worthless to thieves. The two talked to staffers on the Senate Finance Committee and the House Ways and Means Committee about the idea last week, and intend to speak with committee members when they return from the August recess next month.

 

The IRS is making progress in fighting identity theft tax refund fraud, according to Harris, president of Padgett Business Services, and Trinca, vice president of Van Scoyoc Associates. They cite the decline in taxpayers reporting ID theft from 698,700 in 2015 to 376,500 in 2016, a 46 percent drop. And indications are that the number will decline further in 2017.

 

Yet the lower number still reflects approximately a billion dollars a year in lost revenue. Fraudsters are relentless, and will likely adjust in future filing seasons.

 

“Rapid refunds and refundable credits are part of the problem,” said Harris. They increase the incentive for ID theft by putting all taxpayers at risk with a system that only benefits a portion of the taxpayer population. Thieves don’t care if a taxpayer is due a refund or owes money; they just want the taxpayer’s information.”

 

The solution, according to Harris, is a “Refund Lock.”

 

“There is a large pool of returns that, due to the taxpayer’s expected filing outcome, could be removed as a desirable target for fraud,” he said. “These are returns of taxpayers who have little or no interest in receiving a rapid refund.”

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Policymakers at the IRS and Congress could leverage this collective group of tax filers who are disinterested in receiving a rapid refund by allowing them to “lock” themselves out of receiving a potential refund. The tool to do this would be the individual taxpayer accounts, still in the pilot stage, envisioned by the IRS Future State plan.

“The individual accounts would include an application that would allow taxpayers to permanently apply any refund they might receive toward the following year’s estimated tax payment, until they expressly unlock the refund. This would render their information useless to fraudsters,” Harris said. “Directing the refund to estimated taxes avoids the government expense of paying interest on the refund.”

 

Harris suggested that the IRS initially begin Refund Lock as a pilot program, and market it to balance-due taxpayers. “As the program proves its viability, the IRS could then market it to all taxpayers,” he said. “Taxpayers needing a rapid refund who are willing to add the safeguard of requiring an additional step before receiving it, could activate the application. Once the IRS collects enough data on a Refund Lock application and makes necessary adjustments, Congress could at some future date consider requiring some form of the program be made mandatory for all or some portion of taxpayers filing a Form 1040.”

 

Tax return preparers would also receive some protections from the program, Harris indicated. “Tax return preparers have increasingly become the target of ID thieves interested in stealing their clients’ data,” he said. “To diminish the value in seeking out tax data in this manner, client data in the preparer’s software could include an upfront warning indicating that the taxpayer in question has opted for Refund Lock. This would place the tax preparer in a unique position to encourage participation, and assist clients with turning on the Refund Lock.”

 

Currently, thieves have more data than they can sell, according to Harris: “There’s information that was stolen three years ago that is still in their inventory and hasn’t been sold yet. Locking the account with Refund Lock would devalue the entire inventory of stolen IDs.”

 

In their visit to Capitol Hill, Harris and Trinca didn’t find anyone who didn’t like the idea. “For Congress to be interested, it needs to generate revenue,” Harris said. “It’s uncertain how this might be scored, but if it were scored as a revenue raiser it would help with tax reform.”

 

 

 

IRS wins Tax Court ruling in captive insurance case

By Michael Cohn

 

The Internal Revenue Service has prevailed in U.S. Tax Court in a case involving an Arizona jewelry store business that received a tax break by insuring itself for millions of dollars, in part against the risk of terrorism.

 

Benyamin and Orna Avrahami, a couple who own three jewelry stores and three shopping centers in the Phoenix area, spent more than $1.1 million in 2009 and $1.3 million in 2010 insuring their businesses. They set up an insurance company called Feedback, but there were no claims made on any of the company’s policies until the IRS began auditing them, according to the court.

 

Tax Court Judge Mark V. Holmes summarized the competing claims of the Avrahamis and the IRS in a colorfully written opinion Monday. “With money flooding in and none going back to pay claims, Feedback accumulated a surplus of more than $3.8 million by the end of 2010, $1.7 million of which ended up back in the Avrahamis’ bank account—as loans and loan repayments, say the Avrahamis; as distributions, says the Commissioner,” he wrote. “Also included in Feedback’s surplus was $720,000 that the Avrahamis’ jewelry stores sent down to a Caribbean company for terrorism-risk insurance. The full $720,000 then flew right back to Feedback after—the Avrahamis argue—it distributed enough risk for the whole plan to constitute insurance as that term is commonly understood.”

 

They set up the captive insurance company in 2007 on the advice of their longtime CPA, Craig McEntee, who brought in a local estate-planning attorney, Neil Hiller, and a New York-based attorney, Celia Clark. She specializes in captive insurance and helped draft legislation on the subject for the Caribbean island of St. Kitts, where they ultimately established Feedback Insurance. Mrs. Avrahami was the sole shareholder in the company, as well as the treasurer and bookkeeper, though both she and her husband had signature authority over Feedback’s bank account. They elected to have the company taxed as a small insurance company under section 831(b) of the tax code.

 

The Avrahamis argued they relied on the advice of McEntee, Hiller and Clark. “We have no doubt that all three were competent professionals with sufficient expertise,” the judge wrote. “McEntee is a CPA with more than 25 years of experience, Hiller is a reputable Phoenix-based estate planning attorney with more than 30 years of experience, and Clark is a New York lawyer with more than 35 years of experience who focuses her practice on small insurance companies. We also find that the Avrahamis provided their advisers with all the relevant data needed to assess the correct level of tax. The parties dispute, however, whether the Avrahamis actually relied in good faith on the advice of McEntee, Hiller and Clark.”

 

The judge agreed with the Avrahamis not to impose some accuracy-related penalties related to loans they made with the insurance company and another entity the family owned called Belly Button, but agreed with the IRS’s position on others. “Therefore the section 6662(a) penalties should not be imposed to the extent they are related to repayment of the $1.2 million loan,” the court wrote. “But there is no reasonable explanation for why any underpayment flowing from the failure to report $300,000 in interest and dividends for the overrepayment of that loan from Feedback should be penalized. The Avrahamis don’t even make that argument, so the Commissioner wins on this one. We also have the penalty related to the $200,000 distribution directly from Feedback to Mrs. Avrahami, which we held should have been reported as an ordinary dividend. The Avrahamis argue that this was an inadvertent omission caused by their accountant’s error. The Avrahamis, however, are sophisticated and successful business owners, and we find they acted at least in careless disregard of the Code in their treatment of this item.”

Ms. Avrahami declined to comment on the case when contacted by Accounting Today and said she wasn’t sure whether she and her husband would appeal the ruling. McEntee, Hiller and Clark did not immediately respond to requests for comment. An IRS spokesperson declined to comment, noting that federal law prohibits the IRS from commenting on any cases.

 

Tim Tarter of the law firm Woolston & Tarter, one of the litigators involved in the case who represented the Avrahamis with his partner Kacie Dillon, provided the following comment to Accounting Today: “The Avrahamis were disappointed in the Tax Court disallowing their premium deductions, but appreciated that the court did not find that their captive was a sham or find that they were negligent in deducting the premiums at issue. The Avrahamis are meeting with their advisers and considering their options going forward. It’s clear that these cases turn on their facts and additional cases will likely need to be litigated before we know what micro captives will survive court scrutiny.”

 

Reactions to Ruling

However, a former IRS commissioner, Steven T. Miller, who is now national director of tax at alliantgroup, a Washington, D.C.-based tax consulting firm, sees some significant repercussions from the case. “We start from the perspective that this was the first case invoking an 831(b) captive,” he told Accounting Today. “The IRS began its journey with respect to micro captives a few years ago. The IRS has been auditing many captives. The IRS put out at the end of 2016 a 'transaction of interest' notice in which they’re making people disclose if they have captives.

 

There’s been a lot of friction in the industry between the captives industry and the IRS. This will be the first Tax Court case, and is really quite significant in terms of being the first real guidance coming out of the Tax Court.”

 

John Dies, managing director of tax controversy at alliantgroup’s Houston office, is an expert on captive insurance and believes the IRS scored a big victory. “In my judgment it’s a decisive win for the IRS,” he said. “The only aspect that the IRS didn’t have a clear win on was the penalties. They would have been substantial.”

 

However, the court pointed to the advice the Avrahamis received from Hiller and the others, along with the lack of clear guidance from the IRS. “The court mentioned that there was not guidance on this issue,” he said. “If you’re going to seek to penalize folks, first provide guidance on what compliance looks like.” He believes the penalties would have been much larger without those mitigating factors.

 

However, the precedent for other captive insurance cases may be limited. “It’s very specific to the facts of the case,” said Miller. “The court laid out the four factors to define what is and isn’t insurance. The court found there wasn’t good risk distribution. These types of captives require that the risk they have be shifted to a third party and be distributed across a number of people. The court said the latter didn’t happen. The court said you’re not operating as an insurance company and what you’ve done is not sufficient.”

 

Dies noted that the opinion was very colorful in terms of its discussion of the pricing of premiums, and the court attacked the way some of the distributions were being made, pointing out it didn’t conform to a model that was cited as being used by Chubb Insurance. Judge Holmes has two other cases involving captives that are being tried, and Dies expects rulings to be issued by the same judge that could provide further guidance on how the court will view captive insurance.

 

“The cases are all a little bit different,” said Miller. “It may be that the court will use the future cases to point out different issues.”

 

Risk shifting may be one issue where the rulings in the other cases may shed more light.

“That was one of the challenges of this ruling,” said Dies. “The IRS in comments they made to us were looking for a bright line from the court in terms of this issue. Instead the judge dove very deeply, but you don’t have that high-level guidance. There’s going to be considerable distance between the IRS and the taxpayers and their representatives.”

 

Miller believes the ruling will give the IRS a stronger hand. “There’s nothing in this opinion that will limit the IRS’s activity in any way,” he said. “If anything, it will embolden them.”

 

But he admitted it’s hard to say if the ruling will have a material impact on the captive insurance industry. “These were very specific facts and in some ways outlier facts,” said Miller. “I don’t know that the industry will overreact. I would expect it to be appealed. We’ll see what happens.”

“This court was very careful not to attack 831(b) captives,” said Dies. “The criticisms that the court urged really had to do with the analysis in the sense that other captives were created with another approach.”

 

Next IRS Commissioner

Accounting Today asked Miller, as a former IRS commissioner, about what direction the IRS might take in the future on the matter, once Commissioner John Koskinen’s term ends in November. He responded that these sorts of enforcement activities generally fall outside the day-to-day responsibilities of the IRS commissioner, although one former IRS commissioner who also now works for alliantgroup, Mark Everson, did get heavily involved in cracking down on LILO and SILO tax shelters.

 

“I would not expect a large wholesale change out of the new commissioner,” said Miller. “You never know, but it would surprise me about a material change.”

 

Miller declined to speculate on who the next commissioner might be and when the announcement might come. “There are rumors floating around, but they’re just rumors; nothing solid enough,” he said. “It could happen tomorrow. It’s going to be an interesting time.”

He thinks the next IRS commissioner is likely to be more occupied with other matters besides captive insurance, including tax reform and the attitude of Congress and the administration toward the IRS.

 

“A new commissioner is going to be worried about the budget, the upcoming filing season, and the impact of legislation on the organization,” he said.

 

Identity theft is also likely to continue to be a top priority for the next IRS commissioner, although Miller pointed to a recent report from the Treasury Inspector General for Tax Administration that found the IRS making progress on the issue, with the help of the tax preparation industry and preparer organizations.

 

In terms of the Avrahami case, however, he believes it represents a victory for the agency. “The case is clearly a win for the IRS, and the IRS will run with it,” said Miller. “But practitioners will argue correctly they’re limited to the facts in the Avrahami case.”

 

“My sense is that this case will increase the divide between the IRS and taxpayers,” said Dies. “I agree with Steve’s comment that the IRS is unlikely to back off seeking penalties.”

 

 

 

Does a cost segregation study increase the likelihood of an audit?

By Gian P. Pazzia

 

One of the most common concerns raised regarding cost segregation studies is whether it increases the likelihood of an IRS audit down the road. While it’s well documented that these studies are accepted by the IRS if performed properly, there isn’t much evidence suggesting the implementation of a cost segregation study on a tax return, by itself, will trigger an IRS audit.

In the past decade, I’ve seen patterns suggesting that newly constructed buildings or improvements placed in service during bonus depreciation eligible years are reviewed closely.

 

This makes sense because cost segregation studies can have a sizable impact on the amount of bonus depreciation claimed on a tax return. For building projects placed in service in phases over multiple years where bonus depreciation eligibility rules change, taxpayers should ensure their cost segregation report clearly and separately demonstrates when each cost is incurred for each component. This issue was brought to light in Field Attorney Advice (FFA) 20140202F, Jan. 16, 2014, a case involving a hotel owner who was denied bonus depreciation, in large part, because the cost segregation provider it hired did not identify the dates the costs were incurred for each asset.

 

I’ve also seen patterns suggesting that projects generating more than $10 million of additional depreciation in a particular year are more likely to be scrutinized by IRS engineers, although smaller projects certainly do get looked at as well. Large fluctuations of depreciation in excess of $10 million can be generated by a number of factors, including the filing of the Form 3115, Change of Accounting Method, where a taxpayer claims missed deductions from prior tax years.

 

While the Form 3115 can alert the IRS that a cost segregation study has been performed, I have not seen enough evidence suggesting that filing Form 3115 should raise concerns.

 

When reviewing a study, the IRS is primarily concerned with the methodologies and procedures used to prepare the cost segregation analysis. As long as the study is performed by a qualified professional such as a Certified Cost Segregation Professional who is following the approved guidelines, it is less likely to have issues during the audit. 

 

 

IRS Issues Urgent Warning to Beware IRS/FBI-Themed Ransomware Scam

WASHINGTON – The Internal Revenue Service today warned people to avoid a new phishing scheme that impersonates the IRS and the FBI as part of a ransomware scam to take computer data hostage.

 

The scam email uses the emblems of both the IRS and the Federal Bureau of Investigation. It tries to entice users to select a “here” link to download a fake FBI questionnaire. Instead, the link downloads a certain type of malware called ransomware that prevents users from accessing data stored on their device unless they pay money to the scammers.

 

“This is a new twist on an old scheme,” said IRS Commissioner John Koskinen. “People should stay vigilant against email scams that try to impersonate the IRS and other agencies that try to lure you into clicking a link or opening an attachment. People with a tax issue won’t get their first contact from the IRS with a threatening email or phone call."

 

The IRS, state tax agencies and tax industries – working in partnership as the Security Summit – currently are conducting an awareness campaign called Don’t Take the Bait, that includes warning tax professionals about the various types of phishing scams, including ransomware. The IRS highlighted this issue in an Aug. 1 news release IR-2017-125 Don’t Take the Bait, Step 4: Defend against Ransomware.

 

Victims should not pay a ransom. Paying it further encourages the criminals, and frequently the scammers won’t provide the decryption key even after a ransom is paid.

 

Victims should immediately report any ransomware attempt or attack to the FBI at the Internet Crime Complaint Center, www.IC3.gov. Forward any IRS-themed scams to phishing@irs.gov.

The IRS does not use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds. For more information, visit the “Tax Scams and Consumer Alerts” page on IRS.gov. Additional information about tax scams is available on IRS social media sites, including YouTube videos.

 

If you are a tax professional and registered e-Services user who disclosed any credential information, contact the e-Services Help Desk to reset your e-Services password. If you disclosed information and taxpayer data was stolen, contact your local stakeholder liaison

 

 

 

Beware of Fake Charity Scams Relating to Hurricane Harvey

WASHINGTON ― The Internal Revenue Service today issued a warning about possible fake charity scams emerging due to Hurricane Harvey and encouraged taxpayers to seek out recognized charitable groups for their donations.

 

While there has been an enormous wave of support across the country for the victims of Hurricane Harvey, people should be aware of criminals who look to take advantage of this generosity by impersonating charities to get money or private information from well-meaning taxpayers. Such fraudulent schemes may involve contact by telephone, social media, e-mail or in-person solicitations.

 

Criminals often send emails that steer recipients to bogus websites that appear to be affiliated with legitimate charitable causes. These sites frequently mimic the sites of, or use names similar to, legitimate charities, or claim to be affiliated with legitimate charities in order to persuade people to send money or provide personal financial information that can be used to steal identities or financial resources.

 

IRS.gov has the tools people need to quickly and easily check the status of charitable organizations.

 

The IRS cautions people wishing to make disaster-related charitable donations to avoid scam artists by following these tips:

 

  • Be sure to donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. The IRS website at IRS.gov has a search feature, Exempt Organizations Select Check, through which people may find qualified charities; donations to these charities may be tax-deductible.
  • Don’t give out personal financial information — such as Social Security numbers or credit card and bank account numbers and passwords — to anyone who solicits a contribution. Scam artists may use this information to steal a donor’s identity and money.
  • Never give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.
  • Consult IRS Publication 526, Charitable Contributions, available on IRS.gov. This free booklet describes the tax rules that apply to making legitimate tax-deductible donations. Among other things, it also provides complete details on what records to keep.

 

Taxpayers suspecting fraud by email should visit IRS.gov and search for the keywords “Report Phishing.”

 

More information about tax scams and schemes may be found at IRS.gov using the keywords “scams and schemes.” Details on available relief can be found on the disaster relief page on IRS.gov.

 

 

 

Trump’s pivot to taxes is fraught with ‘pitfalls everywhere’

By Sahil Kapur

 

President Donald Trump is planning to kick off one of the most important sales pitches of his presidency this week—getting Americans fired up about rewriting the U.S. tax code.

But there’s no plan to sell.

 

Basic questions remain unanswered. Will the changes be permanent or temporary? How will individual tax brackets be set? What rate will corporations and small businesses pay?

 

Instead of providing details that could help build support for a bill, the president will largely rely on the same talking points he and his advisers have highlighted since January: The middle class deserves a tax cut and businesses need changes to help them compete with global rivals.

 

Treasury Secretary Steven Mnuchin—who earlier predicted having a tax bill done by August—revealed the enormity of the task ahead on Friday: He didn’t commit to completing it by year’s end.

 

“They’re nowhere. They’re just nowhere,” said Henrietta Treyz, a tax analyst with Veda Partners and former Senate tax staffer. “I see them putting these ideas out as though they’re making progress, but they are the same regurgitated ideas we’ve been talking about for 20 years that have never gotten past the white-paper stage.”

 

Treyz said congressional tax staffers she’s spoken with are despondent over what they call an unexpectedly grim situation. There’s “animosity” between Republican leaders and their members, and between House and Senate Republicans, she said. Mistrust between congressional Republicans and Trump has been exacerbated by his recent attacks on key GOP senators.

 

Health-Care Lesson

“Our team has been working with the White House and the Senate to ensure we are all moving in one direction to reach this important goal,” said Emily Schillinger, a spokeswoman for House Ways and Means Chairman Kevin Brady.

 

Administration officials and congressional leaders met periodically this summer to negotiate a tax framework—an attempt to avoid repeating the failed attempt to repeal the 2010 Affordable Care Act.

 

The result was a two-page “statement of principles,” released in July. It contained one big decision—ruling out a controversial border-adjusted tax that House Speaker Paul Ryan had championed—but left other crucial questions unanswered.

 

Trump administration officials had promised a unified tax plan by early September—catching GOP congressional leaders by surprise, and leaving members confused and irritated, said three people familiar with the situation. The White House has since abandoned that promise; it said last week that details will be up to the tax-writing committees in the House and Senate.

 

Those panels must decide how to raise trillions in revenue to pay for the massive tax cuts the White House has promised, and which deductions and loopholes to eliminate. It’s possible that two different plans could result, with neither gaining the White House’s full support.

 

“There’s no indication that either the White House or congressional leaders learned anything from their repeal and replace debacle,” said Stan Collender, a former budget aide for congressional Democrats.

 

‘Internal Debate’

Even the time frame for drafting a bill isn’t clear. National Economic Council Director Gary Cohn told the Financial Times in an interview published Friday that the Ways and Means Committee would write the tax legislation "in the next three or four weeks." Schillinger declined to confirm that, saying only that the panel is working toward achieving a tax overhaul in 2017.

 

After lawmakers return from a recess next week, they must focus first on must-pass bills to keep the federal government open and avert a default on U.S. debt—most likely pushing serious consideration of tax legislation to October. Republicans remain divided on the parameters of a budget measure that’s necessary to kick off tax legislation.

 

Meanwhile, Trump will spend the next several weeks campaigning for tax legislation, the White House said. His first stop is Springfield, Missouri, on Wednesday, said an official who asked not to be identified because the details were still under review. Trump posted a message on Twitter Sunday saying he was heading to Missouri and that Senator Claire McCaskill, a Democrat, is “opposed to big tax cuts.”

 

Republicans had hoped to fill the month of August with similar messaging, but Trump’s comments about white supremacist violence in Charlottesville, Virginia, and pointed attacks on Senate Majority Leader Mitch McConnell and others overshadowed that plan.

 

There’s still no indication that the most essential question for a tax bill—whether its changes would be temporary or permanent—has been settled. “There’s some internal debate about that that we’ll have to sort out among ourselves,” McConnell said Aug. 21.

 

Republicans, who control only 52 seats in the Senate, plan to use congressional budget rules that allow for approving a tax bill with a simple majority. But those rules also require that tax cuts would have to be offset so they don’t add to the long-term budget deficit. Changes that did increase the deficit would have to expire over time.

 

Washington Lobbyists

Beyond vague references to eliminating special breaks, the only one that’s been targeted publicly is the state and local tax deduction for individuals. Officials have said they’d preserve deductions for mortgage interest, charitable giving and retirement savings.

 

“What we’re proposing on the individual side is get rid of the loopholes, get rid of the carve-outs,” Ryan said last week during a CNN town hall. “Just lower people’s tax rates. Let you keep more of your own money.” He offered no additional details during the hour-long event.

 

The lack of specifics has kept Washington lobbyists on the sidelines—but that could change as soon as tax writers target any treasured loopholes.

 

For example, the influential National Association of Realtors wants to retain the state and local tax deduction. Yet the group hasn’t formalized a budget for that fight or other tax-related efforts, said a person familiar with its strategy. The vague plans and difficult legislative calendar present such large impediments to tax legislation that any tactics beyond the usual meetings with lawmakers haven’t been necessary, the person said.

 

‘Potholes and Sinkholes’

Similarly, there’s been no announcement of a specific tax rate that would be applied to more than $2.6 trillion in profit that U.S. companies have stockpiled overseas. Cohn said in the FT interview that a specific “repatriation” rate on those offshore earnings hadn’t been discussed. (He and Mnuchin said they would be discussing a rate with the House and Senate four months ago when unveiling the White House’s one-page tax plan.)

 

Details or no details, Cohn hasn’t swayed from saying he’s committed to a full overhaul, listing it as his first, second and third priorities during a Bloomberg TV interview this month.

 

That level of determination among key players means a tax bill is still possible, said Kevin Madden, a Republican communications strategist who worked for former House Speaker John Boehner. "There’s a reason Kevin Brady and Paul Ryan are criss-crossing the country, talking to workers, talking to businesses both big and small that are major employers."

 

Brady and Ryan met this month with employees at companies including Intel Corp., Boeing Co. and AT&T Inc. They rehashed lines they’ve used since January: They want to simplify the code so Americans can file returns on postcards. Tax overhauls are rare and difficult; the last one happened in 1986 when Ryan got his driver’s license.

 

Treyz said the best-case scenario is that Republicans will pass legislation in late 2017 that expands existing tax perks, like the earned income tax credit and the child tax credit. Proposals to slash rates will run into budgetary problems, and efforts to end deductions will draw a lobbying blitz, making them too painful for many Republicans to support.

—With assistance from Ben Brody, Noah Buhayar and Alexandria Arnold

 

 

 

IRS signs contract to track bitcoin transactions

By Michael Cohn

The Internal Revenue Service has signed a contract with a company called Chainalysis that offers software for analyzing and tracking bitcoin transactions.

 

The IRS has been pushing for ways to tax bitcoin transactions. In 2014, it issued basic guidance in Notice 2014-21 stating that virtual currencies such as bitcoin should be treated as property rather than currency for tax purposes. However, the IRS found that only a little over 800 taxpayers declared either losses or profits in bitcoin in 2015. The agency suspects that bitcoin and similar digital currencies are being used for tax evasion. It filed a broad request known as a John Doe summons last November seeking the identities of users from Coinbase, one of the largest bitcoin exchanges in the U.S. But after coming under pressure from members of Congress, the IRS scaled back the request in July to Coinbase users who engage in transactions of $20,000 or more (see IRS scales back Coinbase investigation).

 

Nevertheless, the IRS recently signed a contract with Chainalysis to track and analyze bitcoin transactions through the company’s Reactor tool, according to a report last week in the Daily Beast. Although the original invoice was only for $13,188, a later agreement increased the deal to $124,000, according to ETHNews. The IRS has paid more than $88,700 since 2015 to the company, according to the Daily Beast.

 

The software is supposed to help the IRS track the use of bitcoin for trade in not only illicit goods such as drugs and ransomware payments, but also to uncover its use for concealing wealth from the tax authorities. “The purpose of this acquisition is … to help us trace the movement of money through the bitcoin economy,” said a section of the contract, which the Daily Beast received through a Freedom of Information Act request.

 

Separately, The Wall Street Journal reported last week that the IRS may be close to issuing additional guidance on bitcoin taxes, especially in light of the recent split in the bitcoin world between bitcoin and a competing version known as Bitcoin Cash, in which every bitcoin owner was set to receive an equivalent amount of Bitcoin Cash.

 

The Financial Accounting Standards Board has also been coming under pressure to develop guidance for how to account for bitcoin and other so-called "cryptocurrency" transactions. According to Thomson Reuters, FASB is in the early stages of developing an accounting standard for digital currency.

 

 

 

Does failure to file constitute obstruction?

By Roger Russell

Does failing to file constitute obstruction of the IRS?

 

Code Section 7212(a) is one of many federal statutes that include a “catchall” residual clause designed to apply to conduct that might not be covered by the specific language in the rest of the statute. In a case coming up this fall, the Supreme Court will determine if the catchall phrase, also called an omnibus clause or “uber” clause, is justified in its broad use and interpretation by federal prosecutors when it comes to taxes.

 

The Tax Code phrase in question states that, “Whoever corruptly or by force … endeavors to intimidate or impede any officer… of the United States acting in an official capacity under this title [the Tax Code] or in any other way corruptly or by force … endeavors to obstruct or impede the due administration of this title, shall, upon conviction thereof, be fined no more than $5,000, or imprisoned not more than three years, or both.”

 

“It’s been called ‘the one-man conspiracy statute,’” said Nathan Hochman, a partner in the Litigation Practice Group of Morgan Lewis, and former head of the Tax Division of the Department of Justice. “Normally you need two or more people for a conspiracy, but not with Section 7212,” he said. “And with a conspiracy, you don’t need to commit the underlying offense to be guilty of a crime.”

 

Code Section 7201 (“attempt to evade tax”) or 7206 (“fraud and false statements”) are generally used by prosecutors, Hochman explained. “But what happens in a tax case where you can’t charge either because you don’t have all the elements to prove a false return or an evasion scheme? That’s where Section 7212 comes into play,” he said.

 

“You can go back into every act taken by someone, whether it’s an affirmative act of tax evasion or not,” he said. “And you can go back as far as you want, even beyond the statute of limitations, if necessary, and lead up to its eventual overall effect on the IRS.”

 

The statute has been used in a number of contexts, according to Hochman. “It’s used in situations where people were taking a variety of steps, and the prosecutor wants to get all the steps before the jury. It makes relevant all types of evidence that may be irrelevant if the charge was just tax evasion or a false statement on a return. It’s a very potent weapon for a prosecutor to have in his or her arsenal. The question for the Supreme Court is, what are the limits?”


For Carlo J. Marinello II, this clause had the effect of turning his failures to file tax returns over a period of years from misdemeanors into a felony.

 

Marinello owned and operated a freight service that couriered items between the United States and Canada. From 1992 to 2010, he did not keep business records or file personal or business tax returns. He was indicted by a grand jury on nine counts of tax-related offenses, and a jury found him guilty on all counts. Eight of the counts were misdemeanors under Code Section 7203 for willfully failing to file personal income and corporate tax returns for the years 2005 through 2008. The remaining count charged him with violating Code Section 7212(a)’s residual clause. The district court instructed the jury that proof beyond a reasonable doubt of any one of the eight obstructive acts alleged in the indictment, including omissions, would be sufficient to find Marinello guilty under section 7212(a).

 

Marinello appealed to the Second Circuit, arguing that guilt under the residual clause requires knowledge of a pending IRS action or investigation. He urged the court to adopt the Sixth Circuit’s interpretation of Code Section 7212(a), which held that the reference to “due administration of this title” requires some pending IRS action, such as a subpoena or audit, of which the defendant was aware. The Second Circuit rejected the Sixth Circuit’s interpretation, holding that the statute covers any corrupt act or omission that obstructs or impedes any activity under the Tax Code.

 

In his dissent from Marinello’s request for a rehearing en banc (by the full court), Judges Jacobs and Cabranes observed that such a broad reading of the statute “had cleared a garden path for prosecutorial abuse.”

 

In the petition for certiorari asking the IRS to hear an appeal from the Second Circuit, Marinello noted that under the Second Circuit’s interpretation, “a defendant who does not maintain records at a time when the IRS does not have a pending action against him – let alone undertaking an action of which he is aware – can nonetheless be convicted of a felony of obstructing the administration of the Tax Code.”

 

“An aggressive prosecutor could use almost any act or omission – the failure to keep a receipt, the decision to be paid in cash, the choice to use a particular method of bookkeeping – as the basis of an obstruction charge under this interpretation,” the petition stated.

 

Marty Davidoff, CPA, Esq., of E. Martin Davidoff & Associates, believes the Second Circuit made the right decision. “Because of the IRS’s limited budget, too many people are getting away with intentional violation of tax laws through non-filing or underreporting of their income,” he said. “Until the breach in having sufficient manpower is closed, I’m in favor of courts being aggressive about punishing intentional violators. It’s become too easy for people to play the manpower lottery to get away with tax fraud.”

 

“I’m fine with a long-term intentional violator having a felony conviction. The fact that they had to stretch to punish him doesn’t bother me,” he added.

 

It’s unclear how the Court will rule, according to Hochman: “We don’t know if they granted certiorari in order to give the government more power, or to rein it in,” he said.

 

 

 

IRS warns of new ransomware scam

By Michael Cohn

The Internal Revenue Service sent an urgent warning Monday about a new phishing scheme in which a scam email purporting to originate from the IRS and the Federal Bureau of Investigation is actually part of a ransomware effort to take computer information hostage.

 

The bogus email actually includes the emblems of both the IRS and the FBI. It tries to convince users to click on a “here” link to download a fake FBI questionnaire. Instead, the hyperlink downloads malware that prevents a victim from accessing the data stored on their device unless they pay money to the cybercriminals.

 

“This is a new twist on an old scheme,” said IRS Commissioner John Koskinen in a statement. “People should stay vigilant against email scams that try to impersonate the IRS and other agencies that try to lure you into clicking a link or opening an attachment. People with a tax issue won’t get their first contact from the IRS with a threatening email or phone call."

 

The IRS, along with state tax authorities and companies in the tax prep industry, have been collaborating on a partnership known as the Security Summit and are conducting an awareness campaign called Don’t Take the Bait warning tax professionals about different kinds of phishing scams, including ransomware.

 

The IRS cautioned victims not to pay a ransom, as it only encourages the criminals, and frequently the scammers won’t provide the decryption key even after a ransom is paid.

 

Victims should instead immediately report any ransomware attempt or attack to the FBI at the Internet Crime Complaint Center, www.IC3.gov, and forward any IRS-themed scams to phishing@irs.gov.

 

The IRS doesn’t use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds. For more information, see the “

 

 

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

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