On December 20, President Donald Trump signed the bipartisan, year-end government spending and tax package, just hours before federal funding was set to expire. Trump's signature on the over 2,000-page spending package avoided a government shutdown.

On December 20, President Donald Trump signed the bipartisan, year-end government spending and tax package, just hours before federal funding was set to expire. Trump's signature on the over 2,000-page spending package avoided a government shutdown.

Year-End Tax Package
The Further Consolidated Appropriations Act, 2020, (HR 1865), logs just over 700 pages and serves as only half of the government spending package for fiscal year 2020, which runs through September 30. Most notably, HR 1865 serves as the legislative vehicle for a year-end tax package, which carries a costly $426 billion price tag over a 10-year budget window, according to the nonpartisan Joint Committee on Taxation (JCT), JCX-54R-19.

Some of the tax-related provisions in the year-end package include, among other items:

• Retroactive and current renewal of over two dozen temporary tax breaks known as tax extenders, which have expired or would soon be expired, spanning from 2017 to 2019. Generally, the renewed tax breaks are extended through 2020, and the biodiesel and short-line railroad maintenance tax credits are extended until 2022;
• The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) (HR 1994), which makes sweeping changes to retirement savings and employer retirement contributions provisions;
• Certain fixes to the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
• Full repeal of three tax-related provisions of the Affordable Care Act (ACA) ( P.L. 111-148), two of which include the 2.3 percent excise tax on medical devices and the 40 percent excise "Cadillac" tax on high-dollar employer-sponsored health insurance plans.

The House approved HR 1865 on December 17 by a 297-to-120 vote. The Senate cleared the measure on December 19 by a 71-to-23 vote.

"So in the end, with more than $400 billion in tax cuts, there were lots of winners and the usual loser – the budget."

"There were numerous fits and starts, but this result is a reminder that Congressional muscle memory on extenders is very strong, so ultimately the members did what they always do – extend them," John Gimigliano, principal-in-charge of the federal legislative and regulatory services group in the Washington National Tax practice of KPMG LLP told Wolters Kluwer. "Some might be surprised to see the ACA taxes rolled back, but it has always felt like those items were on borrowed time; it was really just a question of when and how they were repealed, not whether. So in the end, with more than $400 billion in tax cuts, there were lots of winners and the usual loser – the budget."

SECURE ACT
The bipartisan SECURE Act, which cleared the House in May but remained stalled in the Senate most of the year, makes a number of major as well as administrative changes for retirement savings affecting both individuals and employers.

Some of those changes are noted as follows:

IRA Changes

• Moving the start date for requirement required minimum distributions (RMDs) to the year the owner turns 72;
• Ending the 70 1/2 age limit for contribute contributions to an IRA; and
• Shortening the distribution period for nonspouse inherited IRAs to a 10-year maximum.
  The 10-year window for distributions to a nonspouse beneficiary applies regardless of when the IRA owner dies. Thus, the change will severely limit the use of "stretch IRAs" as an effective planning tool. Limited exceptions are available.

401(k) Changes

• Requiring plans to offer participation to long-term, part-time employees;
• Encouraging auto-enrollment by increasing the cap; and
• Streamlining the safe harbor for non-elective contributions.

Employers with 401(k) plans must offer employees who work between 500 and 1000 hours year an additional means to participate in the plan. The rule change would only affect 401(k) cash or deferral arrangements, and no other qualified plans.

Retirement Plans for Small Employers

Several changes are made to encourage more small employers to offer retirement benefits to their employees, such as:

• Adding a new tax credit for small employers using auto-enrollment plans;
• Increasing the credit for small employer pension plan start-up costs; and
• Allow small employers of two or more to band together to participate in a new class of pooled multiple employer plans (MEPs).

Congress Adjourns Until 2020
After an eventful two-week sprint to the finish line, Congress adjourned for the year on December 20. Lawmakers are expected to return to Washington, D.C. during the week of January 6, 2020.

The Fifth Circuit U.S. Court of Appeals ruled that the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate is unconstitutional because it can no longer be read as a tax, and there is no other constitutional provision that justifies this exercise of congressional power. However, the central question of whether the rest of the ACA remains valid after Congress removed the penalty for not having health insurance remained unanswered. Instead, the case was sent back to the district court to reconsider how much of the ACA could survive without the individual mandate penalty.

The Fifth Circuit U.S. Court of Appeals ruled that the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate is unconstitutional because it can no longer be read as a tax, and there is no other constitutional provision that justifies this exercise of congressional power. However, the central question of whether the rest of the ACA remains valid after Congress removed the penalty for not having health insurance remained unanswered. Instead, the case was sent back to the district court to reconsider how much of the ACA could survive without the individual mandate penalty.

District Court
According to the opinion, "the rule of law demands a careful, precise explanation of whether the provisions of the ACA are affected by the unconstitutionality of the individual mandate as it exists today." Therefore, the opinion directs the district court to carefully consider whether the mandate can be legally distinct from the rest of the law. The opinion instructs the district court to answer two questions: Which parts of the ACA "are indeed inseverable" now that the mandate is no longer enforced and whether a ruling in the case should apply only to the Republican-led states that sued to overturn the law, an issue raised by Trump administration lawyers.

Dissenting Opinion
A dissenting opinion discussed that Congress made it clear that it wanted the rest of the ACA to stand and sending the case back to the lower court was criticized. The opinion also highlighted that sending the case back to the lower court merely identifies serious flaws in the district court’s analysis and remands for a do-over, which will unnecessarily prolong this litigation and the concomitant uncertainty over the future of the health care sector.

Proposed qualified opportunity zone regulations issued on October 29, 2018 ( REG-115420-18) and May 1, 2019 ( REG-120186-18) under Code Sec. 1400Z-2 have been finalized with modifications. The regulations. which were issued in a 550 page document, are comprehensive.

Proposed qualified opportunity zone regulations issued on October 29, 2018 ( REG-115420-18) and May 1, 2019 ( REG-120186-18) under Code Sec. 1400Z-2 have been finalized with modifications. The regulations. which were issued in a 550 page document, are comprehensive.

The regulations address issued related to all aspects of the gain deferral rules and also various requirements that must be met for an entity to qualify as a qualified opportunity fund (QOF) or as a qualified opportunity zone business. Duplicative rules regarding QOFs and qualified opportunity zone businesses have been combined and definitions of key terms added. The regulations detail which taxpayers are eligible to make the election, the types of capital gains eligible for deferral, and the method of making deferral elections. Revisions are made to the rules applying the statutory 180-period and other requirements with regard to the making of a qualifying investment in a QOF.

The IRS will reflect these regulations in updated forms, instructions, and other guidance in January 2020.

Benefits of QOF Investments
Taxpayers may elect to temporarily defer capital gain in income if the gain is invested within 180 days in a QOF. The gain is recognized on Dec. 31, 2026, or if earlier, upon the occurrence of an inclusion event such as the sale of the QOF investment. However, 10 percent of the deferred gain is not recognized if the investment is held five years and 15 percent is not recognized after seven years. In addition, taxpayers may exclude recognition of gain on appreciation in the investment if the investment in the qualified opportunity fund is held for at least 10 years.

Section 1231 gains
The final regulations provide that eligible gains include the gross amount of eligible section 1231 gains unreduced by section 1231 losses regardless of character. The proposed regulations took a "netting" approach. The 180-day period for an eligible taxpayer to invest an amount with respect to an eligible section 1231 gain begins on the date of the sale of the section 1231 asset rather than at the end of the tax year.

RICS and REITS
The 180-day period for RIC or REIT capital gain dividends generally begins at the close of the shareholder’s tax year in which the capital gain dividend would otherwise be recognized by the shareholder. To ensure that RIC and REIT shareholders do not have to wait until the close of their tax year to invest capital gain dividends received during the tax year, the final regulations also provide that shareholders may elect to begin the 180-day period on the day each capital gain dividend is paid. The 180-day period for undistributed capital gain dividends, however, begins on either the last day of the shareholder’s tax year in which the dividend would otherwise be recognized or the last day of the RIC or REIT’s tax year, at the shareholder’s election.

The aggregate amount of a shareholder’s eligible gain with respect to capital gain dividends received from a RIC or a REIT cannot exceed the aggregate amount of capital gain dividends that the shareholder receives as reported or designated by that RIC or that REIT for the shareholder’s tax year.

Installment Sales
The final regulations allow an eligible taxpayer to elect to choose the 180- day period to begin on either (i) the date a payment under an installment sale is received for that tax year, or (ii) the last day of the tax year the eligible gain under the installment method would be recognized. Therefore, if the taxpayer defers gain from multiple payments under an installment sale, there might be multiple 180-day periods, or a single 180-day period at the end of the taxpayer’s tax year, depending upon taxpayer’s election.

Partners, S Corporation Shareholders, and Trust Beneficiaries
The final regulations provide partners, S shareholders, and beneficiaries of decedents’ estates and non-grantor trusts with the option to treat the 180-day period as commencing upon the due date of the related entity’s tax return, not including any extensions. This rule does not apply to grantor trusts.

Gain from Disposal of Partial Interest in QOF Investment
Gain arising from an inclusion event is eligible for deferral even though the taxpayer retains a portion of its qualifying investment after the inclusion event. If an inclusion event relates only to a portion of a taxpayer’s qualifying investment in the QOF, (i) the deferred gain that otherwise would be required to be included in income (inclusion gain amount) may be invested in a different QOF, and (ii) the taxpayer may make a deferral election with respect to the inclusion gain amount, so long as the taxpayer satisfies all requirements for a deferral election on the inclusion gain amount.

Post-December 31, 2026 Gain Ineligible
Gain arising after December 31, 2026 (including gain mandatorily recognized on that date) is not eligible for deferral.

Death Related Transfers of QOF Investments
A qualifying investment received by a beneficiary in a transfer by reason of death remains a qualifying investment in the hands of the beneficiary.

Acquisition of Eligible Interest from Person Other than a QOF
A taxpayer may make a deferral election for an eligible interest acquired from a person other than a QOF. The final regulations do not require the transferor to have made a prior deferral election for the acquirer of an eligible interest to make the election.

Further, for interests in entities that existed before the enactment of the deferral provision, if such entities become QOFs, then the interests in those entities, even though not qualifying investments in the hands of a transferor, are eligible interests that may (i) be acquired by an investor and (ii) result in a qualifying investment of the acquirer if the acquirer has eligible gain and the acquisition was during the 180-day period with respect to that gain.

Built in Gains
Built-in gain of a REIT, a RIC, or an S corporation potentially subject to corporate-level tax is eligible for deferral. If the deferral election is made, the amount of gain is not included in the calculation of the entity’s net recognized built-in gain.

Identification of Disposed Interests in a QOF
The final regulations permit taxpayers to specifically identify QOF stock that is sold or otherwise disposed. If a taxpayer fails to adequately identify which QOF shares are disposed of, then the FIFO identification method applies. If, after application of the FIFO method, a taxpayer is treated as having disposed of less than all of its investment interests that the taxpayer acquired on one day and the investments vary in its characteristics, then a pro-rata method applies to the remainder.

The specific identification method does not apply to the disposition of interests in a QOF partnership.

Deferred Gain Retains Tax Attributes
The final regulations make it clear that if a taxpayer is required to include in income some or all of a previously deferred gain, the gain so included has the same attributes that the gain would have had if the recognition of gain had not been deferred. If a deferred gain cannot be clearly associated with an investment in a particular QOF, an ordering rule applies to make this determination.

Effective Date
The final regulations are generally applicable to tax years beginning after 60 days after publication in the Federal Register.

With respect to the portion of a taxpayer’s first tax year ending after December 21, 2017, that began on December 22, 2017, and for tax years beginning after December 21, 2017, and on or before 60 days after publication in the Federal Register taxpayers may rely on either the proposed regulations or the final regulations but not both.

The IRS has issued final regulations that provide guidance on transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor. Specifically, the regulations override the general nonrecognition rule under Code Sec. 721(a) unless the partnership adopts the remedial allocation method and certain other requirements are satisfied. The regulations affect U.S. partners in domestic or foreign partnerships.

The IRS has issued final regulations that provide guidance on transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor. Specifically, the regulations override the general nonrecognition rule under Code Sec. 721(a) unless the partnership adopts the remedial allocation method and certain other requirements are satisfied. The regulations affect U.S. partners in domestic or foreign partnerships.

Background
Code Sec. 721(a) generally provides that no gain or loss is recognized by either a partnership or any of its partners upon a contribution of property to the partnership in exchange for a partnership interest. In Code Sec. 721(c), the Treasury Secretary has regulatory authority to override this nonrecognition provision for gain realized on the transfer of property to a domestic or foreign partnership if the gain, when recognized, would be includible in the gross income of a person other than a U.S. person.

Under temporary regulations issued in 2017, if a U.S. person contributes certain property with built-in gain to a partnership that has foreign partners related to the transferor, then gain will be recognized unless the gain deferral method is applied with respect to the property ( Temporary Reg. §§1.721(c)-2T; 1.721(c)-3T). Under a de minimis exception, nonrecognition continues to apply if the sum of all built-in gain property contributed to the partnership during the tax year does not exceed $1 million.

The final regulations adopt the temporary regulations with certain modifications.

Related Person Definition
The final regulations modify the definition of related person in certain situations. This modification provides relief when certain foreign individual partners of a partnership would be treated as a related person with respect to a domestic corporation by reason of Code Sec. 267(c)(3).

Consistent Allocation Method
The final regulations add a new sentence in Reg. §1.721(c)-3(c)(1). Upon a variation (as described in Reg. §1.706-4(a)(1)) of a U.S. transferor’s interest in a Code Sec. 721(c) partnership, book items with respect to section 721(c) property that are allocated under the interim closing method (as described in Reg. §1.706-4) will be treated as allocated in the same percentage for applying the consistent allocation method in a single tax year, unless the variation results from a transaction undertaken with a principal purpose of avoiding the tax consequences of the gain deferral method.

Reporting Requirements
The 2017 regulations required much of the reporting to be on statements attached to returns. Since the 2017 regulations were issued, however, the IRS has updated and added new schedules to Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, to facilitate compliance with these reporting requirements. The IRS has also issued new Form 8838-P, Consent To Extend the Time To Assess Tax Pursuant to the Gain Deferral Method (Section 721(c)). The final regulations generally require taxpayers to use these forms and schedules.

The final regulations also clarify the duration for which the U.S. transferor must extend the period of limitations on the assessment of tax under Reg. §1.721(c)-6(b).

Technical Termination Rules
The Tax Cuts and Jobs Act, ( P.L. 115-97) (the "TCJA") eliminated technical terminations. However, the applicability date for these final regulations relates back to the applicability date provided in the 2017 regulations, which is before the effective date provided in the TCJA. Accordingly, the final regulations retain technical termination rules, but their application will be limited. The rules will only apply to technical terminations occurring on or after the applicability date provided in the 2017 regulations but before the effective date for the repeal of Code Sec. 708(b)(1)(B) provided in the TCJA.

Effective Date
The regulations are effective on the date of filing with the Federal Register. For dates of applicability, see Reg. §§1.197-2(l)(5)(i), 1.704-1(f), 1.704-3(g)(1), 1.721(c)-1(e), 1.721(c)-2(e), 1.721(c)-3(e), 1.721(c)-4(d), 1.721(c)-5(g), 1.721(c)-6(g), and 1.6038B-2(j)(4).

The IRS has released Publication 5382, "Internal Revenue Service Progress Update / Fiscal Year 2019—Putting Taxpayers First." This new annual report describes accomplishments across the agency, and highlights the work of IRS employees during the past year. It covers a variety of taxpayer service efforts, including development of the new Taxpayer Withholding Estimator, as well as operations support efforts on areas involving information technology modernization, human capital office initiatives, and others.

The IRS has released Publication 5382, "Internal Revenue Service Progress Update / Fiscal Year 2019—Putting Taxpayers First." This new annual report describes accomplishments across the agency, and highlights the work of IRS employees during the past year. It covers a variety of taxpayer service efforts, including development of the new Taxpayer Withholding Estimator, as well as operations support efforts on areas involving information technology modernization, human capital office initiatives, and others.

"This report is about more than what happened during the past year," IRS Commissioner Chuck Rettig wrote in the report’s opening message to taxpayers. "It’s also designed to provide insight into the people serving this country on behalf of the IRS, and provide a glimpse into the future," he added.

IRS Pub. 5382 also focuses criminal investigation results and efforts involving civil enforcement. Also discussed are ongoing compliance areas, including micro-captives, syndicated conservation easements, and virtual currency. The report further covers the IRS’s implementation of new tax laws, and the IRS’s ongoing work on the new Taxpayer First Act of 2019.

Individual Audits Down
Taxpayers are now half as likely to be audited by the IRS for their individual income tax returns as they were a decade ago. As described in IRS Pub. 5382, the IRS audited 0.45 percent of individual (1040) income tax returns during fiscal year (FY) 2019. This number is down from 1.1 percent of tax returns audited in 2010. The IRS’s ongoing loss to its total workforce is largely to blame for the consistent decline in IRS audits, according to the report.

"The IRS lost more than 29,618 full time positions between FY 2010 and FY 2019, which includes Information Technology, Operations Support, Taxpayer Service and Enforcement personnel. These losses directly correlate with a steady decline in the number of individual audits during the past nine years," the report notes.

Hill Reaction
Although individual audits have significantly decreased, Democratic lawmakers on Capitol Hill are criticizing the fact that the IRS continues to conduct more examinations on lower-income individual taxpayers than it does on higher-income taxpayers or corporations. However, the IRS has said previously that audits on higher-income individuals and businesses are significantly more complex and require more resources.

"IRS audit rates are at their lowest levels in 40 years, allowing the wealthy and well-connected to steal from taxpayers with no consequences," Senate Finance Committee ranking member Ron Wyden, D-Ore., said in a January 7 statement. "The bulk of tax avoidance and fraud comes from corporations, pass-through business and those at the top. Ensuring the wealthy and corporations pay what they owe takes the most resources and manpower, and I’m working with the IRS to get a clear picture on funding and staffing levels needed to audit top earners at 2010 levels," Wyden added.

Currently, the IRS anticipates that up to 31 percent of its workforce (nearly 19,719 full-time employees) will retire within the next five years. The IRS’s workforce decline is expected to create a "significant risk of a large knowledge and experience gap for the nation’s tax agency," according to the IRS report.

Bridget Roberts, the Acting National Taxpayer Advocate, released her 2019 Annual Report to Congress. The report discusses the key challenges facing the IRS regarding the implementation of the Taxpayer First Act, inadequate taxpayer service and limited funding of the agency. Further, Roberts released the third edition of the National Taxpayer Advocate’s "Purple Book," which presents 58 legislative recommendations designed to strengthen taxpayer rights and improve tax administration.

Bridget Roberts, the Acting National Taxpayer Advocate, released her 2019 Annual Report to Congress. The report discusses the key challenges facing the IRS regarding the implementation of the Taxpayer First Act, inadequate taxpayer service and limited funding of the agency. Further, Roberts released the third edition of the National Taxpayer Advocate’s "Purple Book," which presents 58 legislative recommendations designed to strengthen taxpayer rights and improve tax administration.

Taxpayer First Act
The report highlighted that the Taxpayer First Act ( P.L. 116-25) had made the most comprehensive revisions to IRS procedures since the IRS Restructuring and Reform Act of 1998, including some 23 provisions previously recommended by the National Taxpayer Advocate. Further, the Taxpayer First Act also required the IRS to develop four strategic plans:

• a comprehensive taxpayer service strategy (due to Congress by July 1, 2020);
• a comprehensive plan to redesign the IRS’s organizational structure (due to Congress by Sept. 30, 2020);
• a comprehensive employee training strategy that includes taxpayer rights training (due to Congress by July 1, 2020); and
• a multi-year plan to meet IRS information technology (IT) needs.

Key IRS Challenges
The biggest challenge facing the IRS is its struggle to complete its mission. The IRS aims to "provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all." The report emphasizes that the IRS is struggling to meet both of those goals, and attributes the IRS’s shortcomings mostly to budget constraints but also to a culture in which the agency focuses on its own priorities without adequately factoring in the needs of taxpayers.

The report states that the IRS is among the lowest-performing federal agencies in providing a positive customer experience. During fiscal year (FY) 2019, the report said that the IRS received approximately 100 million telephone calls, and customer service representatives answered only 29 percent. The report further states that the IRS has also struggled to enforce the law with "fairness to all". The report urges the IRS to prioritize phone service for taxpayers against whom it takes collection action.

Low Budget
Since 2010, the IRS budget has been reduced by about 20 percent after adjusting for inflation, and the number of full-time equivalent employees has declined by about 22 percent. The report points out that answering 100 million telephone calls, conducting audits, and taking enforcement actions require adequate staffing, and the IRS cannot substantially improve its performance without additional resources. The report urges Congress to increase IRS funding and particularly for taxpayer service and IT modernization, and to change the budget rules to account for the revenue additional IRS appropriations are likely to generate.

Identifying Taxpayer Needs and Preferences
Despite the IRS’s significant funding limitations, the report urges the IRS to utilize the Taxpayer First Act requirements – to develop plans to revamp its taxpayer service strategy, organizational structure, employee training strategy, and technology priorities – as a roadmap for a once-in-a-generation reassessment of its objectives and operations.

While noting that the IRS has developed strategies in a vacuum without soliciting taxpayer feedback and taking into account taxpayer needs and preferences, the report suggests a full-scale cultural shift. The report also expressed concern that the IRS has declined to include the National Taxpayer Advocate or a Taxpayer Advocate Service (TAS) representative as part of a core team created to coordinate its Taxpayer First Act implementation activities.

The report also makes numerous recommendations to improve the customer experience, including that the IRS take the following actions:

• Conduct multi-disciplined, comprehensive research into taxpayer needs and preferences.
• Require that all IRS business units, including those charged primarily with enforcement, develop a detailed customer service strategy.
• Appoint a Chief Customer Experience Officer to coordinate service initiatives across IRS business units.
• Ensure that taxpayers who cannot work with the IRS digitally, or whose issues are not resolved online, can reach and work with an IRS employee.
• Address the needs of practitioners who interact with the IRS on behalf of large numbers of taxpayers.
• For each proposal included in its customer service strategy, include cost estimates, milestones, and taxpayer-focused performance measures so the effectiveness of the strategy in improving customer service can be measured over time.

Other Matters
The report also:

• identified 10 "most serious problems";
• provided status updates on two problems identified in previous reports;
• made dozens of recommendations for administrative change;
• made 58 recommendations for legislative change;
• analyzed the 10 tax issues most frequently litigated in the federal courts; and
• presented four research studies.

The IRS has modified the applicability dates for proposed regulations under Code Sec. 382 that were issued with NPRM REG-125710-18, September 10, 2019 (2019 proposed regulations). The IRS is withdrawing the text of the proposed applicability dates, and proposing revised applicability dates. The newly issued proposed rules would also provide transition relief.

The IRS has modified the applicability dates for proposed regulations under Code Sec. 382 that were issued with NPRM REG-125710-18, September 10, 2019 (2019 proposed regulations). The IRS is withdrawing the text of the proposed applicability dates, and proposing revised applicability dates. The newly issued proposed rules would also provide transition relief.

Proposed Regulations and Notice 2003-65
The 2019 proposed regulations would provide guidance on the inclusion of items of income and deductions in the calculation of built-in gains and losses under Code Sec. 382(h). The proposed regulations would apply to ownership changes that occur after the date the proposed regulations are published as final regulations in the Federal Register.

Notice 2003-65, 2003-2 CB 747, provides interim guidance for identifying built-in gains and losses under Code Sec. 382(h). This notice permits taxpayers to rely on safe harbor approaches for applying Code Sec. 382(h) to an ownership change prior to the effective date of temporary or final regulations issued under that provision.

Delay of Applicability Date
To address concerns raised by taxpayers and practitioners, the IRS has withdrawn the text of Proposed Reg. §1.382-2(b)(4) and Proposed Reg. §1.382-7(g) contained in the 2019 proposed regulations, and replaced it with a revised proposed applicability date text. To avoid any gap between the date on which taxpayers can no longer rely on Notice 2003-65 and the date on which the final regulations are applicable, the applicability date of the final regulations would be 30 days after the date such regulations are published in the Federal Register (delayed applicability date). Exceptions exist for two situations discussed below.

Notice 2003-65 will remain applicable to ownership changes to which the final regulations do not apply.

Limiting Duplicative Application
The first exception to the delayed applicability date relates to the rule in Proposed Reg. §1.382-7(d)(5), which provides that certain carryforwards of business interest expense disallowed under Code Sec. 163(j) would not be treated as recognized built-in losses under Code Sec. 382(h)(6)(B), if such amounts were allowable as deductions during the five-year recognition period set forth in Code Sec. 382(h)(7)(A). This rule eliminates the possible duplicative application of Code Sec. 382 to certain disallowed business interest expense carryforwards.

The IRS has determined that Proposed Reg. §1.382-7(d)(5) should be finalized before the remainder of the rules in the 2019 proposed regulations, and that taxpayers should be allowed to retroactively apply this rule. To that end, the IRS expects that Proposed Reg. §1.382-7(d)(5) will be finalized as part of the Treasury decision that finalizes the proposed Code Sec. 163(j) regulations (see 83 FR 67490), and that taxpayers will be permitted to apply the rule to prior periods. The IRS continues to study the remainder of the rules in the 2019 proposed regulations.

Transition Relief
Under the proposed transition relief provisions, the final regulations would not apply to certain ownership changes that occur after the delayed applicability date. To qualify for the transition relief, the ownership change must occur immediately after an owner shift or equity structure shift that occurs pursuant to:

• a binding agreement in effect on or before the delayed applicability date and at all times thereafter;
• a specific transaction described in a public announcement made on or before the delayed applicability date;
• a specific transaction described in a filing with the Securities and Exchange Commission submitted on or before the delayed applicability date;
• a transaction described in a private letter ruling request submitted to the IRS on or before the delayed applicability date; or
• a court order (or a plan confirmed, or a sale approved, by court order) in a title 11 or similar case, provided that the taxpayer was a debtor in a case before such court on or before the delayed applicability date.

The relevant owner shift or equity structure shift must be a specific, identifiable transaction.

Taxpayers may continue to rely on Notice 2003-65 for to any ownership change qualifying for transition relief, even though the notice will be obsoleted on the delayed applicability date. However, a taxpayer may choose to apply the final regulations to such an ownership change.

The Treasury and IRS have issued final regulations on the due diligence and reporting rules for persons making certain U.S. source payments to foreign persons. Guidance is also provided on reporting by foreign financial institutions on U.S. accounts. The regulations are effective on the date the regulations are published in the Federal Register.

The Treasury and IRS have issued final regulations on the due diligence and reporting rules for persons making certain U.S. source payments to foreign persons. Guidance is also provided on reporting by foreign financial institutions on U.S. accounts. The regulations are effective on the date the regulations are published in the Federal Register.

Obtaining a Foreign TIN and Date of Birth
Temporary regulations provided that beginning January 1, 2017, a beneficial withholding certificate provided to document an account maintained at a U.S. branch or office of a financial institution was required to include a foreign taxpayer identification number (TIN) and the date of birth for an individual, in order to treat the certificate as valid. In response to comments regarding the difficulty of the requirements, the Treasury and IRS issued Notice 2017-46.

The notice provided a one-year delay in the implementation of the requirements for payments made on or after January 1, 2018, and a transitional rules to phase in the foreign TIN requirement for certificates provided before January 1, 2018. The transitional rules allow an otherwise valid certificate to remain valid until January 1, 2020. For payments made after January 1, 2020, a withholding agent may treat a pre-2018 as valid if the foreign TIN is obtained on a written statement or is in the withholding agent’s files. In Notice 2018-20, the IRS stated that it intended to expand its list of jurisdictions that do not issue foreign TINs to their residents to include jurisdictions that requested to be on the list, even if they issue foreign TINs.

The final regulations incorporate the temporary regulations and Notices with minor changes, by:

• providing, with respect to withholding certificates signed on or after January 1, 2018, that a separate written statement is an acceptable way to collect a foreign TIN, if the written statement contains an acknowledgment that the statement is part of the withholding certificate;
• clarifying the exception to the foreign TIN requirement for an account holder that is a government, international organization, foreign central bank or resident of a U.S. territory; and
• clarifying that a withholding agent may rely on the date of birth on a withholding certificate, unless it knows or has reason to know that the date of birth is incorrect.

Nonqualified Intermediaries
A nonqualified intermediary is generally required to provide a withholding agent a Form W-8IMY, a withholding statement, and documentation for each payee for which the intermediary receives a payment. The final regulations clarify that the general standards of knowledge that apply to withholding agents apply to a nonqualified intermediary for reliance on payee documentation, for making the representation that the information on the certificate is not inconsistent with other account information that the nonqualified intermediary has.

A nonqualified intermediary may provide a withholding statement that does not include a chapter 4 recipient code for one or more payees if the withholding agent can determine the appropriate code based on other information included on or associated with the withholding statement, or contained in the withholding agent’s records.

Electronic Signatures
A withholding agent can accept an electronically signed withholding certificate if the certificate reasonably demonstrates to the withholding agent that it has been electronically signed by the recipient identified on the form or authorized by the recipient to sign the form.

The final regulations allow the withholding agent to also consider documentation or other information that the withholding agent has that supports that the withholding certificate was electronically signed, absent actual knowledge that the information or documentation is incorrect.

Additional Changes
The final regulations also make clarifications with respect to withholding certificates and statements furnished through a third party repository.

Regarding the claim of a reduced rate of withholding under a treaty, the final regulations modify the general standard of knowledge by providing that:

• the withholding agent has reason to know that a claim of reduced rate under a treaty is unreliable or incorrect when it can check a list on the IRS website regarding the existence of the treaty, and
• a withholding agent can rely on a beneficial owner’s claim regarding a limitation of benefits (LOB) provision, absent actual knowledge that the claim is unreliable or incorrect.

The final regulation also extend the time for withholding agents to obtain treaty statements, with respect to specific LOB provisions for preexisting accounts, to January 1, 2020.

Taxpayers have been provided with additional guidance for complying with the Code Sec. 871(m) regulations on dividend equivalent payments for 2021, 2022, and 2023. The Treasury Department and the IRS intend to amend the regulations to delay the effective/applicability date of certain rules. Further, the phase-in period provided in Notice 2018-762, I.R.B. 2018-40, 522, has been extended.

Taxpayers have been provided with additional guidance for complying with the Code Sec. 871(m) regulations on dividend equivalent payments for 2021, 2022, and 2023. The Treasury Department and the IRS intend to amend the regulations to delay the effective/applicability date of certain rules. Further, the phase-in period provided in Notice 2018-762, I.R.B. 2018-40, 522, has been extended.

Dividend Equivalent Payments
A dividend equivalent amount is essentially an amount directly or indirectly determined by reference to a U.S. dividend. Code Sec. 871(m) treats dividend equivalent payments as U.S. source dividends. These payments are subject to 30-percent withholding (or a lower treaty rate) if received by a nonresident alien or foreign corporation.

The Code Sec. 871(m) regulations include final and temporary regulations under Code Secs. 871(m), 1441, 1461, and 1473.

Phase-in Year Extended
The effective/applicability date for the specified notional principal contract (NPC) rules under Reg. §1.871-15(d)(2) and the specified equity-linked instrument (ELI) rules under Reg. §1.871-15(e) will be revised. These rules will not apply to any payment made with respect to any non-delta-one transaction issued before January 1, 2023.

The IRS will take into account the extent to which the taxpayer or withholding agent made a good faith effort to comply with the Code Sec. 871(m) regulations in enforcing those regulations—

• for any delta-one transaction in 2017 through 2022; and
• for any non-delta-one transaction that is a Code Sec. 871(m) transaction under Reg. §1.871-15(d)(2) or Reg. §1.871-15(e) in 2023.

Further, the period when the IRS will take into account the extent to which a qualified derivatives dealer made a good faith effort to comply with the Code Sec. 871(m) regulations and the relevant provisions of the 2017 Qualified Intermediary (QI) Agreement is extended through 2022.

The 2017 QI Agreement will be revised so that a QDD will be treated as satisfying the obligations that specifically apply to a QDD under that agreement for 2017 through 2022.

Simplified Standard Extended
The period when the simplified standard applies for withholding agents to determine whether transactions entered into were combined transactions is extended to include 2021 and 2022. Transactions entered into in 2017 through 2022 that are combined under the simplified standard will continue to be treated as combined for future years. They will not stop being combined transactions by applying Reg. §1.871-15(n) (the combined transactions rule in the regulations), or by disposing of less than all of the potential Code Sec. 871(m) transactions that are combined under this rule.

Transactions entered into in 2017 through 2022 that are not combined under the simplified standard will not become combined transactions by applying Reg. §1.871-15(n) to them in future years, unless a reissuance or other event causes the transactions to be retested to determine whether they are Code Sec. 871(m) transactions.

Phase-In Relief for Qualified Derivatives Dealers Extended
Regarding qualified derivatives dealers (QDDs), Reg. §1.871-15(q)(1), Reg. §1.871-15(r)(3), and Reg. §1.1441-1(b)(4)(xxii)(C) will be amended so that a QDD will not be subject to tax on dividends and dividend equivalents received in 2021 and 2022 in its equity derivatives dealer capacity or withholding on those dividends (including deemed dividends). A QDD will have to compute its Code Sec. 871(m) amount using the net delta approach beginning in 2023.

A QDD will remain liable under Code Sec. 881(a)(1) for tax on dividends and dividend equivalents that it receives in any other capacity, and on any other U.S. source FDAP payments that it receives (whether or not in its equity derivatives dealer capacity). A QDD is also responsible for withholding on dividend equivalents it pays to a foreign person on a Code Sec. 871(m) transaction.

Transition Rules Extended
Withholding agents may apply the qualified securities lender (QSL) transition rules described in Notice 2010-46, I.R.B. 2010-24, 757, for payments made in calendar years 2021 and 2022.

Anti-Abuse Rule
The anti-abuse rule in Reg. §1.871-15(o) will continue to apply during the phase-in years. This means that a transaction that would not otherwise be treated as a Code Sec. 871(m) transaction (including as a result of the new guidance) might still be a Code Sec. 871(m) transaction under the anti-abuse rule.

Taxpayer Reliance
Taxpayers and withholding agents can rely on the new guidance before the Treasury and IRS amend the Code Sec. 871(m) regulations and the 2017 QI Agreement.

Responding to growing concerns over the scope of tax-related identity theft, the House has approved legislation to give victims more information about the crime. The House also took up a bill expanding disclosure of taxpayer information in cases involving missing children and the Ways and Means Committee approved a bill impacting disclosures by exempt organizations.

Responding to growing concerns over the scope of tax-related identity theft, the House has approved legislation to give victims more information about the crime. The House also took up a bill expanding disclosure of taxpayer information in cases involving missing children and the Ways and Means Committee approved a bill impacting disclosures by exempt organizations.

Stolen identity refund fraud

Tax-related identity theft occurs when a criminal uses the personal identification of another to obtain a fraudulent refund. According to the IRS and the Treasury Inspector General for Tax Administration (TIGTA), tax-related identity theft continues to grow despite efforts to uncover and apprehend criminals. In 2014, the IRS estimated that it prevented the issuance of nearly $25 billion in fraudulent refunds. However, criminals obtained more than $5 billion in fraudulent refunds.

More often than not, individuals are unware they have been victims until they file their return and discover that a return has already been filed by an identity thief. In some cases, the IRS may send a letter to the taxpayer reporting that the agency identified a suspicious return using the individual’s personal information.

On May 19, the House approved the Stolen Identity Refund Fraud Prevention Act of 2016 (HR 3832). HR 3832 would require the IRS to notify victims of tax-related identity theft as soon as practicable that his or her personal information was used without authorization. The IRS also would be required to notify victims of tax-related identity theft of any criminal changes brought against the alleged identity thief.

Additionally, the bill would create a centralized point of contact for victims of identity theft. The centralized point of contact may be a team or subset of specially trained employees who can work across functions to resolve problems for the victim and who is accountable for handling the case to completion. The makeup of the team may change as required to meet IRS needs, but the procedures must ensure continuity of records and case history and may require notice to the taxpayer in appropriate instances.

The bill also would make willful misappropriation of a taxpayer’s identity for the purpose of making any return a felony. Under the bill, this offense would be punishable by a fine of up to $250,000 ($500,000 for a corporation), imprisonment for up to five years, or both, plus prosecution costs.

Disclosures

The House approved the bipartisan Recovering Missing Children Bill (HR 3209) on May 10. The bill amends the Tax Code to grant law enforcement access to taxpayer information while investigating missing and exploited children. Under Code Sec. 6103, return information is confidential.

Exempt organizations

The Preventing IRS Abuse and Protecting Free Speech Bill (HR 5053) limits the contributor information that must be reported by a Code Sec. 501(c) on its annual return. Generally, the IRS may not require an exempt organization to report the name, address, or other identifying information of any contributor to the organization with respect to any contribution, grant, bequest, devise, or gift of money or property, regardless of amount. The bill is awaiting action by the full House after having been approved by the Ways and Means Committee.

If you have any questions about these or other pending bills, please contact our office.

The IRS is gearing up to outsource some taxpayer collection accounts to private collection agencies. Legislation passed in 2015 directed the IRS to resume working with private collection agencies. The revived program is expected to operate in a similar manner to past ones, with emphasis on taxpayer protections.

The IRS is gearing up to outsource some taxpayer collection accounts to private collection agencies. Legislation passed in 2015 directed the IRS to resume working with private collection agencies. The revived program is expected to operate in a similar manner to past ones, with emphasis on taxpayer protections.

Prior outsourcing

Code Sec. 6306 permits the IRS to use private debt collection agencies. The IRS last contracted with private collection agencies 10 years ago (after prior outsourcing in the 1990s). At that time, the agency initially assigned 12,500 taxpayer accounts to private collection agencies. The accounts were only amounts for which the taxpayer had admitted liability.

The IRS also placed some restrictions on private collection agencies. They were not authorized to take enforcement actions involving liens, levies, or property seizures, work cases where the taxpayer qualified for an installment agreement longer than five years, or be involved in offers-in-compromise, bankruptcies, hardship issues, or litigation.

The IRS ended its work with private collection agencies after three years. The IRS had initially estimated that private collection agencies would collect $88 million. A study by the National Taxpayer Advocate after the program ended reported that private collection agencies had recovered some $86 million.

Revived program

The Fixing America’s Surface Transportation Act of 2015 (FAST Act) instructs the IRS to contract with private collection agencies for the collection of “inactive tax receivables.” The law defines “inactive tax receivables” as a taxpayer account that is:

1. Removed from the IRS’s active inventory for lack of resources or inability to locate the taxpayer;
2. For which more than one-third of the applicable limitations period has lapsed and no IRS employee has been assigned to collect the receivable; or
3. For which, a receivable has been assigned for collection but more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection.

Some taxpayer accounts are expressly excluded and will not be turned over to private collection agencies. These include cases were the taxpayer is seeking innocent spouse relief, taxpayers in combat zones, taxpayers under an installment agreement or offer-in-compromise, cases under examination, and others.

Without delay

President Obama signed the FAST Act into law in December 2015. Congress instructed the IRS to implement private tax collection “without delay.” To carry out the twin goals tax collection and taxpayer rights, lawmakers further directed the IRS to make it a priority to use collection contractors and debt collection centers currently approved by the U.S. Department.

Safeguards

Private collection agencies must adhere to the federal Fair Debt Collections Act. The Act prohibits debt collection companies from using abusive, unfair or deceptive practices to collect past due debts. Additionally, collection agencies cannot telephone at times they know, or should know, are inconvenient, such as before 8 a.m. and after 9 p.m., unless the individual agrees otherwise.

Another protection involves payment. Taxpayers will not make payments directly to the private collection agencies. Payments are required to be processed by IRS employees. Additionally, taxpayers can request that their account be returned to the IRS and no longer worked by the private collection agency.

If you have any questions about private tax collection, please contact our office.

To claim the EITC, a taxpayer must satisfy two tests with respect to earned income. First, the taxpayer must have some earned income. Additionally, the taxpayer’s earned income must fall within certain ranges as the credit is subject to income phaseout. As the taxpayer's adjusted gross income (or, if greater, earned income) rises beyond the phaseout threshold, the credit is reduced according to a percentage phaseout, until it is eliminated at the completed phaseout amount.

To claim the EITC, a taxpayer must satisfy two tests with respect to earned income. First, the taxpayer must have some earned income. Additionally, the taxpayer’s earned income must fall within certain ranges as the credit is subject to income phaseout. As the taxpayer's adjusted gross income (or, if greater, earned income) rises beyond the phaseout threshold, the credit is reduced according to a percentage phaseout, until it is eliminated at the completed phaseout amount.

For 2016, a taxpayer is able to claim the EITC if:

• The taxpayer had three or more qualifying children and earned less than $47,955 ($53,505 if married filing jointly)
• The taxpayer had two qualifying children and earned less than $44,648 ($50,198 if married filing jointly)
• The taxpayer had one qualifying child and earned less than $39,296 ($44,846 if married filing jointly), or
• The taxpayer did not have a qualifying child and earned less than $14,880 ($20,430 if married filing jointly).

For 2016, the maximum amount of investment income a taxpayer can have and qualify for the credit is $3,400.

For 2016, the maximum amount of EITC is:

• $6,269 with three or more qualifying children
• $5,572 with two qualifying children
• $3,373 with one qualifying child
• $506 with no qualifying children

A qualifying child must meet satisfy four tests: (1) relationship; (2) age; (3) residency; and (4) joint return. Examples of a qualifying child are a taxpayer’s son, daughter, stepchild, foster child, or a descendant of any of them (for example, grandchild), or brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them.

Special EITC rules apply to members of the U.S. Armed Forces. For purposes of the EITC, the term “Armed Forces” refers to officers and enlisted personnel in all regular and reserve units under the command of the U.S. Secretaries of Defense, Army, Navy, Marine Corps, Air Force, and Coast Guard.

Members of the U.S. Armed Forces do not have to report nontaxable pay for purposes of the EITC. They can elect to exclude from the EITC calculation the Basic Allowance for Housing (BAH), the Basic Allowance for Subsistence (BAS) and the amount of combat pay. Taxpayers must exclude all combat pay and not only a part of combat pay from earned income. A number of areas across the world have been designated as combat zones. These include Afghanistan, beginning Sept. 19, 2001; Somalia, beginning January 1, 2004; Yemen, beginning April 10, 2002, and other areas. The amount of a taxpayer’s nontaxable combat pay is reflected on the taxpayer’s Form W-2, in box 12, with code Q.

Example. Eugene, who serves in the U.S. Navy, and Karla are married and file a joint federal income tax return. The couple has one daughter, who is a qualifying child for purposes of the EITC. Eugene earned $10,000 in nontaxable combat pay. Eugene and Karla can elect to exclude the $10,000 in nontaxable combat pay from their calculation of the EITC or they can include the amount in the calculation of the EITC.

Yes …but only if it is a medical necessity. The IRS has ruled that uncompensated amounts paid to participate in a weight-loss program as treatment for a specific disease or diseases (including obesity) diagnosed by a physician are deductible expenses for medical care. The deduction is subject to the limitations of Code Sec. 213 and its regulations.

Yes …but only if it is a medical necessity. The IRS has ruled that uncompensated amounts paid to participate in a weight-loss program as treatment for a specific disease or diseases (including obesity) diagnosed by a physician are deductible expenses for medical care. The deduction is subject to the limitations of Code Sec. 213 and its regulations.

Generally, Code Sec. 213(a) provides a deduction for uncompensated expenses for medical care of an individual, the individual’s spouse or a dependent, subject to certain limitations. The term medical care is broad and encompasses the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. If an expense is merely beneficial to a person’s general health, the expense is not a qualified expense for medical care for tax purposes.

In 1979, the IRS ruled that the cost of participation in a weight loss program merely to improve appearance, general health or sense of well-being was not deductible. The individual’s participation in the weight loss program was not to cure or treat a disease or specific illness.

The IRS modified its position in 2002. That year, the IRS announced that expenses for certain weight-loss programs would qualify as a medical deduction. The IRS explained that in 2000, the World Health Organization (WHO) recognized that obesity is a disease. Where a physician has diagnosed an individual with suffering from a disease (including obesity) the cost of the individual’s participation in the weight-loss program as treatment for his obesity is an amount paid for medical care under Code Sec. 213. Uncompensated amounts paid to participate in the weight-loss program as treatment for the disease are deductible expenses for medical care, subject to the limitations of Code Sec. 213. Keep in mind that only taxpayers who itemize their deductions may claim the deduction for qualified medical expenses. Reimbursement for weight-loss expenses from a flexible spending account are also subject to the Code Sec. 213 rules, as well as review by the plan administrator.

Please contact our office for more information about deductible medical expenses.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of June 2016.

June 2
Employers. Semi-weekly depositors must deposit employment taxes for May 25–27. 

June 3
Employers. Semi-weekly depositors must deposit employment taxes for May 28–31. 

June 8
Employers. Semi-weekly depositors must deposit employment taxes for Jun 1–3. 

June 10
Employers. Semi-weekly depositors must deposit employment taxes for Jun 4–7.

Employees who work for tips. Employees who received $20 or more in tips during May must report them to their employer using Form 4070. 

June 15
Individuals. U.S. citizens or resident aliens living and working (or on military duty) outside the United States and Puerto Rico must file Form 1040 and pay any tax, interest, and penalties due.

Employers. For those to whom the monthly deposit rule applies, deposit employment taxes and nonpayroll withholding for payments in May. 

Employers. Semi-weekly depositors must deposit employment taxes for Jun 8–10.

Individuals, partnerships, pass-through entities and corporations make the second installment of 2016 estimated quarterly tax payments. 

June 17
Employers. Semi-weekly depositors must deposit employment taxes for Jun 11–14. 

June 22
Employers. Semi-weekly depositors must deposit employment taxes for Jun 15–17. 

June 24
Employers. Semi-weekly depositors must deposit employment taxes for Jun 18–21. 

June 29
Employers. Semi-weekly depositors must deposit employment taxes for Jun 22-24. 

July 1
Employers. Semi-weekly depositors must deposit employment taxes for Jun 25–28. 

July 7
Employers. Semi-weekly depositors must deposit employment taxes for Jun 29–30.

The 2016 filing season has closed with renewed emphasis on cybersecurity, tax-related identity theft and customer service. Despite nearly constant attack by cybercriminals, the IRS reported that taxpayer information remains secure. The agency also continued to intercept thousands of bogus returns and prevent the issuance of fraudulent refunds.

The 2016 filing season has closed with renewed emphasis on cybersecurity, tax-related identity theft and customer service. Despite nearly constant attack by cybercriminals, the IRS reported that taxpayer information remains secure. The agency also continued to intercept thousands of bogus returns and prevent the issuance of fraudulent refunds.

Cybersecurity

Concerns about cybersecurity and the confidentiality of taxpayer information were paramount during the filing season. According to the IRS, its basic systems are attacked “millions of times” every day by cybercriminals looking for weaknesses. In April, IRS Commissioner John Koskinen told Congress that the agency’s basic systems are secure. However, cybercriminals did breach its Get Transcript app in 2015 and other applications are under constant probing and attack by cybercriminals.

Koskinen assured Congress that the agency is beefing up its cybersecurity staffing. The IRS has hired 55 new cybersecurity experts. However, he acknowledged that the agency’s cybersecurity head has left and the position is open. This has drawn criticism from lawmakers who have questioned why such an important job is open. Koskinen said that the lengthy government hiring process is a deterrent to hiring cybersecurity professionals and urged Congress to reinstate the agency’s fast-track hiring process.

Identity theft

Closely related to cybersecurity is tax-related identity theft. The breach of the Get Transcript App in 2015 resulted in $50 million in fraudulent refunds paid to cybercriminals, according to a government watchdog.

Because the filing season has just ended, final statistics will not be released until later this year. However, interim statistics give a snapshot of the vastness of the problem of tax-related identity theft. As of March 5, 2016, the IRS had successfully prevented the issuance of some $180 million in fraudulent refunds.

To help prevent tax-related identity theft, the IRS has enhanced its return processing filters. Many of these enhancements, the IRS has explained, are invisible to taxpayers. Other enhancements have been made working with return preparers and tax software providers.

Customer service

The IRS’s level of customer service hit historic lows during the 2015 filings season. Almost two-thirds of all calls to the IRS went unanswered and the agency disconnected millions of callers (so-called “courtesy disconnects.”) There were also long lines for in-person assistance at IRS service centers nationwide. The IRS blamed the poor customer service on budget cuts and its inability to hire more employees to answer taxpayer questions.

In December 2015, Congress gave the IRS an additional $290 million and instructed the agency to use the money to improve customer service, along with boosting cybersecurity and combating identity theft. Koskinen told Congress in April that the agency spent more than $100 million of the $290 million on customer service. As a result, the agency’s level of customer service reached as high as 65 percent during the filing season. However, that level will fall to around 50 percent for all of 2016, Koskinen said. The additional employees hired during the filing season were merely temporary employees and their employment ended with the close of the filing season, Koskinen explained.

Return processing

The IRS expects to receive some 150.6 million returns this filing season. That number includes an estimated 13.5 million returns on extension. Taxpayers on extension have until October 17, 2016 to file.

If you have any questions about the 2016 filing season, please contact our office.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended:

Section 179 expensing. The PATH Act permanently extended the Code Section 179 dollar of investment limitations at the higher $500,000 and $2 million, levels, which are adjusted for inflation for tax years beginning after 2015 (it is $500,000 and $2,010,000 for 2016). In addition, starting only in 2016, the $250,000 limitation on the amount of section 179 property that can be attributable to qualified real property has been eliminated. Further, for tax years beginning after 2015, the Code Section 179 expense deduction is now allowed for air conditioning and heating units.

Bonus depreciation. In addition to the big news that the PATH Act extended Code Section 168(k) bonus depreciation to apply to most qualifying property placed in service before January 1, 2020, it made a number of modifications, including:

• replacement of the bonus allowance for qualified leasehold improvement property with a bonus allowance for additions and improvements to the interior of any nonresidential real property, effective for property placed in service after 2015; and
• allowance to farmers of a 50 percent deduction in place of bonus depreciation on certain trees, vines, and plants in the year of planting or grafting rather than the placed-in-service year, effective for planting and grafting after 2015.

Section 181 expensing. Special Section 181 expensing for qualified film and television productions is extended for two years to apply to qualified film and television productions commencing before January 1, 2017. However, the expensing rule is also expanded to apply to qualified live theatrical productions commencing after December 31, 2015.

WOTC. The Work Opportunity Tax Credit (WOTC) has been extended five years through December 31, 2019. In addition, the credit has been expanded and made available to employers who hire individuals who are qualified long-term unemployment recipients who begin work for the employer after December 31, 2015.

Research credit. The PATH Act permanently extended the research credit that applies to amounts paid or incurred after December 31, 2014. However, a new allowance of the research credit against alternative minimum tax liability applies to credits determined for tax years beginning after December 31, 2015. In addition, a new payroll tax credit associated with the research credit applies only to tax years beginning after December 31, 2015 (Act Sec. 121(d) (3) of the PATH Act).

Military differential pay. The PATH Act extended the employer tax credit for differential wage payments made to qualified employees on active military duty has been made permanent and applies to payments made after December 31, 2014. Effective only for tax years beginning after December 31, 2015, however, the credit may be claimed by all employers regardless of the average number of individuals employed during the tax year. The credit is also no longer limited to eligible small business employers with less than 50 employees.

Teachers' classroom expense deduction. The PATH Act permanently extended the above-the-line deduction for elementary and secondary school teachers' classroom expenses. Additionally, for tax years after 2015, the Act includes "professional development expenses" within the scope of the deduction. These expenses include courses related to the curriculum in which the educator provides instruction.

Nonbusiness energy property credit. The PATH Act extended the nonrefundable nonbusiness energy property credit allowed to individuals under Code Sec. 25C for two years, making it available for qualified energy improvements and property placed in service before January 1, 2017. For property placed in service after December 31, 2015, the standards for energy efficient building envelope components are modified to meet new conservation criteria. 

If you have any questions about these new “extenders,” please contact our office.

The IRS has issued its annual Data Book for fiscal year (FY) 2015, which provides statistical information on activities such as examinations and collections conducted by the IRS from October 1, 2014 to September 30, 2015. For FY 2015, the Data Book shows the total number of audits conducted by the IRS was 1.37 million, down from the 1.38 million examined in FY 2014.

The IRS has issued its annual Data Book for fiscal year (FY) 2015, which provides statistical information on activities such as examinations and collections conducted by the IRS from October 1, 2014 to September 30, 2015. For FY 2015, the Data Book shows the total number of audits conducted by the IRS was 1.37 million, down from the 1.38 million examined in FY 2014.

Returns filed

Categories reflecting the main functions of the IRS, processing federal tax returns and collecting revenue, saw a marked increase in FY 2015 in comparison to the same time last year. The information in the Data Book shows that the IRS processed more than 243 million tax returns and related forms and issued more than 199 million refunds, amounting to $403.3 billion. The IRS collected more than $3.3 trillion in gross taxes.

Audit coverage

In total, the IRS audited 0.7 percent of all returns filed in calendar year (CY) 2014. The data shows that the number of audited returns has been decreasing since 2010, the IRS reported.

A majority of the audits, nearly 73 percent, were conducted via correspondence. The remainder was field audits. The IRS reported that 28,000 taxpayers did not agree with the examiner’s determination. The amount disputed across those who disagreed with the IRS was approximately $7.4 billion.

For FY 2015, the Data Book states that examinations protected approximately $2.1 billion in refund payments for taxpayers. Of that amount, $2.0 billion came from field examinations and $122.3 million from correspondence examinations.

Individuals. Individual returns filed in 2014, including both business and nonbusiness taxpayers, were audited at 0.8 percent, which amounted to approximately 1.2 million returns, during FY 2015, based on more than 146.8 million individual returns filed. The audit rate rose significantly for income levels of $1 million or more. The audit rate for individuals in the $10 million or more level rose to 34.69 percent, more than double the audit rate reported in FY 2014.

The IRS noted that the total number of individual tax return examinations has decreased by 22 percent over the last five years. The agency attributes the decrease to the fact that FY 2015 marks the fifth consecutive year that the IRS budget has been decreased, which brought about a 15-percent reduction in full-time staff as compared to five years ago. Accordingly, operations across a number of areas, including return examinations, were downsized. Of the 1.2 million individual income tax returns examined, almost 40,000 resulted in additional refunds to taxpayers, totaling more than $1.1 billion.

Although the audit rate for higher income individual taxpayers experienced a considerable jump in CY 2014, the number of returns filed for this category, as a percentage of the total returns filed, remained fairly constant.

Partnerships. Partnerships and S corps filed a total of approximately 8.4 million returns during FY 2015, a slight increase from FY 2014 when these types of entities filed almost 8.2 million returns. In addition, the audit rate increased slightly from 0.39 percent in FY 2014 to 0.45 percent in FY 2015. In FY 2014, IRS officials announced that the agency intended to concentrate more heavily on partnership audits. The data appears to reflect this movement, as the audit rate rose 0.1 percent to 0.5 in FY 2015.

Corporations. The IRS examined nearly 1.3 percent of all corporate returns (other than S corps) during FY 2015, based on a total of nearly 1.9 million returns and 24,761 examinations. The IRS reported that during FY 2015, it recommended more than $10.36 billion in additions to tax for corporate returns. The additions to tax recommended for returns filed by corporate taxpayers with more than $20 billion in assets comprised approximately 38 percent of the total additions to tax. Large corporations with total assets between $5 billion and $20 billion experienced an audit rate of 36.1 percent, showing a decrease from FY 2014 when the audit rate for this same category was 44.3 percent. In addition, large corporations with total assets greater than $20 million experienced a substantial decrease in terms of audit rate with 64 percent, whereas in FY 2014, the audit rate was 84.2 percent, the IRS added. 

Tax-exempt organizations. The IRS reported that it received 787,339 returns from tax-exempt organizations in CY 2014 and examined 6,392 tax-exempt entities and related taxable returns in FY 2015. This shows a decrease over the 8,084 tax-exempt entities examined out of 765,395 returns filed in CY 2013.

Individual taxpayers may claim a nonrefundable personal tax credit for qualified residential alternative energy expenditures. The residential alternative energy credit generally is equal to 30 percent of the cost of eligible solar water heaters, solar electricity equipment, fuel cell plants, small wind energy property, and geothermal heat pump property. After 2016, the credit is available only for qualified solar electric property and qualified solar water heating property placed in service before 2022.

Individual taxpayers may claim a nonrefundable personal tax credit for qualified residential alternative energy expenditures. The residential alternative energy credit generally is equal to 30 percent of the cost of eligible solar water heaters, solar electricity equipment, fuel cell plants, small wind energy property, and geothermal heat pump property. After 2016, the credit is available only for qualified solar electric property and qualified solar water heating property placed in service before 2022.

Solar electric property. A qualified solar electric property expenditure must meet these requirements:

• an individual taxpayer must make the expenditure for qualified solar electric property,
• the qualified solar electric property must use solar energy to generate electricity,
• the electricity must be for use in a dwelling unit,
• the dwelling unit must be located in the United States, and
• the dwelling unit must be used as a residence by the taxpayer (but it does not have to be the taxpayer’s principal residence).

Expenditures for purposes of the credit include labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified solar electric property and for piping or wiring to interconnect such property to the dwelling unit. Generally, for purposes of determining the tax year when the credit is allowed, an expenditure with respect to an item is treated as made when the original installation of the item is completed.

Solar electric property panels, such as photovoltaic panels, are eligible for the credit even if they constitute structural components of a building, such as when they are installed as a roof or a portion of a roof. Conversely, qualified solar electric property does not have to be installed directly on the taxpayer’s home, as long as the panels use solar energy to generate electricity for use in a home that the taxpayer uses as a residence. Under certain circumstances, a purchase of solar panels that are placed on an off-site solar array may meet the definition of qualified solar electric property expenditures. 

Caution. This credit should not be confused with the credit for nonbusiness energy property. For property placed in service through 2016, a tax credit is available for nonbusiness energy property that meets the requirements for qualified energy efficiency improvements (building envelope components) and residential energy property expenditures (furnaces, central air conditioners, water heaters, certain heat pumps, biomass stoves).

Social media has helped to make our world smaller and when natural disasters and tragedies occur we want to help with contributions of money and/or other types of aid. At home, countless charitable organizations are providing all types of help and generally, your contributions to U.S. charities are tax-deductible. Contributions to foreign charities generally are not tax-deductible; however, special rules apply to charitable organizations in Canada, Israel and Mexico.

Social media has helped to make our world smaller and when natural disasters and tragedies occur we want to help with contributions of money and/or other types of aid. At home, countless charitable organizations are providing all types of help and generally, your contributions to U.S. charities are tax-deductible. Contributions to foreign charities generally are not tax-deductible; however, special rules apply to charitable organizations in Canada, Israel and Mexico.

First, let’s take a brief look at some of the rules for U.S. charities. A charitable deduction is allowed only for a gift of money or property made to or for the use of an organization that meets qualification requirements. Charitable contributions of $250 or more must be substantiated by a contemporaneous written acknowledgment from the charitable organization to be deductible.

It is not enough that a domestic charity is “tax-exempt.” The charitable organization must be qualified at the time of the contribution. It is the organization’s responsibility to ensure that its character, purposes, activities, and method of operation satisfy the qualification requirements, so donors have assurance that their contributions are tax-deductible at the time made.

While a domestic charity can use contributions abroad, it cannot merely transfer them to a foreign charity. Contributions generally are deductible only if it can be shown, among other requirements, the domestic charitable organization is not serving as an agent for, or conduit of, a foreign charitable organization.

Special rules apply to charitable organizations in Canada, Israel and Mexico. Contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada may be tax-deductible. Generally, the taxpayer must have income from sources in Canada.

The U.S.-Israel income tax treaty provides that a contribution to an Israeli charitable organization is deductible if and to the extent the contribution would have been treated as a charitable contribution if the organization had been created or organized under U.S. law. Among other requirements, the taxpayer must have income from sources in Israel.

The same approach applies to contributions to Mexican charitable organizations. Under the U.S.-Mexico income tax treaty, a contribution to a Mexican charitable organization may be deductible, but only if and to the extent the contribution would have been treated as a charitable contribution to a public charity created or organized under U.S. law. Among other requirements, the taxpayer must have income sources in Mexico.

Please contact our office for more details.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of May 2016.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of May 2016.

May 2
Employers. File Form 941 for the first quarter of 2016 for employment taxes if you have not deposited the tax for the quarter timely, properly, and in full. Deposit or pay any undeposited tax under the accuracy of deposit rules. 
Deposit federal unemployment tax owed through March if more than $500. 

May 4
Employers. Semi-weekly depositors must deposit employment taxes for April 27–29. 

May 6
Employers. Semi-weekly depositors must deposit employment taxes for April 30 and May 1–3. 

May 10
Employers. File Form 941 for the first quarter of 2016 for employment taxes if you deposited the tax for the quarter timely, properly, and in full.
Employees who work for tips. Employees who received $20 or more in tips during April must report them to their employer using Form 4070. 

May 11
Employers. Semi-weekly depositors must deposit employment taxes for May 4–6. 

May 13
Employers. Semi-weekly depositors must deposit employment taxes for May 7–10. 

May 16
Employers. For those to whom the monthly deposit rule applies, deposit employment taxes and nonpayroll withholding for payments in April. 

May 18
Employers. Semi-weekly depositors must deposit employment taxes for May 11–13. 

May 20
Employers. Semi-weekly depositors must deposit employment taxes for May 14–17. 

May 25
Employers. Semi-weekly depositors must deposit employment taxes for May 18–20. 

May 27
Employers. Semi-weekly depositors must deposit employment taxes for May 21–24. 

June 2
Employers. Semi-weekly depositors must deposit employment taxes for May 25–27. 

June 3
Employers. Semi-weekly depositors must deposit employment taxes for May 28–31.

Tax reform continues to be highly touted in Congress as lawmakers from both parties call for simplification of countless complex rules, overhaul of tax rates, and more. At times this year, President Obama and Congressional Republicans seem far apart on a way forward, but at similar times in the past, agreements have quickly and often surprisingly emerged, most recently in the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). As the November elections approach more closely every passing day, lawmakers from both parties and the President have a short window to agree on tax legislation. The weeks leading up to Congress’ summer recess may be decisive.

Tax reform continues to be highly touted in Congress as lawmakers from both parties call for simplification of countless complex rules, overhaul of tax rates, and more. At times this year, President Obama and Congressional Republicans seem far apart on a way forward, but at similar times in the past, agreements have quickly and often surprisingly emerged, most recently in the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). As the November elections approach more closely every passing day, lawmakers from both parties and the President have a short window to agree on tax legislation. The weeks leading up to Congress’ summer recess may be decisive.

PATH Act as path forward

The scope of the PATH Act surprised many Hill observers. Instead of merely extending the so-called tax extenders (including the state and local sales tax deduction, research tax credit, teachers’ classroom expense deduction), Congress voted to make permanent many of the incentives. Although there had been hearings and discussions about permanently extending some of the incentives, the prospect of getting a bill through Congress and to the President’s desk seemed remote right up to December. Behind the scenes negotiations between the White House and Congressional Republicans resulted in the largest tax bill since the American Tax Relief Act of 2012. The PATH Act went far beyond the extenders. It made changes to the rules for IRS administration, real estate investment trusts (REITs), how the Tax Court works, and more.

Passage of the PATH Act shows that another tax bill, possibly an even larger tax reform package, could make it out of Congress before year-end. Speaking in Washington, D.C. earlier this year, Senate Finance Committee (SFC) ranking member Ron Wyden, D-Oregon, suggested such an outcome. “Against all odds, Democrats and Republicans reached a bipartisan agreement on the PATH Act," Wyden said. "The December agreement (leading to passage of the PATH Act worked out because of the approach members took to the negotiations." Wyden predicted that lawmakers would use the PATH Act as a "blueprint for broader reform."

Everything on the table

Almost everything in the Tax Code appears to be on the table at this time. House Ways and Means Chair Kevin Brady, R-Texas, who is a leading proponent of tax reform, in the House has said as much. "Not all deductions and exclusions will stay; not all will go. The question to ask is: how will these policies drive economic growth?" Among the provisions/ideas being discussed by legislators are:

• Consolidation of the individual income tax rates
• Enhancing incentives for lower and middle income taxpayers
• Revising/repealing some of the tax measures under the Affordable Care Act
• Lowering the U.S. corporate tax rate
• Consolidating education tax incentives
• Eliminating/consolidating some energy tax breaks
• Repealing the alternative minimum tax (AMT)
• Tweaking the child tax credit, earned income tax credit, child and dependent care credit

International tax reform

Reforming the rules for international taxation, such as the complex rules for corporate inversions, transfer pricing, and more, has been of special interest this year to the House Ways and Means Committee. One unanswered question is whether international tax reform can move forward by itself or if proponents need to add “sweeteners” such as expanded tax breaks for lower and middle income taxpayers to win support in Congress. Some lawmakers want to link international tax reform to a cut in the U.S. corporate tax rate. How to pay for any rate cuts also is generating questions and few answers. President Obama has proposed to tighten the international tax rules and use the expected revenue to pay for infrastructure projects, along with reducing the corporate tax rate.

Energy tax measures

Before Congress’ summer recess, a package of energy tax breaks could be approved by the House and Senate. Many of these are temporary incentives that were not included in the PATH Act, such as the special credits for fuel cell vehicles. There appears to be bipartisan support to make permanent some, if not all, of these tax breaks. SFC ranking member Wyden is spearheading the movement to win passage of these energy tax incentives, seeking to attach them to a bipartisan aviation bill.

Please contact our office if you have any questions about tax reform and what measures might be taken now in anticipation of various changes.

Six years ago, Congress passed the Foreign Account Tax Compliance Act (FATCA), which set in motion a wave of new reporting and disclosure requirements by individuals, foreign financial institutions, and others. In response, the IRS created a host of new rules and regulations; and new forms for these reporting requirements. One key FATCA form – Form 8938, Statement of Specified Foreign Financial Assets – has seen usage steadily increase since passage of FATCA, the IRS recently reported. At the same time, more individuals are filing a related form – FinCEN Form 114, Report of Foreign Bank and Financial Accounts (known as the FBAR), which reached a record high in 2015.

Six years ago, Congress passed the Foreign Account Tax Compliance Act (FATCA), which set in motion a wave of new reporting and disclosure requirements by individuals, foreign financial institutions, and others. In response, the IRS created a host of new rules and regulations; and new forms for these reporting requirements. One key FATCA form – Form 8938, Statement of Specified Foreign Financial Assets – has seen usage steadily increase since passage of FATCA, the IRS recently reported. At the same time, more individuals are filing a related form – FinCEN Form 114, Report of Foreign Bank and Financial Accounts (known as the FBAR), which reached a record high in 2015.

Two key forms

FATCA generally requires U.S. citizens, resident aliens and certain non-resident aliens to report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Examples of financial accounts include: savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer. And, to the extent held for investment and not held in a financial account, individuals must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterpart that is not a U.S. person. Examples of these assets that must be reported if not held in an account include (but are not limited to) stock or securities issued by a foreign corporation; a note, bond or debenture issued by a foreign person; a partnership interest in a foreign partnership; and any interest in a foreign-issued insurance contract or annuity with a cash-surrender value. Reporting thresholds vary based on whether a taxpayer files a joint income tax return or lives abroad.

Individuals with an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 have a separate reporting requirement. This requirement is satisfied by filing the FBAR. The FBAR is filed through the BSA E-Filing System (with Treasury’s Financial Crimes Enforcement Network (FinCEN).

Note. Treasury’s Financial Crimes Enforcement Network (FinCEN) has proposed revisions to the rules for filing FBARs. The revisions generally would apply to financial professionals who file FBARs due to their employment responsibilities

Increase in filings

According to the IRS, taxpayers filed more than 300,000 Forms 8938 with their returns in tax year (TY) 2014. The number of filings was approximately the same as in 2014 but up from 200,000 filing for TY 2011, which was the first year for filing Form 8938. Form 8938 is filed with the taxpayer’s annual return.

FinCEN received 1,163,229 FBARs in 2015, representing an eight percent increase compared to 2014. During the past five years, the number of FBAR filings has increased on average by 17 percent each year, the IRS reported.

IRS investigations

Since passage of FATCA, the IRS has stepped up its investigations into reports of undisclosed foreign accounts. The IRS often uses its summons authority to discover foreign accounts and the federal courts have upheld the agency’s authority when challenged by taxpayers.

In Chan, 2016-1 ustc ¶50,205, February 29, 2016, the First Circuit Court of Appeals found that foreign bank account records fell within the required records exception to the Fifth Amendment. The First Circuit joined seven other circuits in holding that the required records exception applies.

The court found that the Bank Secrecy Act requires individuals engaged in foreign banking to file reports and maintain certain records. These records must be retained for a certain time and must be available for inspection. The required records doctrine prevents individuals, who possess records the government requires to be maintained as a result of voluntary participation in certain regulated activities, from asserting their Fifth Amendment privilege.

If you have any questions about Form 8938, the FBAR, or the required records exception, please contact our office.

Legislation enacted in 2015 provides new rules for IRS partnership audits. The new rules are a drastic departure from current rules and the IRS is hopeful that the rules will simplify the audit process and allow the IRS to conduct more partnership audits.

Legislation enacted in 2015 provides new rules for IRS partnership audits. The new rules are a drastic departure from current rules and the IRS is hopeful that the rules will simplify the audit process and allow the IRS to conduct more partnership audits.

The provisions do not take effect until partnership tax years beginning on or after January 1, 2018, until an existing partnership may elect to apply the new rules to tax years after November 2, 2015. The IRS is working on guidance for the new audit regime and has requested comments by April 15, although agency officials said that comments after that date will be accepted.

Background

Under current rules, as provided by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), when the IRS audits a partnership with more than 10 partners, the IRS determines any changes to the partnership return in a single administrative proceeding with the partnership. The partnership must designate a tax matters partner (the “TMP”) to handle the audit and any subsequent litigation. After determining the appropriate adjustments for the partnership as a whole, the IRS must recalculate the tax liability of each partner for the year under audit.

For partnerships with 10 or fewer partners, the IRS must audit the partner and the partnership separately. These small partnerships may elect to be audited under the TEFRA procedures.

Electing out 

A partnership with 100 or fewer partners may opt out of the new regime. Partnerships that elect out will be audited under the general rules for individual taxpayers. Unlike the TEFRA regime, which applies TEFRA to partnerships with 11 or more partners, the new rules will not apply unless the partnership has over 100 partners. Thus, the IRS conceivably would have to conduct up to 100 audits of individual taxpayers.

The Tax Code requires that partners be individuals, C corporations, foreign entities that would be domestic C corporations, S corporations (special rules apply for counting owners as partners), and estates of deceased partners. The number of partners would be based on the number of Schedules K-1 issued by the partnership. The IRS may prescribe rules for treating other entities as eligible partners.

Partnership representative

Unlike the TMP procedures under TEFRA, the partnership will designate a partnership representative (PR) to deal with the IRS, who does not have to be a partner. The PR will have sole authority to act on behalf of the partnership. The partnership and all partners will be bound by the actions of the partnership. The new law does away with TEFRA rights for individual partners to receive notice of the audit and to participate in the audit. Partnerships could organize a group of partners to advise the PR.

Partnership/partner liability

The partnership will pay an IRS audit adjustment (the “imputed underpayment”) unless the partnership elects to provide each partner (and the IRS) with a statement of the partner’s share of the adjustment. Partnerships that pay the tax will provide amended Schedules K-1 to their partners. Thus, under the new law, the partnership will determine the partner’s liability for the increase in taxes that the partnership pays; under TEFRA, the IRS had to calculate the partners’ adjustments.

Under Code Sec. 1031, a taxpayer can make a tax-free exchange of property held for productive use in a trade or business or for investment. The exchange must be made for other property that the taxpayer will continue to use in a trade or business or for investment. Ordinarily, the exchange is made directly with another taxpayer who holds like-kind property. For example, an investor in real estate may exchange a building with another person who also owns real estate for use in a trade or business or for investment.

Under Code Sec. 1031, a taxpayer can make a tax-free exchange of property held for productive use in a trade or business or for investment. The exchange must be made for other property that the taxpayer will continue to use in a trade or business or for investment. Ordinarily, the exchange is made directly with another taxpayer who holds like-kind property. For example, an investor in real estate may exchange a building with another person who also owns real estate for use in a trade or business or for investment.

Another way to take advantage of Code Sec. 1031 is to make a deferred like-kind exchange, using a third person to facilitate the exchange. This can be advantageous when the taxpayer cannot find another holder of like-kind property to make a direct exchange with. The taxpayer identifies a third person to act as a qualified intermediary (QI) and enters into a legal agreement with the QI. The QI is not treated as the agent of the taxpayer. The QI acquires from the taxpayer the property that the taxpayer is relinquishing, and sells the property to another person identified by the taxpayer. As part of the transaction, the QI acquires legal title to the property and transfers it to the person buying the property.

The agreement between the taxpayer and the QI must provide that the taxpayer has no right to the proceeds received by the QI. Otherwise, the taxpayer would be in actual or constructive receipt of the proceeds. If this occurred, the exchange would not be tax-free.

To complete the deferred like-kind exchange, the taxpayer will identify other like-kind property that it wishes to acquire, perhaps from a fourth person. The QI will use the proceeds from the original sale to purchase the property sought by the taxpayer, again acquiring legal title to the property. Finally, the QI will transfer the acquired property to the taxpayer. The taxpayer’s transfer of the relinquished property and acquisition of the replacement property qualify as a like-kind exchange.

Individuals may contribute up to $5,500 to a traditional and a Roth IRA for 2016. This is the same limit as 2015. An individual age 50 and older can make a catch-up contribution of an additional $1,000 for the year. The contribution is limited to the taxpayer’s taxable compensation for the year, minus contributions to all non-Roth IRAs.

Individuals may contribute up to $5,500 to a traditional and a Roth IRA for 2016. This is the same limit as 2015. An individual age 50 and older can make a catch-up contribution of an additional $1,000 for the year. The contribution is limited to the taxpayer’s taxable compensation for the year, minus contributions to all non-Roth IRAs.

Taxpayers can contribute to a Roth IRA as long as the taxpayer’s adjusted gross income for the year is less than:

• $193,000 for married filing jointly or qualifying widow(er),
• $131,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
• $10,000 for married filing separately and you lived with your spouse at any time during the year.

Unlike traditional IRAs, the owner of a Roth IRA can make contributions to the IRA after turning age 70 ½ and does not have to begin taking contributions at that age. The mandatory distribution rules that normally begin at age 70 ½ do not apply until the owner dies.

Although contributions to a Roth IRA are not deductible, income accumulates tax-free and “qualified” distributions will also be tax-free, if certain conditions are satisfied:

• The distribution must be made after the owner turns 59 ½, unless the owner is disabled or the payment is made to a beneficiary after the owner’s death; and
• The amount contributed must be held in the Roth IRA for at least five years.

Taxpayers can also roll over benefits from an eligible retirement plan to a Roth IRA, without the rollover being counted against the annual contribution limit, provided the payment from the retirement plan is an eligible rollover distribution. The retirement plan can be qualified plan, 401(k) plan, tax-sheltered annuity, or governmental deferred contribution plan. The payment will still be taxable, since contributions to a Roth IRA are not deductible and must be made with after-tax dollars.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of April 2016.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of April 2016. 

April 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll date March 26–29.
Individuals. Taxpayers who turned 70½ during 2015 must start to receive required minimum distributions (RMDs) from their IRAs; retirees who turned 70½ during 2015 must receive RMDs from workplace retirement plans. 

April 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll date March 30–31 and April 1. 

April 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 2–5. 

April 11
Employees who work for tips. Employees who received $20 or more in tips during March must report them to their employer using Form 4070. 

April 13
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 6–8. 

April 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 9–12.
Employers. Employers deposit Social Security, Medicare, and withheld income tax for March. Employers who paid cash wages of $1,900 or more in 2015 to a house-hold employee, file Schedule H (Form 1040).
Farmers and fisherman. File 2015 income tax return (Form 1040) by April 18 if not previously filed.
Individuals. Individuals file a 2015 income tax return (Form 1040 series) and pay any tax due.
Partnerships. File a 2015 calendar year return (Form 1065). Provide each partner with a Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1. 

April 20
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 13–15. 

April 22
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 16–19. 

April 27
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 20–22. 

April 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 23–26. 

May 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 27–29. 

May 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 30–May 3.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made permanent many popular but previously temporary tax breaks for individuals and businesses. The PATH Act also enhanced many incentives. These enhancements should not be overlooked in tax planning both for 2016 and future years. Some of the enhancements are discussed here. If you have any questions about these or other tax breaks in the PATH Act, please contact our office. 

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made permanent many popular but previously temporary tax breaks for individuals and businesses. The PATH Act also enhanced many incentives. These enhancements should not be overlooked in tax planning both for 2016 and future years. Some of the enhancements are discussed here. If you have any questions about these or other tax breaks in the PATH Act, please contact our office.

Business incentives

Code Sec. 179 expensing. The PATH Act made permanent the Code Sec. 179 $500,000 dollar limit and $2 million investment limit. For tax years beginning after 2015 these amounts are adjusted for inflation. The IRS has announced that 2016 will not see any increase in the $500,000 limit and only a slight rise to $2,010,000 for the investment limit.

Enhancements, for tax years only beginning after 2015, include allowing the Code Sec. 179 expense deduction for air conditioning and heating units. Additionally, the $250,000 limitation on the amount of Code Sec. 179 property that can be attributable to qualified real property is eliminated, with a corresponding removal of carryforwards of disallowed amounts.

Bonus depreciation. Under the PATH Act, bonus depreciation is available at its 50 percent level starting in 2015 through 2017. However, the bonus rate is reduced from 50 percent to 40 percent for property placed in service in 2018 and to 30 percent for property placed in service 2019, after which it sunsets (ending after 2020, in the case of certain noncommercial aircraft and property with a longer production period). Effective for property placed in service after 2015, bonus depreciation for qualified leasehold improvement property is replaced with a bonus depreciation deduction for "qualified improvement property" made to the interior portion of a nonresidential building whether or not the building is subject to a lease; and the improvement need not be made only more than three years after the building was placed in service.

Research tax credit. The PATH Act made permanent the research tax credit. Effective for tax years beginning after December 31, 2015, a qualified small business during a tax year may elect to apply a portion of its research credit against the 6.2 percent payroll tax imposed on the employer’s wage payments to employees. The research credit is also added to the list of general business credit components designated as "specified credits" that may offset alternative minimum tax (AMT) as well as regular tax.

Work Opportunity Tax Credit. The Work Opportunity Tax Credit (WOTC) is extended through December 31, 2019 by the PATH Act. The WOTC also is expanded and made available to employers that hire individuals who are qualified long-term unemployment recipients beginning work for the employer after December 31, 2015.

Film/TV/live theatrical productions. The special expensing provision for qualified film and television productions is expanded by the PATH Act to apply to qualified live theatrical productions. These productions must commence after December 31, 2015, and before January 1, 2017.

Incentives for individuals

Exclusion from gross income of discharges of acquisition indebtedness on principal residences. The PATH Act extended for two additional years (through December 31, 2016) the exclusion from gross income for discharges of qualified principal residence indebtedness. The provision also provided for an exclusion from gross income in the case of those taxpayers whose qualified principal residence indebtedness was discharged on or after January 1, 2017, if the discharge was pursuant to a binding written agreement entered into prior to January 1, 2017.

Code Sec. 25C credit. The PATH Act extended and modified the popular Code Sec. 25C credit for energy-efficient improvements. For property placed in service after December 31, 2015, the standards for energy efficient building envelope components are modified to meet new conservation criteria.

Teachers’ classroom expense deduction. The $250 annual limit for the now permanent above-the-line deduction for classroom expenses under the PATH Act is inflation-adjusted starting in 2016. Due to low inflation, the $250 limit will not rise for 2016. Starting in 2016, expenses for professional development are added to the list of eligible expenses.

Your tax planning needs to respond to changes in the tax laws. Please contact our office and we can discuss how these and other changes in recent tax legislation may impact your comprehensive tax planning.

Tweaks to enhanced Code Sec. 179 expensing and the high-dollar health care excise tax are two proposals in President Obama’s fiscal year (FY) 2017 budget that could become law before the end of his term. President Obama released his FY 2017 budget proposals in February. Other proposals that could be passed by Congress include enhancements to small business tax incentives, expanded opportunities for retirement saving, revisions to the net investment income (NII) tax, and more.

Tweaks to enhanced Code Sec. 179 expensing and the high-dollar health care excise tax are two proposals in President Obama’s fiscal year (FY) 2017 budget that could become law before the end of his term. President Obama released his FY 2017 budget proposals in February. Other proposals that could be passed by Congress include enhancements to small business tax incentives, expanded opportunities for retirement saving, revisions to the net investment income (NII) tax, and more.

Small businesses

A long-sought goal of many small businesses was made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act): enhanced Code Sec. 179 expensing. President Obama proposed more tweaks to Code Sec. 179 expensing. Under the President’s proposal, the annual expensing limitation would increase from an inflation-adjusted $500,000 to an inflation-adjusted $1 million. The phase-out threshold would remain at an inflation-adjusted $2 million level. President Obama also proposed to increase the deduction for start-up expenses and the tax break for small employers that obtain health coverage for their employees through SHOP.

High-cost health plans

Certain employer-sponsored health insurance plans (high-cost plans also known as “Cadillac plans”) may be liable for an excise tax. Generally, if the aggregate cost of applicable employer-sponsored coverage provided to an employee exceeds a statutory dollar limit, adjusted annually, the excess benefit is subject to a 40 percent excise tax.

Originally, the Affordable Care Act (ACA) imposed the excise tax on high-cost health plans effective after 2017. The PATH Act delayed the excise tax on high dollar health plans until after 2019. President Obama has proposed to increase the excise tax threshold to the greater of the current law threshold or a "gold plan average premium."

Retirement savings

In his 2016 State of the Union Address, President Obama urged lawmakers to expand the availability of retirement savings plans, especially to part-time employees and workers at businesses without retirement plans. The President’s FY 2017 budget follows through on some of these approaches. The President proposed to require employers in business for at least two years and having more than ten employees and offering no retirement plan to offer an automatic payroll-deduction IRA option. Another proposal would allow unaffiliated employers to maintain a single multiple-employer retirement plan.

NII tax

The ACA also created the NII tax to help fund health care reform. Generally, individuals with incomes over certain threshold amounts are subject to the 3.8 percent tax on NII. Under current law, the NII tax does not apply to self-employment earnings. The President has proposed to ensure that the 3.8 percent is paid (either through the NII tax or the Self-Employed Contributions Act (SECA)) by amending the definition of net investment income to include gross income and gain from any trades or businesses of an individual that is not otherwise subject to employment taxes.

Higher income individuals

President Obama renewed previous proposals to tighten tax breaks for higher income individuals. The so-called “Buffett Rule” would impose a minimum 30 percent tax on higher income taxpayers with large deductions and other tax preferences. Certain tax expenditures of higher income individuals would be capped at 28 percent. Tax rates on capital gains and qualified dividends would also be increased in individuals in the higher brackets.

EITC and other incentives

In 2012 and subsequent years, Congress made permanent some enhancements to the earned income tax credit (EITC). President Obama has proposed to continue this pattern of enhancements, by, among other changes, expanding the EITC to qualified taxpayers without children. Other proposals targeted to individuals’ income include a second-earner credit (for two-earner families), reforms to the child and dependent care tax credit, and some enhancements to the American Opportunity Tax Credit (AOTC).

Fossil fuels

As in past years, President Obama proposed to repeal fossil fuel tax preferences. The President also proposed a new revenue raiser: a fee of $10.25 (adjusted for inflation from 2016) per barrel on oil to be phased-in over a five year period beginning October 1, 2016. The fee would be collected on domestically produced as well as imported petroleum requirements.

If you have any questions about the President’s proposals, please contact our office.

As February gets underway, the 2011 filing season is about to kick into high-gear. The IRS began processing 2010 returns from individuals in January but some taxpayers have to wait until mid-February to file their returns. Additionally, the traditional April 15 filing deadline is extended three more days in 2011, so taxpayers have some extra time to file. All these changes and more may make the start of the filing season challenging. Individuals who are informed about the changes can better navigate their return preparation.

 Filing delays

In December 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act). The new law renewed many individual and business tax incentives that had expired after 2009 for 2010 (and sometimes for 2011 and beyond).

All of these late changes to the Tax Code required the IRS to quickly redesign its forms and reprogram its computer systems. The IRS began processing 2010 returns in January. However, some individuals must wait until February 14, 2011 to file their 2010 returns because of the late legislation. They are:

• Taxpayers claiming itemized deductions on Form 1040, Schedule A: Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses, as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction, which was extended by the 2010 Tax Relief Act.
• Taxpayers claiming the higher education tuition deduction. This deduction for parents and students is claimed on Form 8917.
• Taxpayers claiming the teacher's classroom expense deduction. This deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.

The delays affect individuals who file their 2010 Forms 1040 on paper or electronically. Individuals who electronically file their returns can get a head start because many major software providers will accept these impacted returns immediately. The software providers will hold on to the returns and then electronically submit them after the IRS systems open on February 14, 2011 for the delayed forms.

Some of the late changes to the Tax Code have not resulted in delays. For example, the 2010 Tax Relief Act provides for higher 2010 exemption amounts for the alternative minimum tax (AMT). The IRS was able to reprogram its operating systems for this development without any delay for affected taxpayers. Other changes in the 2010 Tax Relief Act do not have any affect on 2010 returns. These include the extension of the American Opportunity Tax Credit and creation of a two percent payroll tax cut for 2011. These changes have no effect on 2010 returns.

April 18

Because of a little-known holiday in the District of Columbia, taxpayers get extra days to file their 2010 returns in April. Friday, April 15, 2011, is Emancipation Day in the District of Columbia. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do. Therefore, all taxpayers will have three extra days to file this year: 2010 individual returns are due April 18, 2011. Taxpayers requesting an extension will have until October 17, 2011 to file their 2010 tax returns.

Form 1040

Form 1040 and its schedules (especially Schedule A for itemized deductions) for 2010 looks very similar to Form 1040 for 2009 but there are some changes. Among the changes are:

Standard deduction. The basic standard deduction amounts for 2010 are $5,700 for single individuals; $11,400 for married couples filing a joint return and surviving spouses; $8,400 for heads of household filers; and $5,700 for married taxpayers filing separate returns.

Taxes paid. Taxpayers can elect to deduct state and local sales taxes paid in 2010 in lieu of deducting state and local income taxes paid in 2010. To calculate their deduction, taxpayers can use either actual expenses or the IRS optional sales tax tables.

Adoption credit. Effective for 2010 (and 2011), the adoption credit is refundable. For 2010, the amount of the adoption credit (and maximum exclusion) is $13,170.

Roth IRAs and designated Roth accounts. For tax years beginning before January 1, 2010, an individual may not convert amounts in a traditional IRA to a Roth IRA if his or her modified adjusted gross income (AGI) for the year of distribution exceeds $100,000 (or, if married, do not file jointly). The $100,000 limit and the requirement that a married distributee file a joint return do not apply to distributions made on or after January 1, 2010.

Under a default rule for 2010, half of the taxable amount that results from a rollover or conversion to a Roth IRA from another retirement plan is reported in 2011 and the other half is reported in 2012. An individual may elect to report the entire taxable amount in 2010. The same rule applies to a rollover after September 27, 2010 to a designated Roth account in the same plan. The election may not be revoked after the due date (including extensions) of the individual's 2010 return.

Casualty losses. For 2010, each personal casualty or theft loss is limited to the excess of the loss over $100 (down from $500 for 2009). This is in addition to the 10 percent of AGI limit that generally applies to the net loss.

Health insurance. The health care reform law enacted in early 2010 provides that the value of any employer-provided health insurance coverage for an employee's child is excluded from the employee's income through the end of the tax year in which the child turns age 26. The tax benefit is effective March 30, 2010. Consequently, the exclusion applies to any coverage that is provided to an adult child from that date through the end of the tax year in which the child turns age 26.

Small employer health insurance credit. The health care reform law also created a new tax credit to help small employers provide health insurance to their employees. The credit reaches 35 percent (25 percent for tax-exempt employers) of qualified premium costs. The credit is subject to various limitations, including phase-out based on wages and number of full-time equivalent employees (Line 53).

Self-employed individuals. The Small Business Jobs Act of 2010 allows the deduction for income tax purposes for the cost of health insurance in calculating net earnings from self-employment for purposes of self-employment taxes. The provision only applies to the self-employed taxpayer's first tax year beginning after December 31, 2009.

These are just some of the changes that may impact you. Please contact our office for more details.