While You Were Filing ... 

    A few significant bills with tax provisions were enacted in addition to some other developments of interest to tax advisers. 
    by Annette Nellen, CPA, Esq. 
    Published May 13, 2010


    Annette
    Nellen

    Legislation

    The following bills were signed into law during filing season. Provisions warranting immediate attention are noted along with links to sources of additional information (a thorough discussion of each is beyond the scope of this article).

    Continuing Extension Act of 2010 (P.L. 111-157; April 15, 2010): This Act extended to May 31, 2010, the premium assistance for Consolidated Omnibus Budget Reconciliation Act (COBRA) benefits provided by the American Recovery and Reinvestment Act. Earlier, the Temporary Extension Act of 2010 (P.L. 111-144 (PDF); March 2. 2010) provided an extension to March 31. For additional information, see:

    Hiring Incentives to Restore Employment (HIRE) Act (P.L. 111-147 (PDF); March 18, 2010): This new legislation includes a payroll tax exemption and credit for qualified employees hired in 2010, a one-year extension of the higher §179 expensing amounts, new foreign withholding and reporting rules and other rules. For more information, see:

    • Nellen, Employers Please Stimulate the Economy!, AICPA Tax Insider, April 15, 2010, with links to IRS information;
    • AICPA Business Brief (PDF) (April 2010);
    • IRS Announcement 2010–22 — the IRS is seeking comments to assist in its guidance project on the foreign account compliance and cross-border transaction provisions of HIRE. These new foreign rules are known as the Foreign Account Tax Compliance Act (FATCA). These rules can be found in Subtitle A of Title V of the HIRE Act (PDF).

    Health Reform Acts: In March, Congress passed two health reform acts — the Patient Protection and Affordable Care Act (P.L. 111-148 (PDF); March 23, 2010) and the Healthcare and Education Reconciliation Act of 2010 (P.L. 111-152 (PDF); March 30, 2010). Numerous changes were made to insurance and health-related laws, as well as the tax law. The tax provisions have varying effective dates ranging from 2009 to 2018. Practitioners serving both individuals and businesses will need to devote time to learning the tax rules as they affect various elements of taxable income, tax liabilities, tax planning and certain types of businesses. For example, changes effective in upcoming years include an increase in Hospital Insurance tax for high-income individuals (IRC §3101(b)); a new Medicare contribution tax on unearned income of high-income individuals, estates and trusts (§1411); W-2 reporting of the cost of employer-provided health insurance; increase in the medical expense deduction threshold to 10 percent of adjusted gross income (AGI) (§213); a 2.3-percent excise tax on sales of certain medical devices (§4191); and penalties for large employers who do not offer and individuals who do not have health insurance (§4980H and §5000A). (For a summary, see Christian, New Healthcare Act, AICPA Corporate Taxation Insider, April 29, 2010.)

    The healthcare legislation includes a few changes unrelated to healthcare, such as codification of the economic substance doctrine with new penalties (§7701(o), §6662, §6664 and §6676); information reporting on payments to corporations (§6041(h)); and changes to the adoption credit (§36C).

    Key changes of immediate significance include the following:

    • A 10 percent excise tax is imposed on indoor tanning services effective starting July 1, 2010 (§5000B).
    • Small employers may be eligible for a health insurance credit starting in 2010 (§45R). Generally, the employer must have no more than 25 employees with an average annual wages of $50,000 or less. The credit is subject to a phase-out provision. The IRS has provided guidance including Revenue Ruling 2010-13 (PDF) and a website with links to an FAQ, examples and a video. In mid-April, the IRS sent postcards to over 4 million small businesses and tax-exempt organizations to let them know of the credit and suggesting they contact the IRS website or their tax professional for information.
      (IR-2010-48, April 19, 2010)
    • The healthcare exclusion was broadened to include children under age 27, effective March 30, 2010. The IRS has provided guidance in Notice 2010-38 (PDF).

    Regarding tax legislation, it is relevant to also note that an extenders bill has not yet been enacted. Some of the provisions that expired at the end of 2009 include the research tax credit, the special deduction for K-12 teachers, the sales tax deduction, various energy credits and the alternate minimum tax (AMT) “patch.” The delay in enacting extenders legislation is likely due to the time spent on healthcare legislation and meeting the pay-as-you-go (PAYGO) rules.

    FICA Taxes

    Severance pay: The question of whether FICA tax is owed on certain severance pay was stimulated with a District Court case decided in February 2010. In U.S. v. Quality Stores, Inc., 105 AFTR2d 2010-1110 (DC MI), the court held that the severance paid for "involuntary separation from employment" due to a "reduction in force or the discontinuance of a plant or operation" met the IRC §3402(o)(2) exception as wages for "supplemental unemployment compensation benefits" and thus was not subject to FICA tax. This is contrary to CSX Corp., 101 AFTR 2d 2008-1120 (Fed. Cir. 2008). Also see IRC §3402(o) and Revenue Ruling 90-72. Practitioners will want to review these and related rulings and employer facts to determine if any protective refund claims are warranted, as well as wait to see if the government appeals the Quality Stores decision.

    Medical residents: In IR-2010-25 (March 2, 2010), the IRS announced that it would "accept the position that medical residents are excepted form FICA taxes based on the student exception for tax periods ending before April 1, 2005, when new IRS regulations went into effect." The IRS will contact employers and residents who filed refund claims.

    Like-kind Exchanges

    Revenue Procedure 2010-14, 2010-12 IRB 456, provides a safe harbor reporting method for taxpayers unable to complete an exchange because a qualified intermediary defaulted on its obligations.

    Enforcement

    Uncertain tax positions: In January 2010, the IRS announced that it was creating a new schedule for certain businesses to report "uncertain tax positions" (Announcement 2010-9 (PDF)). The IRS expects the information will make examinations more effective and efficient. The IRS is seeking comments on the process and draft form (Schedule UTP (PDF)) by June 1, 2010 (Announcement 2010-30).

    FBAR: The IRS suspended the requirement to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), for non-US persons for 2009 and earlier (Announcement 2010-16). The IRS also released Notice 2010-23 providing administrative relief for certain persons with signature authority for a foreign financial accounts or funds.

    Cash industries examinations: In April 2010, the IRS released Cash Audit Techniques Guide to assist revenue agents in examining businesses, such as restaurants, that receive a significant amount of cash receipts.

    Multistate Reaching

    Several states continued efforts to ensure that they collect their share of sales and income taxes. Some states, such as Washington (SB 6143), enacted economic nexus standards for income and perhaps other business-activity taxes. States also continue to pursue ways to help collect sales-and-use tax on purchases made from remote (non-present) sellers. For example, Colorado enacted a rule requiring certain remote vendors that do not collect sales tax to report information to purchasers and the state (HB10-1193 (PDF) and Department of Revenue website).

    Addressing the Federal Deficit and Debt

    In February 2010, President Obama created the National Commission on Fiscal Responsibility and Reform (Executive Order, February 18, 2010). This 18-member, bipartisan commission is to identify policies to "improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run." It is to vote on a final report with recommendations and with at least 14 members approving, by December 1, 2010. The commission held its first meeting on April 27, 2010 (White House blog).

    Conclusion

    Clearly, tax practitioners were not the only ones busy during this recent filing season. The courts, IRS and Congress were also busy issuing new rules and guidance. Healthcare legislation and new enforcement measures will keep practitioners busy for years. And bear in mind, that the developments summarized above are ones of significance or warranting immediate attention, the government provided others as well.

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    Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.




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