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Additional tax-related advocacy news and information is available from The CPA Advocate (AICPA’s advocacy newsletter), Tax Division advocacy webpage and Washington Tax Brief webcast series.
Section 7216: Guidance and sample consent forms to comply with regulations involving disclosure and use of tax return information by tax return preparers.
ADVOCACY: AICPA Endorses Permanent Disaster Tax Relief Provisions (September 2015)
AICPA endorsed permanent disaster tax relief provisions in Title III of the National Disaster Tax Relief Act of 2015, H.R. 3110 and S. 1795, in letters to the sponsors of the legislation on Sept. 24 and Sept. 28.
Title III of the identical bills includes a number of permanent tax relief provisions recommended by the AICPA so that taxpayers know what tax relief will be available automatically to them if a federally declared natural disaster strikes where they live or where they have a principal place of business. The AICPA is a long-time advocate of implementing permanent disaster tax relief provisions because tax relief currently is dependent on Congressional action after every disaster and has been available only sporadically.
Read AICPA’s letter to Rep. Reed and the letter to Senator Vitter.
ADVOCACY: AICPA Recommends Changes to Senate Finance Committee Proposal to Grant Broad Authority to IRS to Regulate Paid Tax Return Preparers (September 2015)
In a letter to the Senate Finance Committee today, the AICPA commended the committee for its efforts to combat identity theft and tax fraud in the Chairman’s Mark of a Bill to Prevent Identity Theft and Tax Refund Fraud, but spelled out concerns regarding the bill’s provision granting broad authority to the Department of the Treasury and the IRS to regulate paid tax return preparers.
AICPA Tax Executive Committee Chair Troy K. Lewis noted that in order to prevent potential overregulation, unnecessary administrative costs, marketplace confusion or other unintended consequences, the AICPA recommends that Congress prescript language that grants the IRS the specific authority necessary to address the concerns of incompetent and fraudulent, currently-unenrolled tax return preparers. At a minimum, he said the AICPA encourages Congress to limit the IRS’s authority to require a PTIN and require the IRS to take steps to mitigate marketplace confusion.
UPDATE: Proposed Rules Govern Taxation of Gifts and Bequests from Covered Expatriates (September 2015)
Under new proposed regulations (Reg-112997-10) that implement IRC Section 2801, any U.S. person who received a covered gift or bequest on or after June 17, 2008 from a covered expatriate under Section 877A will be subject to tax at the highest estate or gift tax rate. Exceptions include qualified disclaimers of property, charitable donations that qualify as estate or gift tax charitable deductions, gifts or bequests to a covered expatriate’s U.S. citizen spouse if the gift would have qualified for the marital deduction, among others.
A U.S. citizen, a domestic trust, or an electing foreign trust who receives a covered gift or bequest will be liable for the tax. The value of the covered gift is reduced by the amount of the gift tax exclusion, and the property’s value is determined on the date of receipt. The net amount is multiplied by the highest estate or gift tax rate in effect for the calendar year. The tax will be reported and paid on a new Form 708, which will be released once the regulations are finalized. Read more in the Journal of Accountancy online.
ADVOCACY: Highway Funding Bill Changes Tax Return Due Dates (July 2015)
The federal highway funding extension bill passed by Congress on July 30 and signed by President Obama on July 31 contains several tax provisions, including changing the due dates for partnership and corporate tax returns, a provision the AICPA has long advocated. This article in the Journal of Accountancy outlines these changes and other items affected, including mortgage interest statements, basis of inherited assets, and the six-year statute of limitation.
ADVOCACY: AICPA Due Dates Proposal Moves Forward (July 2015)
UPDATE: Required Minimum Distribution Regulations (July 2015)
The AICPA's proposal to re-order certain filing due dates that are causing headaches for many taxpayers, especially those with investments in flow-through entities, was included in the Highway Trust Fund reauthorization passed by the House July 15. Learn more
about the due dates challenges, solution and AICPA proposal.
UPDATE: IRS Considering Proposed Regs to Disallow Valuation Discounts on Transfers of Family Entity Interests (July 2015)
There is serious speculation that the IRS will release proposed regulations (late this summer or early this fall) that will impact the availability of valuation discounts when transferring interests in family controlled entities (such as family limited partnerships and limited liability companies) to family members. Under current law, taxpayers are permitted to transfer minority interests in family entities to family members at a significantly reduced tax cost with the use of valuation discounts.
Given the likelihood of a change to the current valuation discount rules, it is advisable for practitioners to consult with their clients today. If a client is thinking about giving a gift of a family entity or limited partnership interest, he or she should consider making those gifts now while the valuation discounts are still available. Learn more
In a recent podcast
, Bob Keebler provides an update on Notice 2015-49
issued July 9, 2015 regarding the use of lump sum payments to replace lifetime income being received by retirees under defined benefit pension plans. The IRS announced that it would amend regulations to provide that qualified defined benefit plans cannot replace any joint and survivor, single life, or other annuity currently being paid with a lump-sum payment or other accelerated distribution. The rules will be applied as of July 9, 2015, except for certain grandfathered transactions. Read more from the Journal of Accountancy
UPDATE: Proposed Regulations for ABLE Accounts (June 2015)
On June 19, the IRS issued proposed regulations
implementing Sec. 529A, which authorizes states to offer specially designed tax-favored accounts for the disabled (ABLE accounts). Sec. 529A was added by the Achieving a Better Life Experience (ABLE) Act of 2014, which was part of the Tax Increase Prevention Act of 2014. Contributions made to an individual’s ABLE account can be used to meet the individual’s qualified disability expenses. Read
more about the proposed regulations from the Journal of Accountancy.
UPDATE: FBARs Due June 30; New Guidance Limits Penalties (June 2015)
The deadline for the Treasury Department to e-file the Report of Foreign Bank and Financial Accounts (FBAR) is June 30, and the penalties for noncompliance can be large. CPAs may need to do some digging with clients, who may not realize they are subject to file an FBAR. Learn more about e-filing FBARs in this article. FinCEN Report 114 details the requirements for the e-filing of FBARs.
In May, the IRS issued interim guidance easing FBAR penalties. Prior to the memo, penalties for willful violations of FBAR filing requirements could be as high as 50% of the balance of the applicable accounts each year. The memo recommends a penalty of 50% of the highest aggregate balance of all unreported foreign financial accounts during the years under examination, allocated across all years based on the balances for the year. For non-willful violations, the memo recommends that if a taxpayer has more than one account, only one $10,000 penalty should be imposed each year, not $10,000 per account.
Furthermore, in October, the IRS issued streamlined compliance procedures for taxpayers who have non-willfully failed to report offshore assets. Learn more in this Journal of Accountancy article.
ADVOCACY: AICPA Urges IRS to Raise Safe Harbor Threshold in Tangible Property Regulations (April 2015)
The AICPA reiterated its support for a higher de minimis safe harbor threshold for taxpayers who do not have an applicable financial statement (AFS), asking the IRS to increase it from $500 to $2,500 and adjust it annually for inflation. In a letter to the IRS, the AICPA noted, “Many small business owners stated [in an AICPA survey] that repairs are consistently over $500….A cell phone or printer easily cost over $500 and are replaced quickly.”
In addition, the AICPA recommended that Treasury expand the definition of an approved AFS to include a reviewed set of financial statements, stating: “The AICPA believes the requirement that a taxpayer have an AFS to use the $5,000 de minimis threshold unfairly discriminates against smaller taxpayers, and recommends an alternative test to allow such taxpayers to use the de minimis rule.”
UPDATE: Statute of Limitations Does Not Run Due to Failure to Make Foreign Financial Asset Disclosure (April 2015)
In IRS Technical Advice Memorandum 2014-018, the IRS describes the circumstance of an executor for a decedents estate filing the decedents final Form 1040. The executor does not report a foreign financial asset of the decedent, which Code Section 6038D requires should be reported on Form 8938 with the Form 1040. The executor also does not report income from such foreign financial asset on the estates Form 1041, and did not report the asset on the estate Form 706 which the estate was obligated to file. The three year statute of limitations for both the Form 1041 and Form 706 has expired. The TAM employs Code Section 6501(c)(8) to extend the statute of limitations on assessment for the estate income tax return and the Form 706. Practitioners should be aware of this area of risk when preparing returns for decedents and estates.
UPDATE: Exclude Personal Information from Exempt Organization Applications and Returns (April 2015)
You can prevent unwanted disclosure of private information, such as Social Security numbers, by not including it in exemption applications (Forms 1023 and 1024) and information returns (Forms 990, 990-EZ, 990-PF, 990-T, and Form 5227). The IRS does not require an organization to include any individual's Social Security or bank account number on a return or other form available to the public. Visit the Tax Section to learn more.
ADVOCACY: AICPA Calls for Uniform Retirement Plan Types and Rules (March 2015)
"Because qualified retirement plans are such a large source of retirement savings for many Americans, it is important that the tax rules governing the plans are as simple as possible," the AICPA observed when it sent eight recommendations to the Senate Finance Committee tax reform working group on savings and investment. Among the recommendations is a proposal to reduce the number of retirement plans and eliminate top heavy rules.
ADVOCACY: AICPA Recommendations to Simplify Retirement Plans (March 2015)
The AICPA submitted eight recommendations to the Senate Committee on Finance Tax Reform Working Group on Savings and Investment that would simplify employer-sponsored retirement plans and individual retirement accounts. In the letter to the working group, Troy Lewis, CPA, CGMA, chair of the AICPA Tax Executive Committee, wrote, “Because qualified retirement plans are such a large source of retirement savings for many Americans, it is important that the tax rules governing the plans are as simple as possible.”
UPDATE: How the AICPA’s New Confidentially Rule Interacts with Section 7216 (March 2015)
The recently revised AICPA Code of Professional Conduct includes a new Confidential Client Information Rule under Section 1.700.001, which expands the guidance on maintaining the confidentiality of client information. The general thought previously has been that if CPA tax practitioners were complying with Sec. 7216 and revisions of its related regulations that went into effect six years ago (Regs. Secs. 301.7216-1 through 301.7216-3), they were complying with the less detailed AICPA code Rule 301, Client Confidential Information. Now that the new AICPA guidance with its expanded interpretations has taken effect (on Dec. 15, 2014), members are encouraged to assess their practices for compliance with both sets of rules.
Sec. 7216 prohibits tax preparers from knowingly or recklessly disclosing any taxpayer information obtained in the process of preparing returns. The AICPA's Confidential Client Information Rule, on the other hand, is concerned with other confidential information not necessarily involving tax return preparation. A recent article in the Journal of Accountancy discusses the effect of these two requirements on CPAs.
ADVOCACY: AICPA Recommends Estate Tax Portability Relief for Surviving Spouses (March 2015)
The AICPA submitted a letter on March 19 to the IRS and the Department of the Treasury recommending relief for surviving spouses who would like to elect portability of their deceased spouse’s unused estate tax exemption.
The portability election must be made by a decedent’s executor on a timely filed Form 706. However, executors of estates for decedents who died on January 1, 2014 or later may be unaware that a Form 706 is required to be filed (even for estates below the filing threshold) within 9 months of the date of death in order for the surviving spouse to make the portability election.
The AICPA requested that Treasury and IRS:
- Permanently allow estates below the filing threshold 15 months after the death to file Form 706 in order to elect portability;
- Provide a short Form 706-EZ to make the portability election; and
- Allow the surviving spouse to file Form 706 for portability, if the executor chooses not to file the form because the estate is not otherwise required to do so.
Read more from the Journal of Accountancy.
UPDATE: New Sec. 529A Credit Rules Will Allow State Accounts to Be Grandfathered (March 2015)
The Internal Revenue Service has announced that, because a number of states may be setting up their own Achieving a Better Life Experience (ABLE) programs (which allow tax-free savings accounts to be set up to benefit disabled individuals) before the IRS has issued guidance on them, any state program set up before the guidance is issued will be deemed to comply with the rules. This Journal of Accountancy article provides more information.
UPDATE: New Repair Regs Resources (February 2015)
As reported in the Journal of Accountancy, on February 13, the IRS released Rev. Proc. 2015-20, the much anticipated relief permits small businesses to change a method of accounting on a prospective basis, and avoid completing and filing a Form 3115. The IRS released a set of FAQs on the tangible property repair regulations, which includes information on the applicability of the regulations, de minimis safe harbor election, simplified procedures for small business taxpayers and more. To ensure that the AICPA is providing our members with the most reliable information, the AICPA’s Tangible Property Resources webpage has been updated with sample 3115 resources (for applicable businesses), a repair regs flowchart, a sample client letter, an overview of the tangible property regulations, links to current and previous regulations, and more. Most resources on this page are open to all AICPA members.
UPDATE: AICPA Calls for Missed Tax Election Relief (January 2015)
If you or your client missed a deadline for one of 26 tax elections that are set by law, you (or the client) are out of luck. That’s why the AICPA is calling on Congress to allow the IRS to grant relief as it does now for missed elections with deadlines set in regulation instead of statute. Elections with deadlines set by law include installment payments for estate tax, innocent spouse relief and claiming an unused portion of the estate tax exclusion (known as portability). Read the AICPA’s letter requesting relief for taxpayers in certain situations when they miss a statutory deadline or make an error in choosing an election.
UPDATE: Congress Passes Tax Extenders (December 2014)
The House and Senate approved a one-year extension of tax provisions that expired at the end of last year; however, the bill does not address 2015 extenders, as negotiations on a broader bill fell apart. The bill is now with President Obama for his signature. Individual tax extenders in the bill include:
- the tax deduction of expenses of elementary and secondary school teachers;
- the tax exclusion of imputed income from the discharge of indebtedness for a principal residence;
- the equalization of the tax exclusion for employer-provided commuter transit and parking benefits;
- the tax deduction of mortgage insurance premiums; the tax deduction of state and local general sales taxes in lieu of state and local income taxes;
- the tax deduction of contributions of capital gain real property for conservation purposes;
- the tax deduction of qualified tuition and related expenses; and
- the tax exemption of distributions from individual retirement accounts for charitable purposes.
Listen to a podcast
from Bob Keebler providing a more detailed overview of the individual provisions in the tax extenders bill, noteworthy business provisions and the Achieving a Better Life Experience Act of 2014, which creates savings opportunities for individuals with disabilities. Send the following Forefield Alert
to your clients.
UPDATE: IRS Releases Guidance on After-Tax Rollovers (September 2014)
The IRS released guidance in Notice 2014-54 on how to allocate pre- and after-tax amounts distributed from qualified retirement plans to multiple destinations. Notably, the new guidance allows workers to roll over after-tax amounts and convert the money to a Roth IRA, tax free. The rule applies to distributions made on or after September 19. Read more from Journal of Accountancy.
ADVOCACY: AICPA Submits Comments to IRS on Material Participation of a Trust or Estate (September 2014)
The AICPA submitted comments to the Department of the Treasury and the IRS relating to the issue of material participation by a trust or estate in a trade or business for purposes of section 469 of the Internal Revenue Code. The AICPA realizes that, after 28 years without guidance and two court decisions on which taxpayers are able to rely, the expanded scope of the section 1411 net investment income tax has created a broader need for all trusts and estates that have an interest in a trade or business to determine under section 469 whether the trust or estate materially participates in the trade or business. Specifically, AICPA suggests that guidance from the IRS or Treasury should:
- Incorporate the conclusions reached in the two court decisions;
- Thoroughly address the complicated issues involved;
- Provide comprehensive, administrable, and clear guidance;
- Count the combined activities of any trustee or executor who, under local law, has fiduciary duties and responsibilities with respect to the trust or estate, irrespective of the capacity in which the individual is performing those activities and irrespective of whether the individual also owns an interest in the same trade or business;
- Count the activities of employees and agents employed by the trust or estate to perform services in the trade or business;
- Provide that the material participation tests for individuals set forth in Temp. Reg. § 1.469-5T(a) apply to trusts and estates;
- Include a special rule to treat, for a certain period of time, an estate or former grantor trust as materially participating in any trade or business in which the decedent or deemed owner materially participated at the time of his or her death;
- Provide that the character of the income is determined at the level of the trust or estate, and the character of any distributed income remains the same in the hands of the beneficiary;
- Include a special rule to provide that the participation of the beneficiary of a qualified subchapter S trust is used to determine whether the trust’s gain from the sale of the S corporation stock is treated as active or passive;
- Include a special rule to provide that the S portion and the non-S portion of an electing small business trust are treated as a single trust for purposes of applying the section 469 rules.
- Provide that a trust or estate may qualify as a real estate professional under section 469(c)(7) and tests for how a trust or estate may qualify as a real estate professional.
ADVOCACY: AICPA Urges Congress to Act Now on Tax Extenders (September 2014)
The AICPA sent a letter urging House and Senate tax committee members to immediately address the 57 tax provisions that expired at the end of 2013 and six provisions that expire at the end of 2014 so that taxpayers can have more certainty. “These ever-changing, often expiring, short-term changes to the tax laws make it increasingly difficult for small businesses and their owners to perform any long-term tax, cash-flow or financial planning. If businesses are not able to rely on these tax benefits for the long-term, they are limited in their ability to plan, invest, grow and expand, and hire additional workers,” the AICPA wrote. Acting now would also prevent unnecessary delays in the tax filing season and further distortions in financial reporting.
ADVOCACY: Small Businesses Need Cash Method of Accounting, AICPA Tells Congress (July 2014)
The AICPA called on a House small business panel to expand the cash method of accounting to small businesses. “The cash method of accounting is simpler in application, has fewer compliance costs, and does not require taxpayers to pay tax before receiving the income being taxed,” the AICPA said in its written testimony. The AICPA also noted the impact on professional service firms that are subject to state regulations limiting ownership to individuals who actively participate in the business — for them, the hardship “would increase significantly." Many states prohibit public accounting firms from allowing any passive (investor) ownership and a majority of the owners must hold active CPA licenses.
UPDATE: One-IRA-Rollover-a-Year Rule Effective in 2015 (July 2014)
Starting in 2015, taxpayers will only be able to make one rollover per year no matter how many IRAs they own.
Following up on its promise earlier in the year to follow the Tax Court’s holding in Bobrow v. Commissioner that the limit of one rollover per year applies on an aggregate basis and not on an IRA-by-IRA basis, the IRS withdrew a proposed regulation from 1981, which had provided otherwise. The IRS also announced that the new rule will not apply to any rollover that involves a distribution that occurs before January 1, 2015.
The IRS reiterated that the new interpretation of Sec. 408(d)(3)(B) will not affect an IRA owner’s ability to transfer funds from one IRA trustee to another (as opposed to the taxpayer’s getting a check and making the transfer himself or herself) because those transactions are not considered rollovers under Rev. Rul. 78-406 and therefore are not subject to the one-a-year limit.
Read more from the Journal of Accountancy.
Listen to a “60 Second Planner” audio clip with Bob Keebler on this topic, courtesy of Leimberg Information Services, Inc. (LISI).
ADVOCACY: IRS Voluntary Program for Tax Preparers is Unlawful and Improper, Says AICPA (June 2014)
After repeated requests to the IRS to obtain public comment on its proposed program to certify unlicensed preparers or to consider alternatives, the AICPA sent a letter to the agency expressing strong concern that the program “would cause significant legal problems.”
AICPA President and CEO Barry Melancon and AICPA Board Chairman William E. Balhoff observed that implementing the program “would cause significant legal problems that may ultimately frustrate the IRS’s goals, confuse the public, and lead to litigation.”
The AICPA outlined several policy and legal concerns with both the agency’s legal basis to create such a program, as well as the process that the IRS used. However, Melancon and Balhoff also noted that it valued its relationship with the IRS: “We have sought to work with the IRS to achieve workable solutions to regulate tax return preparers and protect the public, and we stand ready to continue these efforts.”
ADVOCACY: AICPA Speaks up for Members on Net Investment Income Tax (June 2014)
While progress has been made in simplifying the regulations for the NIIT, the AICPA would like to see more changes to ease the burden on taxpayers. In a letter to the IRS and Treasury, the AICPA offered detailed suggestions that included:
UPDATE: New Rules for Providing Written Tax Advice Finalized (June 2014)
- Increasing the threshold amounts and adjusting them for inflation to make the optional simplified reporting method available to more taxpayers.
- Giving taxpayers the option of including their entire chapter 1 gain or excluding their entire chapter 1 loss from the disposition of certain active interests in pass-throughs to reduce the burden of calculating the loss or gain subject to the tax
- Providing a simplified safe harbor method for tiered pass-through dispositions
The IRS issued final regulations under Circular 230 on the rules for practitioners to provide written tax advice and certain other related provisions (T.D. 9668), adopting the proposed regulations (REG-138367-06) issued in September 2012 with some modifications. The regulations require practitioners to base written advice on reasonable factual and legal assumptions and to consider all relevant facts that the practitioner knows or reasonably should know. Practitioners must use reasonable efforts to identify the facts relevant to written federal tax advice. Read more from the Journal of Accountancy
ADVOCACY: AICPA Proposes a Level Playing Field for PFIC Filers (May 2014)
The complex passive foreign investment company (PFIC) rules apply to more and more U.S. taxpayers, resulting in compliance costs for minor shareholders that “can, at times, far exceed the underlying tax potentially imposed by the PFIC rules,” the AICPA told the IRS commissioner and Treasury officials in comments
. The PFIC Task Force of the International Tax Technical Resource Panel recommends 10 ways to address the disparity between the treatment of direct and indirect shareholders and the related compliance costs.
ADVOCACY: AICPA Opposes Proposed Voluntary IRS Preparer Registration Program (May 2014)
In a letter
to IRS Commissioner John Koskinen, AICPA expressed opposition to the “voluntary certification” program proposed by the IRS in the aftermath of the Loving
case. The AICPA has “deep concerns with regard to a voluntary system, and the speed with which the IRS is moving to implement such a system,” AICPA President and CEO Barry C. Melancon, CPA, CGMA and Jeffrey A. Porter, CPA, chair of the AICPA Tax Executive Committee, wrote. “We believe a voluntary program would create confusion regarding the relative proficiencies of the various types of preparers. In addition, the proposed voluntary system would undoubtedly leave the impression among most taxpayers that certain tax return preparers are endorsed by the Internal Revenue Service.” For complete details, see the full press release
UPDATE: Erroneous IRS Notices on E-Filed Forms 1041 (May 2014)
The AICPA has contacted the IRS regarding erroneous notices sent to fiduciaries who e-filed Form 1041 with a balance due. The problem seems to have been caused when an electronically filed tax return was posted “one cycle earlier” than the mailed payment. As a result, a CP161 notice may have been generated showing an amount due (including penalties and interest). We understand that the IRS is addressing this glitch and issuing corrected notices.
If the taxpayer made the payment timely and the payment check has cleared, the IRS should issue a CP210 notice to reverse the penalty and interest and clarify that no payment is owed. This problem should resolve itself for most of the incorrect notices. If you have a client who received such an incorrect notice and the IRS has not yet corrected this situation, you can contact the IRS directly even without a power of attorney if “yes” is checked in the Paid Preparer Authorization box on the bottom of page 1.
UPDATE: IRS Finalizes Rules on Distributions to Pay Insurance Premiums (May 2014)
Final regulations issued by the IRS on Friday state that distributions from qualified retirement plans that are used to pay for accident or health insurance premiums are taxable (T.D. 9665), unless a statutory exclusion applies. However, distributions used to pay for disability insurance to replace retirement plan contributions in the event of a participant’s disability are not taxable if they meet certain requirements. Read more from the Journal of Accountancy.
UPDATE: AICPA Testimony on State Taxes on Non-Resident Employees (April 2014)
The AICPA testified that the current patchwork of rules for taxing employees who temporarily work in another state "unnecessarily creates complexity and costs for both employers and employees." For example, a non-resident is subject to tax after working 59 days in Arizona, 15 days in New Mexico and 14 days in Connecticut. The Mobile Workforce Simplification Act, which would address this issue by setting a 30-day threshold for all states, may be considered by the House Judiciary Committee soon and has strong bipartisan support.
UPDATE: Proposed Legislation to Lighten NIIT, Income Tax Burden on Estates (April 2014)
The AICPA submitted a legislative proposal to Congress to treat estates and certain trusts as married persons filing separately for both income tax and the net investment income tax purposes. This proposal highlights the excessive tax burden placed on an estate compared with the tax burden that the decedent had during his or her life, as well as provides a solution to these inequalities. Currently, an individual’s estate is subject to the top rate of 39.6% on annual taxable income in excess of $12,150.
ADVOCACY: AICPA Recommendations for NIIT and CRTs (March 2014)
In a comment letter, the AICPA made several recommendations to the IRS regarding how forthcoming final regulations should apply the net investment income tax rules to charitable remainder trusts. The comments focus on the proposed regulations’ elective simplified method for calculating a CRT’s net investment income and attributing that net investment income to the beneficiary’s annuity or unitrust distribution. Read more from the Journal of Accountancy.
ADVOCACY: Tax Incentives for Higher Ed Expenses (March 2014)
Approximately 1.5 million taxpayers failed to claim an education deduction they qualified for, in a study by the Government Accountability Office. The simplification of over 13 education tax incentives, long endorsed by the AICPA, is picking up momentum in Congress and is included in the Tax Reform Act. In response to recent bills and proposals, the AICPA made several recommendations to further ease compliance, such as making the new American Opportunity Tax Credit 100% refundable and available for graduate-level and professional degree courses.
ADVOCACY: AICPA Confirms Digital Signatures Allowed for Form 8879 (March 2014)
On March 12, IRS issued a QuickAlert announcing revisions to electronic signature guidance for Forms 8878 and 8879. However, the AICPA discovered that a key reference to the permissions for digital signature only referenced Form 8878, raising question about whether digital signatures were permitted on Form 8879 as well. The AICPA worked with the IRS to clarify the changes. As a result, the IRS updated the page Signing an Electronic Tax Return with two critical changes. First, the words “and 8879” were added to the following statement: “EROs may use an electronic signature pad to have taxpayers sign Forms 8878 and 8879.” Secondly, the words “or electronic signature” were added to the following sentence: “This does not alter the requirement that taxpayers must sign Form 8878 and Form 8879 by a handwritten or electronic signature.” As a result, authorization for digital signatures for Form 8879 is now explicitly authorized.
UPDATE: IRS Announces It Will Follow the Tax Court's One-Rollover-per-Year Decision (March 2014)
In Announcement 2014-15, the IRS has indicated it will follow the Tax Court decision in Bobrow v. Commissioner, which held that a taxpayer may make only one tax-free, 60-day rollover between IRAs within each 12-month period, regardless of how many IRAs he or she maintains. However, the IRS will not apply this new interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015. Listen to a brief audio clip from Bob Keebler on Bobrow v. Commissioner and view a Forefield client alert that discusses the case.
UPDATE: IRS Guidance on Electronic Signatures – AICPA Issues Caution (March 2014)
On March 11, the IRS updated Publication 1345, Handbook for Authorized IRS e-File Providers of Individual Income Tax Returns (the updated publication is only available in electronic form on the IRS website). Some interpreted these changes to mean that the IRS is accepting e-signatures on Form 8879, IRS e-file Signature Authorization. However, a careful review and analysis of the changes suggests that the IRS has only clarified two Form 8879 rules.
- The IRS explained that preparers can accept copies of signed e-file authorization forms. For example, clients can fax or email a copy of their Form 8879 that contains a handwritten signature. This clarifies the often misunderstood notion that preparers need to receive the original, signed document before transmitting the return.
- Only the Self-Select PIN method provides for a completely paperless process where clients can authorize transmission without a handwritten signature on an e-file authorization form. NOTE: There are additional steps to validate your client's identity and your client must appear in person for part of the process.
Read more, courtesy of the AICPA Tax Division. The AICPA advocacy team will be reaching out to the IRS to request additional clarity on this new guidance. A longer, more expansive discussion of these rules is in development and is scheduled to be released in the May 2014 Tax Adviser.
UPDATE: President Obama’s Budget Proposal Contains Limitations on Retirement Accounts (March 2014)
President Obama’s proposed 2015 budget would limit tax deductible contributions to 401(k)s and IRAs to 28% of income and cap retirement savers' tax-deferred accounts to an amount needed to produce a joint and 100% survivor annuity of $210,000 beginning at age 62 (presently $3.2 million). The budget would also eliminate the carried interest provision that allows income from managed retirement investments to be taxed at the capital gains rate, while dropping the "chained" consumer price index proposal reducing Social Security cost-of-living adjustments.
Additionally, it would require that Roth IRAs follow the same required minimum distribution rules as other retirement accounts (RMDs at 70 ½ similar to traditional IRAs). It also establishes a 5-year rule for IRAs inherited by (most) non-spouse beneficiaries, requiring that distributions be taken out over a five year period of time, and establishes 60-day rollover rule for IRAs inherited by non-spouse beneficiaries. Finally, the budget includes mandatory automatic IRA enrollment for small businesses and RMD elimination for small retirement accounts of $100,000 (cumulative across all retirement plans).
Even though these provisions may not be enacted, it’s helpful to know what the President’s legislative agenda for this year is. We will monitor and keep you apprised of any developments.
ADVOCACY: AICPA Seeks Extensions for Cost Basis Reporting (March 2014)
During the 2013 filing season, AICPA members and their clients experienced significant confusion trying to comply with final regulations (T.D. 9616) for cost basis reporting for stocks and mutual funds. AICPA recently asked the IRS to extend all the reporting effective dates by one year to allow reporting entities more time to prepare. AICPA’s proposal
would move the initial tracking of cost basis for options and debt instruments from January 1, 2014 to January 1, 2015, transfer reporting from January 1, 2015 to January 1, 2016, and reporting for complex debt instruments from January 1, 2017 to January 1, 2018.
UPDATE: Form 8960 Instructions Released (February 2014)
The IRS released final instructions for Form 8960, Net Investment Income Tax – Individuals, Estates, and Trusts. Access resources from the PFP Section on the 3.8% NIIT in the Planning for ATRA and the Net Investment Income Tax Toolkit, including archived webcasts checklists, newsletters, articles and more. See NIIT specific resources on this page.
REMINDER: Review Software NIIT Calculations Carefully (February 2014)
Tax practitioners need to be very careful reviewing the NIIT calculations from their software programs as we are hearing various cases where the software is not defaulting correctly or overrides may not easily or successfully happen. For example, some software programs:
- are not correctly computing NII on Form 1041 K-1s,
- are not allowing the grouping of an activity involving the rental of personal property with an active trade or business, and
- are excluding rental income for expats from the NIIT calculation when it should be included in the NIIT calculation.
The instructions to Form 8960 at the bottom left hand corner of page four contain, "Special Rules For Certain Passive Income", that makes it clear that passive activities properly grouped with trades or businesses in which the taxpayer materially participates are treated as non-passive and, consequently, not subject to NIIT. This matches what the statute and regulations state. Some software programs may need to fix their software for this clarification. Tax practitioners should be extra careful checking the Form 8960 calculations this year.
IRS Releases 2013 Form 8960 for NIIT (January 2014)
The IRS released Form 8960, Net Investment Income Tax for Individuals, Estates and Trusts. Access resources from the PFP Section on the 3.8% NIIT in the Planning for ATRA and the Net Investment Income Tax Toolkit, including archived webcasts checklists, newsletters, articles and more. See NIIT specific resources on this page.
ADVOCACY: AICPA Voices Strong Support for Senate Finance Committee Discussion Draft on Tax Administration Reform and Simplification (January 2014)
In a letter to Senate Finance Committee Chairman Baucus and Ranking Member Hatch, the AICPA said that it “strongly supports the efforts by the Senate Committee on Finance on tax administration reform and simplification.” Responding to the Finance Committee’s Nov. 20, 2013 discussion draft, Senate Committee on Finance Chairman’s Staff Discussion Draft of Provisions to Reform Tax Administration, the AICPA outlined recommendations it believes will reduce taxpayers’ compliance costs, encourage voluntary compliance through an understanding of the rules, and facilitate enforcement actions. The AICPA’s recommendations include reforms related to information returns, identity theft and tax fraud, closing the tax gap, expanding electronic filing and tax filing improvements.
UPDATE: IRS Releases Draft Form 5227 and Instructions (January 2014)
The IRS released draft Form 5227, Split-Interest Trust Information Return, and draft instructions. Form 5227 includes dramatic changes due to section 1411 of the IRC, which imposes the 3.8% net investment income tax.
ADVOCACY: AICPA Calls for Permanent Tax Relief for Disaster Victims (December 2013)
To treat all taxpayers in declared disaster areas fairly and consistently, the AICPA is asking that 10 permanent provisions be added to the tax code. Currently, the government deals with each disaster as an individual event, which means taxpayers may get different treatment for similar losses; they often do not even know what treatment they will receive until the government enacts the required relief. In a letter to Congress and the IRS, the AICPA calls for provisions to help businesses and property owners, such as a five-year carryback period for net operating losses and tax-free withdrawals up to $100,000 from qualified retirement plans if the money is repaid in five years.
ADVOCACY: AICPA Recommends that IRS Issue Additional DOMA Guidance (December 2013)
The AICPA identified 17 areas in which the IRS should provide additional guidance to taxpayers and tax practitioners as a result of the U.S. Supreme Court’s decision ruling the Defense of Marriage Act (DOMA) unconstitutional. This request for additional guidance covers income tax, estate and gift tax and other issues. Among the issues on which the AICPA requested guidance are:
- The status of certain civil unions and registered domestic partnerships;
- Whether special notations are needed on amended returns to aid in the processing of forms filed by couples who choose to amend their returns to convert to joint status;
- Whether a same-sex married employee who requests that his/her employer file to obtain a FICA tax refund must also amend his/her Form 1040 to change the filing status;
- The tax treatment of payments that qualify as alimony to/from a former same-sex marriage partner;
- The tax-free transfer of property between spouses;
- The process for estates to claim portability of the estate tax exemption if they did not file Form 706 because they were below the filing threshold; and
- How taxpayers must report, or track, previously reported gifts that are now eligible for the marital exclusion and for gift splitting.
Read the comment letter.
ADVOCACY: AICPA Calls on IRS to Provide Shutdown Plan for Input (November 2013)
The AICPA asked the IRS to announce its plans now for how it will operate if there is another federal government shutdown in January. Practitioners should be able to provide input into such a plan, the AICPA noted in a letter to the IRS. The AICPA is deeply concerned about the potential impact such a shutdown would have in light of the fact that only 9.3% of the agency was deemed essential during the Oct. 15 filing deadline.
ADVOCACY: AICPA Recommends Changes to 3.8% NII Tax on International Entities (August 2013)
The AICPA recently submitted recommendations to the IRS for the proposed regulations that provided guidance for the Net Investment Income (NII) tax and its effects on international entities (controlled foreign corporations CFCs and passive foreign investment corporations PFICs). Under section 1411, the new 3.8% NII tax imposes a tax on unearned income on investments of certain individuals, estates, and trusts, and certain foreign entities whose income is above the statutory threshold amounts. Subpart F and PFIC income should be treated as “other income” and not dividend income for purposes of the 3.8% tax, the AICPA told the IRS.
UPDATE: Consolidated and Extended Relief Now Available for Late S Elections (August 2013)
The IRS released Rev. Proc. 2013-30, which provides a simpler framework for requesting relief for late S corporation elections, including those for ESBT, QSST, QSub, and late corporate classifications that the taxpayer intended to start with the original election. The procedure will provide a single source for requesting relief; the IRS also included a flowchart for determining availability.
ADVOCACY: AICPA Opposes Combining Partnership and S Corporation Regimes (August 2013)
In a letter to the House Ways and Means Committee Chairman and Ranking Member, the AICPA objected to a proposal in Option 2 of Chairman Camp’s Small Business Tax Reform discussion draft. The proposed reform would eliminate the current Subchapter S and Subchapter K regimes and replace them with a single, unified regime. While the AICPA is in favor of simplifying the tax system, the new system, as proposed, would result in significant complexity and corresponding costs.
ADVOCACY: AICPA Requests Administrative Relief for Missed or Late QTIP and QRT Elections (August 2013)
The AICPA petitioned to Congress requesting that the IRS be given authority to grant section 9100 relief for missed and late Qualified Terminable Interest Property (QTIP) and Qualified Revocable Trust (QRT) elections. Section 9100 relief is helpful when practitioners or taxpayers inadvertently do not file elections or file them late; however, section 9100 does not currently provide relief for many elections with statutory due dates, such as the QTIP and QRT elections.
ADVOCACY: AICPA Recommends Section 736(b)(2) Partnership Payments Be Exempt from 3.8% NII Tax (August 2013)
For proposed regulations covering IRC section 736(b)(2), the AICPA recommended that certain partnership payments not be subject to the 3.8% net investment income tax under four specified circumstances. In a recent letter to the IRS, the AICPA outlined what it considers appropriate basis for the exceptions, including level of participation by partners, nature of the business operated within the partnership, and nature of the payments received among other criteria.
UPDATE: IRS Releases Draft Net Investment Income Tax Form (August 2013)
Last week, the IRS posted a draft version of new Form 8960, which will be used to compute the 3.8% net investment income tax imposed on high-income individuals and trusts and estates starting this year. On Form 8960, taxpayers will calculate total investment income and total deductions and modifications (such as investment interest expense and state taxes) to arrive at net investment income. The form provides separate tax calculations for individuals and for trusts and estates. Now that the draft form (which is one page) has been released, taxpayers and practitioners can examine it and address areas where the IRS has requested comments by September 27. Read more from the Journal of Accountancy.
ADVOCACY: AICPA Speaks Up Against Limits on Cash Methods of Accounting (July 2013)
The AICPA voiced its objections to a proposal that would prohibit many pass-through entities, farmers and personal service corporations from using the simpler cash method of accounting. Under the Small Business Tax Reform Discussion Draft released by Ways and Means Committee Chairman Dave Camp, only individuals and certain taxpayers with average gross receipts of $10 million or less would be eligible for the cash method. In a letter to committee leaders, the AICPA urged them to consider the financial burden that the proposal would place on businesses. “The proposal would require these companies to change to the accrual method, force their owners to pay tax before they have the cash to pay it, and add to complexity and costs,” the AICPA stated.
ADVOCACY: AICPA Calls for Simplification of Education Tax Incentives (July 2013)
The AICPA recently laid out several proposals to Congress to clean up overlapping education tax credits, recommending that features of existing education tax credits be combined into one simplified tax credit. The AICPA also recommended repealing certain deductions and educational savings bonds, and then merging the Coverdell Education Savings Accounts into Section 529 accounts to simplify and harmonize education savings tools.
ADVOCACY: AICPA Recommends Changes to Medicare Surtax Proposed Regulations (June 2013)
On June 17, the AICPA submitted comments on proposed regulations under Section 1411 regarding the new 3.8% Medicare surtax on net investment income. In his letter, AICPA Tax Executive Committee Chair Jeffrey Porter notes that the IRS’s guidance on Sec. 1411 "generally provides a reasonable approach to interpreting, implementing, and complying with the new [net investment income] tax rules." However, in response to the proposed regulations, the AICPA is making 16 detailed recommendations. Read more in this Journal of Accountancy article. Proposed regulations issued on November 30, 2012 answered many questions. Review a summary of some of the most important clarifications from Bob Keebler.
ADVOCACY: AICPA Requests Clarification from IRS on Conversion of Disregarded Entities to Partnerships (June 2013)
The AICPA Partnership Taxation Technical Resource Panel recommended that the IRS issue additional guidance regarding the conversion of disregarded entities to partnerships with respect to Revenue Ruling 99-5. The issues that the AICPA requested clarification from the IRS include the treatment of liabilities upon conversion of a disregarded entity to a partnership and the treatment of non-recognition transactions that result in the conversion of a disregarded entity to a partnership.
ADVOCACY: AICPA Recommends Simpler Small Business Tax Rules to Congress (May 2013)
The AICPA made recommendations focused on simplification of the tax rules for small businesses and pass-through entities, including reforming tax return due dates and adjustments. The AICPA submitted a letter with a written statement for the May 15th House Ways and Means Committee Select Revenue Subcommittee hearing. The hearing was in response to Chairman Camp's small business tax reform discussion draft. Significant opinions by the AICPA included:
- The AICPA opposes the limitation on use of cash method of accounting imposed on non-natural persons and the elimination of exceptions for personal service corporations and farmers.
- The AICPA supports the availability of the cash method for an increasing level of gross receipts for small businesses.
The AICPA supports the proposed new due dates for Partnership, S Corporation, and C Corporation returns and the automatic 6-Month extension of corporate income tax returns.
ADVOCACY: AICPA Addresses “Challenging Tax Season” and IRS Budget with House (May 2013)
Jeffrey Porter, Chair of the AICPA Tax Executive Committee, submitted written testimony on May 6 to the House Ways and Means Committee in response to the Committee’s recent hearing on “Internal Revenue Service Operations and the 2013 Tax Return Filing Season.” It was recommended that Congress pass legislation that would permit taxpayers to report de minimis changes in their income from a corrected Form 1099 or amended Schedule K-1 in the year of receipt of the amended form. This recommendation would remedy the issue of taxpayers having to file amended returns or incur penalties due to minimal changes in income because of amended forms.
The AICPA also advocated for Congress to review funding levels of the IRS’s 2014 fiscal year budget. It was recommended that the IRS be given the resources necessary to properly process tax returns and enforce the tax laws, which is vital to maintaining a voluntary compliance tax system. The AICPA believes that the any increase in enforcement funding must be balanced with positive responses to the taxpaying public as customers, which has become difficult, as the IRS’s role has expanded from one concentrated on tax collection to one focused on distributing benefits to a variety of individuals and businesses.
ADVOCACY: AICPA Sends Tax Reform Proposals and Principles to Ways and Means (May 2013)
In April 2013, the AICPA offered numerous recommendations to congressional study groups for ways to improve tax laws for individuals, businesses and exempt organizations. This is a significant step as the 11 study groups formed by House Ways and Means Committee Chair Dave Camp will likely be critical influences on tax reform legislation. The AICPA submitted comments to the House Ways & Means Tax Reform Working Groups.
AICPA Comments on IRS's Proposed Guidance Regarding Cancellation of Debt (April 2013)
On April 1, the AICPA submitted comments to the IRS regarding proposed guidance governing how to report the cancellation of debt. The AICPA believes changes are needed to the filing requirements for Form 1099-C, Cancellation of Debt. Specifically, AICPA recommended that:
- The IRS require lenders to issue Form 1099-C only upon the legal discharge of a debt, which will occur at the earlier of the expiration of the applicable statute of limitations or when all collection efforts by the lender or surrogate collection organizations have ceased.
- The IRS amend the applicable regulations so that a Form 1099-C is issued only for the year that a debt is legally discharged, which would solve the timing problem created because the current 36-month non-payment testing period results in a Form 1099-C being issued several years after the debt is legally discharged.
- The IRS collaborate with other government agencies involved with credit card and other debts to ensure that the rules for legal discharge of debt are applied so that borrowers do not receive a Form 1099-C if the lender or 3rd party purchaser of the debt intends to continue collection efforts.
UPDATE: Penalty Relief Announced for Payments Related to Delayed Forms (March 2013)
Under Notice 2013-24, relief is available to individuals and businesses filing extensions for tax returns claiming tax benefits using forms that were not released until March by the IRS. The relief applies to the late-payment penalty, normally 0.5% per month, charged on tax payments made after the regular filing deadline. Taxpayers must still estimate their expected tax liability and pay the estimated amount by the original due date and will still be subject to interest for any tax payment made after the original deadline. This relief applies to any of the forms delayed until February or March, primarily due to the January enactment of the American Taxpayer Relief Act.
UPDATE: House Discussion Draft Proposes Tax Reform to Help Small Businesses (March 2013)
House Ways and Means Committee Chairman Dave Camp recently released a discussion draft of tax reforms to help small businesses. Part 2 of the discussion draft proposed simplification of business tax return due dates, an initiative that has been championed by the AICPA. The proposal would alleviate the problem of receiving late Schedule K-1 information, which often prevents the pass-through owners from filing accurate and timely returns. The proposal creates a logical set of due dates focused on allowing a more timely flow of information from pass-through entities to their owners.
ADVOCACY: AICPA Legislation Would Adjust Due Dates to Address K-1 Issue (February 2013)
Taxpayers and preparers have long struggled with problems created when Schedule K-1s arrive late, sometimes within days of (before or after) the extended due date of many returns and up to a month after the extended due date of business returns, including Forms 1065, 1120S, 1120, and 1041. This makes it difficult, if not impossible, to file a timely, accurate tax return. An AICPA-backed bill has been re-introduced in both houses of Congress to alleviate this problem. If enacted this year, it would take effect for tax year 2014 (2015 filing season). For more information on the legislation and proposed due dates, go to the AICPA's Due Dates webpage.
ADVOCACY: AICPA Raises Concerns About IRS Delays in Release of Tax Forms (February 2013)
In a Feb. 15 letter to the IRS, the AICPA raised concerns about the impact in the IRS’ delay in releasing certain tax form is having on taxpayers and CPAs. These form delays are causing taxpayers and tax preparers to face a very compressed and difficult filing season.
The letter states that while the AICPA is pleased with the recent release of Form 4562 (Depreciation and Amortization) and Form 8863 (Education Credits), the Institute remains concerned about the continuing delay in the release of 29 other forms. The AICPA requested a dialogue with the IRS to gain more clarity on IRS’ plans to release the remaining forms, and provide taxpayers with potential reasonable cause relief from failure to file, failure to pay, and estimated tax penalties.
ADVOCACY: AICPA Proposes Tax Code Cleanup (February 2013)
While many major tax policies continue to be debated in Washington, the AICPA believes many technical issues can be resolved with less controversy, making practitioners and taxpayers' lives easier. The AICPA recently submitted our Compendium of Legislative Proposals on provisions in the Internal Revenue Code that need attention. The Compendium covers a broad range of problems that continue to vex preparers and taxpayers such as overlapping education tax incentives and varying mileage rates and proposes solutions that help simply tax administration.
UPDATE: Tax Season News (February 2013)
Catch up on the latest news from the IRS affecting your clients this tax season, including:
- Revised Form 8949 for 2012 Now Available
- IRS releases changes to 5471 and 8621 Form Instructions
- More Hurricane Sandy Filing Extensions and a Funding Package from Congress
- IRS Issues Form 8958, Allocation of Tax Amounts Between Registered Domestic Partners and Same Sex Spouses in Community Property States
- New IRS Audit Guide on Family Limited Partnerships
- IRS To Start Processing Form 8863, Education Credits on February 14th
UPDATE: IRS Postpones Effective Date of New Procedures for Consents to Disclose (February 2013)
Rev. Proc. 2013-19, issued Feb. 6, delays the date that taxpayer consents to disclose and consents to use tax return information must contain the mandatory language recently issued in Rev. Proc. 2013-14. The original effective date of Jan. 14, 2013, has been moved back to Jan. 1, 2014. Read more from Journal of Accountancy.
ADVOCACY: IRS Reopens PTIN Registration System (February 2013)
On February 2, the IRS reopened its PTIN registration system, following an AICPA letter urging the IRS to address the issue and clarification from the district court that struck down the IRS’ return preparer registration program. The court refused the IRS’ request to suspend its injunction on the program, but it did clarify that the injunction does not affect the IRS's requirement that preparers use a preparer tax identification number. Read more from Journal of Accountancy.
UPDATE: New Section 7216 Guidance (Jan. 2013)
As accounting firms continue preparations for the 2013 tax filing season, CPAs should closely review the final regulations and new revenue procedure recently released by the IRS under IRC Section 7216. This Code section involves the disclosure or use of tax return information by a tax return preparer. Some aspects to be aware of include:
- Accounting Services. The preamble to the final regulations (TD 9608) suggests that the solicitation of a current tax client about new accounting services (including payroll return preparation) may necessitate obtaining the written consent of the client.
- Rev. Proc. 2013-14 provides revised language that tax return preparers must include in written consent forms provided to clients regarding disclosures or use of tax return information.
- Electronic Signatures. Rev. Proc. section 6 addresses the procedures for taxpayers furnishing the tax return preparer with an electronic signature verifying that the taxpayer consented to the disclosure or use of the tax return information.
- Consent Form Language. Rev. Proc. section 7 provides examples of the modified language for consent forms to be provided to clients filing returns in the Form 1040 series.
- Effective Date. Consents obtained on or after January 1 must contain the modified consent form language highlighted in the Rev. Proc.
UPDATE: U.S. District Court Strikes Down IRS Preparer Regulation Program (Jan. 2013)
On January 18, the United States District Court struck down the IRS registered tax return preparer program and enjoined it from enforcing the regulations (Loving, No. 12-385 (D.D.C. 1/18/13)). The IRS immediately issued a statement saying they "have confidence in the scope of its authority to administer the program." Indeed, on January 23, the IRS filed a motion to suspend the District Court’s injunction pending appeal which the Service intends to file within 30 days.
Simply stated, the District Court indicated in its ruling that Congress never contemplated that the 1884 law that created rules for practice before Treasury, Circular 230, would define “practice” to cover tax return preparation. However, the pre-existing Circular 230 rules, beyond the new tax return preparation rules, continue to apply to CPAs, attorneys, & Enrolled Agents.
Because the Court’s injunction was effective immediately, the IRS closed down the PTIN registration system. The unavailability of the PTIN system creates an administrative challenge for CPAs who may still need to renew their PTIN or obtain one for the first time – actions still required by the Internal Revenue Code. The AICPA has contacted IRS and they are aware of this issue and are working to resolve it. The AICPA continues to monitor the situation and interact with the IRS, and will keep you informed of any developments.
UPDATE: American Tax Relief Act Signed by President Obama (January 2013)
Pulling back from the “fiscal cliff” at the 13th hour, Congress preserved most of the George W. Bush-era tax cuts and extended many other lapsed tax provisions. Shortly before 2 a.m. Tuesday, January 1, the Senate passed the American Taxpayer Relief Act (ATRA), H.R. 8. The House of Representatives approved the bill by a vote of 257–167 late on Tuesday evening, after plans to amend the bill to include spending cuts were abandoned. The bill was signed by President Obama on Wednesday, January 2. Notable items for financial planners include:
- All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).
- The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.
- A 20% rate applies to capital gains and qualified dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.
- The exemption amount for the AMT on individuals is permanently indexed for inflation. Relief from AMT for nonrefundable credits is retained.
- The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.
- If an employer offers a designated Roth 401(k) plan, ATRA will now allow individuals to convert their existing 401(k) to a Roth 401(k) whether or not the individual is allowed to take a distribution from the plan
Read more details from the Journal of Accountancy and Michael Kitces. Personalize and send the following Forefield Alert on the legislation to your clients.
UPDATE: Section 7216 Final Regulations Issued (December2012)
The Internal Revenue Service issued final regulations on Wednesday on the circumstances in which tax return preparers can use or disclose taxpayer information. The regulations adopt rules issued in 2010 as temporary regulations, and they cover what lists practitioners may compile to solicit return preparation business, transfers of such lists in the sale of a practice, statistical compilations of taxpayer information, and conflict-of-interest reviews. Source: JournalofAccountancy.com
Also, in Rev. Proc. 2013-14, the IRS has provided guidance to tax return preparers about the format and content of taxpayer consents to disclose and consents to use tax return information and modified the mandatory language required on each taxpayer consent. The guidance applies to individuals filing a return in the Form 1040 series. The revenue procedure also lists specific requirements for electronic signatures when a taxpayer executes an electronic consent to the disclosure or consent to the use of the taxpayer’s tax return information.
UPDATE: Updated ITIN Guidance (November 2012)
On November 29, 2012, the IRS issued updated ITIN guidance that incorporates most of the interim guidelines announced earlier in the year and makes them permanent. Most significantly, the individual taxpayer identification number (ITIN) applications submitted directly by individuals will continue to require original documentation (e.g., passports, driver’s licenses, national ID cards) or certified copies. On the other hand, certified acceptance agents (CAAs) will be able to certify the authenticity of the documents for adults – a positive change that was strongly advocated by the AICPA.
This change means the applicant will not need to mail original documents to the IRS as required under the interim procedures. However, for the rules for dependents of ITIN holders will continue to require original documents or copies. Finally, new ITINs will be issued for a five-year period rather than an indefinite period. The updated procedures take effect January 1, 2013.
ADVOCACY: AICPA Comments on Proposed Revisions Circular 230 (November 2012)
Proposed regulations were released in September 2012 to eliminate the old section 10.35 covered opinion standards. AICPA submitted comments on the proposed revisions on November 29, 2012. The AICPA supports the proposed regulations and is particularly grateful for the simplification provided through the elimination of Section 10.35. If issued in final form in 2013, these changes will have a significant impact on CPAs and other tax professionals. Some of the major provisions under the proposed regulations include:
- Written Advice: The proposed amendment eliminates the complicated and costly “covered opinion” rules in current Circular 230 §10.35, and expands the written advice requirements of §10.37. Proposed §10.37 would establish one standard for all written tax advice by providing that practitioners must: (1) base all written advice on reasonable factual and legal assumptions; (2) exercise reasonable reliance; and (3) consider all relevant facts the practitioner knows or should know.
- Disclaimers: The disclaimers in email and other writings are eliminated under the proposed amendments. The overuse of these disclaimers has resulted in clients ignoring the disclaimer outright.
- General Standard of Competence: The revised §10.35 establishes a general standard that a practitioner must exercise competence when engaged in practice before the IRS. Proposed §10.35 defines competent practice to include the knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged.
UPDATE: IRS Proposes Detailed Regs on Medicare Surtax, Including Immediate CRT Planning Opportunity (November 2012)
On Nov. 30, the IRS and Treasury issued proposed regulations regarding the new 3.8% Medicare surtax on net investment income (“Medicare surtax”), as well as proposed regulations on the additional 0.9% Medicare tax. The IRS also issued FAQs on the 3.8% Medicare surtax proposed regs and posted Q&As to provide employers and payroll service providers information that will help them as they prepare to implement the additional 0.9% Medicare tax.
The proposed regulations on the 3.8% Medicare surtax (REG-130507-11) provide much anticipated guidance under new IRC section 1411, as added by the Health Care and Education Reconciliation Act of 2010. Section 1411 imposes a 3.8% tax on some net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts (MFJ $250,000, S/HOH $200,000, MFS $125,000, estates and trusts $11,650). The Medicare surtax will start to apply in 2013 (i.e., tax years beginning after Dec. 31, 2012). However, the regs generally are proposed to be effective for 2014 and future tax years (i.e., tax years beginning after Dec. 31, 2013). The special computational rules for charitable remainder trusts (CRTs) are proposed to apply to 2013 and future tax years (i.e., tax years beginning after Dec. 31, 2012). Taxpayers may rely on the proposed regs for purposes of complying with section 1411 until the effective date of the final regs. Treasury and the IRS intend to finalize regs under section 1411 in 2013.
One aspect of the new proposed regulations concerns the application of the Medicare surtax to charitable remainder trust distributions and creates an immediate planning opportunity to consider before 2013. According to the new proposed regulations, while CRTs are exempt from the new 3.8% Medicare surtax, distributions of post-Dec. 31, 2012 net investment income of CRTs will be subject to the 3.8% Medicare surtax. Therefore, CRT distributions of income and capital gains realized and recognized before Dec. 31, 2012 will not be subject to the surtax, but CRT distributions of income and capital gains realized and recognized after 2012 will be subject to the surtax. Accordingly, selling appreciated CRT assets in calendar year 2012 may reduce the amount of the Medicare surtax on future CRT distributions. Likewise, deferring the sale of CRT loss assets and the payment of expenses until 2013 may also reduce the tax burden on future CRT distributions. Special thanks to Bob Keebler for immediately pointing out this planning tip.
For more information on the proposed regulations, see the AICPA proposed regs CRT impact summary page and read articles on the 3.8% Medicare surtax and 0.9% additional Medicare tax proposed regs from the Journal of Accountancy. Also, for more resources and tools on the Medicare surtax, see the Proactive Planning in Preparation for 2013 Toolkit. The AICPA Tax Division will be developing comments on the proposed regulations, which are due by March 5, 2013.
ADVOCACY: AICPA Submits Comments to IRS on Proposed Regulations Regarding Shareholder Debt of S Corporations (November 2012)
On Nov. 13, the AICPA submitted a letter to the IRS supporting the IRS’s proposed regulation to clarify the proper treatment of shareholder debt of S corporations. The AICPA also suggested that IRS include in the regulation an example it provided to help tax preparers better understand basis for S corporation shareholders. AICPA Tax Executive Committee Chairman Jeffrey A. Porter, CPA, wrote, “The proposed regulations will, when final, substantially reduce the uncertainty clouding the proper treatment of shareholder debt under section 1366 of the Internal Revenue Code. We appreciate and applaud the Service for adding more clarity and fairness in tax administration.” In an effort to provide further clarity, the AICPA recommended and offered specific language for inclusion in any final regulations regarding the issue of bona fide indebtedness.
ADVOCACY: AICPA Suggests Improvements to the Partnership De Minimis Section 704(b) Proposed Regulation (November 2012)
On Nov. 2, the AICPA submitted comments on the proposed regulations (REG-109564-10) that withdraws the de minimis exception of Treas. Reg. § 1.704-1(b)(2)(iii)(e) (the “De Minimis Exception”) regarding a partner’s distributive share. The proposed regulation was withdrawn because the rule may have resulted in unintended tax consequences. The AICPA comments address the withdrawal of the De Minimis Exception and suggest an alternative that will reduce the burden of complying with the substantial economic effect rules without diminishing the safeguards that the current rules provide. The AICPA believes that partnerships that pose little to no risk to the underlying policies of section 704(b) should be excluded from the complicated substantial economic effect rules.
ADVOCACY: AICPA Letter on Pro Rata Distributions and the Creation of a Second Class of Stock for S Corps (October 2012)
In an Oct. 23