Capital Tax Update

August 26, 2016

Tax changes are happening all the time in Washington, even in August – below is a roundup of recent developments related to ITINs, partnerships, and reporting requirements for taxpayers who live abroad.    

New ITIN Guidance May Require Action by Clients
New rules issued by the IRS will mean, among other things, that ITINs that have not been used on a federal tax return at least once in the last three years will no longer be valid for use on a tax return unless renewed by the taxpayer. The AICPA Tax Division is reviewing the new guidance to determine its impact on taxpayers and tax administration, and will likely be offering comments.

Here and on the Horizon – Partnership Items
The ink has just dried on the new federal law governing partnership audits (with welcome changes, but still a doozy, so the AICPA is drafting suggestions to the IRS regarding needed guidance), and it will soon be time to look ahead to see what may change in the states. The AICPA anticipates that states may start to consider this issue in their next legislative session and will be monitoring the states’ activity closely in conjunction with state societies.  Also, the IRS announced that taxpayers can elect to have the newly enacted procedures apply to certain tax years beginning before Jan. 1, 2018. (See Journal of Accountancy article.)

And speaking of partnerships, the AICPA is questioning whether proposed section 385 regulations that would recharacterize certain debt instruments as equity can legally apply to partnerships, as they do now. In a letter to the IRS, AICPA Tax Executive Committee Chair Troy Lewis commented that the language in section 385 “relates directly to Treasury’s authority to prescribe regulations to determine whether an interest in a corporation is considered debt or equity for federal income tax purposes.” Partnerships are not mentioned, he added.

Simpler Reporting Rules Proposed for Americans Abroad
It’s time to simplify the tax compliance process for Americans residing abroad, the AICPA told the IRS and Treasury. Americans abroad generally maintain assets such as a local checking account that currently must be reported under foreign asset reporting laws such as FBAR. The requested relief would eliminate this requirement but apply only to foreign accounts established in the taxpayer’s country of residence.

“We believe it is unfair to subject these taxpayers to a complicated, time-consuming, and potentially expensive reporting requirement for information available to the IRS from alternative sources,” the AICPA observed in a letter to regulators. To back up its statement, the AICPA noted the official estimated time to fill out Form 3520 exceeds 54 hours, and that while the official estimated time to fill out FinCEN Form 114 is 20 minutes, the actual time is one to two hours, according to members.