Newsletters
The IRS has reminded taxpayers to report digital asset income on 2023 federal tax returns, with an updated question now on Forms 1040, Individual Income Tax Return; 1040-SR, U.S. Tax Return...
For purposes of the new clean vehicle credit and the used clean vehicle credit, the IRS has extended the deadlines for submitting seller reports for vehicles placed in service in 2023 and ea...
For purposes of the low-income housing credit, the IRS concluded that additional housing credit dollar amounts (HCDAs) for 2021 and 2022 that are returned to a state housing agency may be realloca...
The IRS has underscored the vital importance of selecting a tax professional carefully to safeguard personal and financial information. Taxpayers bear legal responsibility for their income tax...
The Financial Crimes Enforcement Network (FinCEN) issued guidance on inflation adjustments to its civil monetary penalties as mandated by the Federal Civil Penalties Inflation Adjustment...
Subcomponents of a taxpayer's project may qualify as pilot models for research expense deduction purposes under California corporate tax law. Responding to the taxpayer's request for a ruling, the Chi...
For Connecticut property tax purposes, the Supreme Court upheld property tax assessments on two motor vehicles owned by the taxpayer because the motor vehicle property tax authorized by § 12-71 (f) i...
The Georgia Department of Revenue has released a local sales and use tax rate chart for the quarter beginning April 1, 2024. Georgia Sales and Use Tax Rate Chart, Georgia Department of Revenue, March ...
The New Jersey petroleum products gross receipt tax rates on the following remain as indicated for the period April 1 through June 30, 2024:gasoline and LPG—31.8 cents per gallon;diesel—35.8 cents...
For New York personal income tax purposes, a taxpayer’s petition challenging a notice of disallowance (notice) of a 2021 School Tax Relief (STAR) credit was dismissed because the petition was not fi...
Following what was described as a successful launch of beneficial ownership information reporting requirements, officials from the Department of the Treasury found themselves before the House Financial Services Committee defending the regulations.
Following what was described as a successful launch of beneficial ownership information reporting requirements, officials from the Department of the Treasury found themselves before the House Financial Services Committee defending the regulations.
"The beneficial ownership registry successfully launched on January 1 this year," Andrea Gacki, director of the Financial Crimes Enforcement Network, said during a February 14 oversight hearing of the committee. "In the first week alone, more than 100,000 companies successfully filed their beneficial ownership information. And I am pleased to report that today, so far, FinCEN has received more than half a million reports successfully filed."
Brian Nelson, Treasury undersecretary for Terrorism and Financial Intelligence, told the committee that there are 32 million companies that are expected to file a BOI report.
Gacki continued: "The now ongoing better collection of beneficial ownership information, paired with the forthcoming phased provision of access to the database by law enforcement and other authorized users will close what is long been identified as a gap in the United States anti-money laundering and countering the financing of terrorism regime."
Gacki and Nelson were put on the defensive during the hearing as committee members challenged them on the effect of the reporting requirements on small businesses.
She noted that FinCEN took steps to make sure the filing system is "workable for small businesses," including making it simple with the ability to complete in 20 minutes without the need to seek professional help that could end up costing a small business more money.
Nelson also emphasized that Treasury is using all available tools to spread the word of the filing requirements and offer guides on how to file.
"We recognize that a number of these small businesses have never heard of FinCEN, so there’s a big educational campaign," he said, adding that the agency is working on a solution for those unable to file BOI electronically, such as businesses in Amish communities.
Gacki also stressed that if there are issues related to filing, FinCEN is not looking to take action against those who are simply having trouble filing their BOI report.
"I want to stress that, when it comes to enforcement, the statute is clear," she said. "We can only take enforcement action for willful violations. We are not out to take ‘gotcha’ enforcement actions. We want to educate about the requirement."
AICPA Calls For Suspension Of BOI Reporting Requirement
Despite the efforts FinCEN and the broader Treasury department are making to educate the public on the BOI reporting requirements, the American Institute of CPAs is calling for the suspension of BOI reporting requirements.
In a February 13, 2024, letter to the leadership of the House Financial Services Committee and the Senate Banking Committee, AICPA stated the BOI reporting rule "should be suspended until the small business community is considered well-informed of their requirement to report BOI information to FinCEN and the outstanding questions by the financial professionals who serve this community have been answered."
AICPA stated that small businesses "should have a reasonable chance at compliance" in addition to a timeframe to gain awareness of the requirements. "To comply and provide the information necessary, small businesses need additional time to work through these and other questions that have not been answered in the six weeks this rule has been in effect. We urge you to suspend the rule and give small entities the time necessary to work through this requirement so we can best support the small business community."
By Gregory Twachtman, Washington News Editor
The IRS has issued a warning to small businesses regarding potential issues with Employee Retention Credit (ERC) claims as the March 22, 2024 deadline for the ERC Voluntary Disclosure Program approaches. Seven suspicious warning signs have been identified based on feedback from tax professionals and compliance personnel. These signs may indicate erroneous claims and could lead to IRS scrutiny.
The IRS has issued a warning to small businesses regarding potential issues with Employee Retention Credit (ERC) claims as the March 22, 2024 deadline for the ERC Voluntary Disclosure Program approaches. Seven suspicious warning signs have been identified based on feedback from tax professionals and compliance personnel. These signs may indicate erroneous claims and could lead to IRS scrutiny. The ERC Voluntary Disclosure Program allows businesses to rectify incorrect claims by repaying just 80% of the amount claimed. Taxpayers who realize their claims are ineligible are urged to quickly pursue the claim withdrawal process.
The IRS has highlighted seven suspicious signs indicating potential inaccuracies in ERC claims. These include:
- Too many quarters being claimed: Employers should ensure they meet eligibilitycriteria for each quarter claimed.
- Government orders that dont qualify: Employers should have clear documentation demonstrating how and when government orders related to COVID-19 impacted their operations.The frequently asked questions about ERC – Qualifying Government Orders section of IRS.gov has helpful examples. Also, employers should avoid a promoter that supplies a generic narrative about a government order.
- Too many employees and wrong calculations : Employers should accurately calculate the credit based on changes in the law and avoid overclaiming. For details about credit amounts, see the Employee Retention Credit - 2020 vs 2021 Comparison Chart.
- Business citing supply chain issues :Employers should carefully review the rules on supply chain issues and examples in the 2023 legal memo on supply chain disruptions.
- Business claiming ERC for too much of a tax period: Businesses should check their claim for overstated qualifying wages and should keep payroll records that support their claim.
- Business didn’t pay wages or didn’t exist during eligibility period: Employers can only claim ERC for tax periods when they paid wages to employees.
- Promoter says there’s nothing to lose: Businesses should be on high alert with any ERC promoter who urged them to claim ERC because they have nothing to lose.
The Employee Retention Credit (ERC) is available to eligible employers who paid qualified wages to some or all employees between March 12, 2020, and January 1, 2022. Eligibility varies based on the time period:
- For 2020 and the first two quarters of 2021: Eligibility is based on trade or business operations being fully or partially suspended due to a COVID-19-related government order or experiencing a decline in gross receipts.
- For the third quarter of 2021: Eligibility includes suspension of trade or business operations, a decline in gross receipts, or being classified as a recovery startup business.
- For the fourth quarter of 2021: Only recovery startup businesses are eligible.
The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2024 and the lease inclusion amounts for business vehicles first leased in 2024.
The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2024 and the lease inclusion amounts for business vehicles first leased in 2024.
Luxury Passenger Car Depreciation Caps
The luxury car depreciation caps for a passenger car placed in service in 2024 limit annual depreciation deductions to:
- $12,400 for the first year without bonus depreciation
- $20,400 for the first year with bonus depreciation
- $19,800 for the second year
- $11,900 for the third year
- $7,160 for the fourth through sixth year
Depreciation Caps for SUVs, Trucks and Vans
The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2024 are:
- $12,400 for the first year without bonus depreciation
- $20,400 for the first year with bonus depreciation
- $19,800 for the second year
- $11,900 for the third year
- $7,160 for the fourth through sixth year
Excess Depreciation on Luxury Vehicles
If depreciation exceeds the annual cap, the excess depreciation is deducted beginning in the year after the vehicle’s regular depreciation period ends.
The annual cap for this excess depreciation is:
- $7,160 for passenger cars and
- $7,160 for SUVS, trucks, and vans.
Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans
If a vehicle is first leased in 2024, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:
- $62,000 for a passenger car, or
- $64,000 for an SUV, truck or van.
The 2024 lease inclusion tables provide the lease inclusion amounts for each year of the lease.
The lease inclusion amount results in a permanent reduction in the taxpayer’s deduction for the lease payments.
Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts
The depreciation caps and lease inclusion amounts do not apply to:
- cars with an unloaded gross vehicle weight of more than 6,000 pounds; or
- SUVs, trucks and vans with a gross vehicle weight rating (GVWR) of more than 6,000 pounds.
So taxpayers who want to avoid these limits should "think big."
The Internal Revenue Service has reviewed, redesigned and deployed 31 notices for the 2024 tax filing season in an effort to simplify the notices and improve their clarity.
This is a part of a broader effort to simplify up to 90 percent of the notices the agency sends out to taxpayers on an annual basis.
The Internal Revenue Service has reviewed, redesigned and deployed 31 notices for the 2024 tax filing season in an effort to simplify the notices and improve their clarity.
This is a part of a broader effort to simplify up to 90 percent of the notices the agency sends out to taxpayers on an annual basis.
Included in the first wave of redesigned notices are notices to taxpayers who served in combat that may be eligible for tax deferment, notices that remind a taxpayer that they may have an unfiled return, and notices that remind a taxpayer about their balance due and where they can go for assistance.
"The IRS has a large number of these letters as well as other standard correspondence,"IRS Commissioner Daniel Werfel said during a January 23, 2024, teleconference with reporters."And as we’ve heard from tax professionals as well as taxpayers, these notices can be confusing. They cover complex topics. They can include a lot of legal language, and with our current systems and machines, the letters can be a mishmash of looks that do not always have a consistent familiar look you might get from a credit card company or a bank."
Werfel said that these issues made it clear the agency management that they need to redesign the notices to utilize clearer, plain language that a taxpayer can act upon without potentially needing to consult with a tax professional to help understand the information being sent and potentially requested. About 20 million of these 31 notices were sent to taxpayers in calendar year 2022, he said.
He highlighted the potential that the redesigned notices will have by discussing the pilot program that redesigned Notice 5071C, which asks questions about possible identity theft. The IRS made the language clearer and included a QR code to direct taxpayers to the appropriate web page to allow them to respond to the notice.
"In all, 60,000 taxpayers received this pilot letter compared to taxpayers who received the original letter,"Werfel said."There was a 16 percent reduction in taxpayers who called the IRS as their first action and a 6 percent increase in taxpayers who used the online option. The IRS will apply the lessons learned from this pilot to a larger redesign initiative."
By the 2025 tax filing season, Werfel said the IRS is hoping to have redesigned up to 200 notices, which make up about 90 percent of the notices sent out to individual taxpayers in 2022.
By Gregory Twachtman, Washington News Editor
The IRS, with its Criminal Investigation (CI) arm, has urged businesses to review eligibility for the Employee Retention Credit (ERC). To combat fraud, they intensified compliance efforts related to this pandemic-era credit. Businesses wrongly claiming the ERC are advised to consider applying for the Voluntary Disclosure Program before the March 22 deadline. A special withdrawal program is also available for those with eligibility concerns on pending claims.
The IRS, with its Criminal Investigation (CI) arm, has urged businesses to review eligibility for the Employee Retention Credit (ERC). To combat fraud, they intensified compliance efforts related to this pandemic-era credit. Businesses wrongly claiming the ERC are advised to consider applying for the Voluntary Disclosure Program before the March 22 deadline. A special withdrawal program is also available for those with eligibility concerns on pending claims. Both programs aimed to help employers to avoid penalties and interest on incorrect claims. CI special agents plan to conduct nationwide educational sessions in February for tax professionals, focusing on the ERC. These sessions, part of a broader initiative, will be held in at least 23 U.S. states and the District of Columbia. The IRS has implemented several initiatives to address inappropriate claims by businesses. Some key points are listed below.
ERC Voluntary Disclosure Program (Open until March 22, 2024):
- businesses with erroneous claims and received payments can participate;and
- the program runs until March 22, 2024.
Withdrawal Program for Pending ERC Claims:
- the IRS continues to accept and process requests to withdraw an employer's full ERC claim under a special withdrawal process.
ERC Eligibility Information:
- special information is available to help businesses understand Employee Retention Tax Credit guidelines; and
- resources include ERC FAQs and the ERC Eligibility Checklist, offered as an interactive toolor a printable guide.
Increased IRS Compliance Activity:
- letters notifying taxpayers of disallowed ERC claims have been sent;
- letters related to claiming an erroneous or excessive credit are planned; and
- ongoing compliance efforts include Audits, Civil Investigations, and Criminal Investigations.
The Financial Crimes Enforcement Network (FinCEN) has published a Small Entity Compliance Guide (Guide) to provide an overview of the Beneficial Ownership Information Access and Safeguards Rule (Access Rule) requirements for small entities that obtain beneficial ownership information (BOI) from FinCEN.
The Financial Crimes Enforcement Network (FinCEN) has published a Small Entity Compliance Guide (Guide) to provide an overview of the Beneficial Ownership Information Access and Safeguards Rule (Access Rule) requirements for small entities that obtain beneficial ownership information (BOI) from FinCEN. Under the Access Rule, issued in December 2023, BOI reported to FinCEN is confidential, must be protected and may be disclosed only to certain authorized federal agencies; state, local, tribal and foreign governments; and financial institutions. The guide includes sections summarizing the Access Rule’s requirements that pertain to small financial institutions’ access to BOI.
Further, FinCEN intends to provide access to certain categories of financial institutions with obligations under the current Customer Due Diligence (CDD) Rule. Therefore, this Guide includes sections summarizing the Access Rule’s requirements that pertain to these small financial institutions only
The Department of the Treasury and the Internal Revenue Service have released new analysis that shows the additional funding provided to the IRS under the Inflation Reduction Act can increase revenues by"as much as" $561 billion.
The Department of the Treasury and the Internal Revenue Service have released new analysis that shows the additional funding provided to the IRS under the Inflation Reduction Act can increase revenues by"as much as" $561 billion.
"This analysis provides a more comprehensive assessment of the revenue effects of the transformational enforcement and modernization efforts enabled by the IRA" Greg Leiserson, Treasury deputy assistant secretary for tax analysis, said February 6, 2024, during a press teleconference."The IRS estimates that the IRA, as enacted, would increase revenue by as much as $561billion through fiscal year 2034, substantially more than earlier estimates. If IRA funding is renewed with it runs out, as the administration has proposed, estimated revenue would be as much as $851 billion."
A previous estimate had the IRA generating an additional $390 billion over the next 10 years based primarily on enforcement hires as the key revenue driver and assuming a diminished return over time.
Leiserson noted that previous estimates"were limited to revenues generated by direct enforcement activities resulting from higher enforcement staffing. This narrow focus does not consider the significant impact of the technology, data, and service improvements made possible by the IRA or any deterrent effect the greater enforcement capabilities and activities would have in order to better assess the revenue raised by this transformation."
The new analysis is broken down into five categories:
- Direct Revenue: payments received related to enforcement actions
- Revenue Protected: stopping illegitimate refund claims before the refund is issued
- Impact of Service on Compliance: making it easier for taxpayers to pay what they owe
- Compliance Assurance: increasing transparency and tax certainty for complex tax situations
- Efficiency Gains: including from IT investments and improvements to data analytics
The IRS has traditionally made estimates in the first two categories listed.
IRS Chief Data and Analytics Officer Melanie Krause during the call highlighted that in addition to the heightened compliance and enforcement efforts going on against the wealthy individuals that may not be paying taxes they legitimately owe, the improvements to things such as customer service and to improving access to Taxpayer Assistance Centers also helps.
"For example, whether we have the resources to serve taxpayers by being available to answer the phone" when they have question is important for voluntary compliance, she said, adding that the same is true for when people use TACs.
She noted that the analysis being published"is a pioneering step forward for developing a more exhaustive and accurate estimates of the return on investment for IRS funding, which will enrich our understanding of how these investments yield tangible outcomes,"she said.
Taking into consideration everything and not just enforcement gains "illustrate the bottom-line importance of investing in our nation’s tax system really can’t be overstated," Krause said."And the resulting changes will ripple out and create benefits for taxpayers and the nation in many ways."
By Gregory Twachtman, Washington News Editor
The American Institute of CPAs offered a series of guidance recommendations to the Department of the Treasury and the Internal Revenue Service to help provide clarity on a notice issued by the IRS on changes to the regulation for Roth IRA catch-up contributions made by SECURE 2.0.
The American Institute of CPAs offered a series of guidance recommendations to the Department of the Treasury and the Internal Revenue Service to help provide clarity on a notice issued by the IRS on changes to the regulation for Roth IRA catch-up contributions made by SECURE 2.0.
In a January 17, 2024, letter to the agencies, AICPA recommend that guidance be issued across areas.
First, the organization recommended that Treasury and the IRS "ssue guidance stated that federal income tax withholding with respect to a participant’s mandatory Roth IRAcatch-up contribution is not required before February 1 of the year in which the amount is contributed," the letter stated.
Second, AICPA called for guidance "allowing an elective deferral which is treated as a Roth catch-up contribution due to being recharacterized based on the failure of the ADP [actual deferral percentage] test, to be taxable to the participant in the year of recharacterization."
Third, it was recommended that future guidance issued in relation to Section V.3 of the Notice 2023-62"clarifies that for purposes of determining if an employee’s participating wages exceeds $145,000 (as adjusted0, only wages from the employee’s specific common law employer in the previous year are included, and only if it is a participating employer in the plan."
Finally, AICPA recommends the agencies "issueguidance stating that an individual who had deferrals characterized as Roth contributions as a result of not contributing deferrals equal to the regular limit be permitted to have them designated as regular deferrals."
The organization characterized these guidance recommendations as helping to bring more simplicity to the tax system.
"Due to the mandate in SECURE 2.0 requiring certain catch-up contributions be made on a Roth IRA basis, the IRS issued notice 2023-62 to help implement the provision," Kristin Esposito, AICPA director of tax policy and advocacy, said in a statement. "AICPA want to highlight certain administrability issues noticed in the guidance that we believe will make for a smoother transition."
By Gregory Twachtman, Washington News Editor
As part of the ongoing efforts to improve tax compliance in high income categories, the IRS will begin dozens of audits on business aircraft involving personal use.
As part of the ongoing efforts to improve tax compliance in high income categories, the IRS will begin dozens of audits on business aircraft involving personal use. The audits will be focused on large corporations, large partnerships and other high income taxpayers, and will scrutinize whether the use of jets is being properly allocated between business and personal reasons. "During tax season, millions of people are doing the right thing by filing and paying their taxes, and they should have confidence that everyone is also following the law," said IRS Commissioner Danny Werfel, "These aircraftaudits will help ensure high-income groups aren’t flying under the radar with their tax responsibilities."
These audits of corporate jet usage is part of the IRS Large Business and International division’s "campaign" program and includes issue-focused examinations, taxpayer outreach and education, tax form changes and focusing on particular issues that present a high risk of noncompliance. "The IRS continues to increase scrutiny on high-income taxpayers as we work to reverse the historic low audit rates and limited focus that the wealthiest individuals and organizations faced in the years that predated the Inflation Reduction Act," Werfel said. In addition to the work on corporate jets,the IRS has a variety of efforts underway to improve tax compliance in complex, overlooked high-dollar areas where the agency did not have adequate resources prior to Inflation Reduction Act funding.
On June 28, the U.S. Supreme Court issued its long-awaited landmark decision on the Patient Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation Act (HCERA). In a 5 to 4 decision of historic proportions, the nation's highest court upheld the law – except for a certain Medicaid provision involving state funding. Key to the Court's approval of President Obama's signature health care law was the finding that the linchpin individual mandate was constitutional. The requirement under the individual mandate that individuals pay a penalty if they fail to carry minimum essential health insurance coverage was declared within the Constitution based upon Congress's power to tax.
The Supreme Court's decision preserves all of the far-reaching tax provisions and health insurance reforms that were part of the overall health care reform legislation as passed in 2010. In coming months, lawmakers and legal scholars will examine all of the nuances of the Court's highly complex decision. More immediately, individuals and businesses are concerned about what steps they need to take next.
Role of taxes
To a large extent, the Obama administration's health care law is driven by tax provisions, to provide the carrot, the stick and adequate funding in alternating quantities. The role played by taxes in the new health care provisions is also underscored by the predominate part that the IRS will play in its administration.
Under the health care law, a number of tax provisions are scheduled to take effect in 2013 and beyond. The court's decision allows the numerous tax provisions within the health care laws to move forward on schedule. Some important provisions have already taken effect; others will take effect in 2013 and 2014. One provision, the excise tax on high-cost employer-sponsored coverage, will not take effect until 2018.
Main provisions/effective dates
PPACA and HCERA include the following tax provisions (not a complete list):
- Small employer Sec. 45R credit, effective for tax years beginning in 2010 – the government will provide a credit of 35 percent of health insurance premiums to small employers (25 percent for tax-exempt organizations. The credit expires after 2015.
- Economic substance doctrine, effective after March 30, 2010 – the economic substance test was codified as a two-prong test, requiring that the transaction change the taxpayer's economic position in a meaningful way, and that the taxpayer has a substantial business purpose for the transaction.
- Over-the-counter limitations for health accounts, effective for tax years beginning after December 31, 2010 – health accounts, such as flexible spending arrangements, health reimbursement arrangements, health savings accounts, and Archer Medical Savings Accounts, can only reimburse expenses for medicine and drugs if the item is a prescription drug (or insulin).
- Indoor tanning services excise tax, effective on or after July 1, 2010 – amounts paid for indoor tanning services are subject to a 10-percent excise tax. Tanning salons must collect the tax and pay it quarterly.
- Itemized deduction for medical expenses, effective for tax years beginning after December 31, 2012 – the threshold for deducting medical expenses as an itemized deduction is raised from 7.5 percent to 10 percent of adjusted gross income.
- Additional 0.9% Medicare tax, effective after December 31, 2012 – an additional 0.9 percent Medicare tax is imposed on wages and self-employment income of higher-income individuals: individuals – above $200,000; married filing jointly – above $250,000; married filing separately – above $125,000.
- 3.8% Medicare contribution tax, effective after December 31, 2012 – a 3.8 percent Medicare tax is imposed on unearned income for higher-income individuals, including interest, dividends, annuities, royalties, rents and other passive income.
- Medical device excise tax, effective for sales after December 31, 2012 – a 2.3 percent excise tax is imposed on sales of certain medical devices by manufacturers, producers and importers. Retail items such as eyeglasses are excluded from the tax.
- Employer shared responsibility, effective after December 31, 2013 – the "employer mandate": an applicable large employer (50 or more full-time employees) must make a payment if any full-time employee can receive the premium tax credit. The payment is required if the employer does not offer minimum essential coverage, or offers coverage that is not affordable.
- Branded prescription drug fees, effective for calendar years beginning after December 31, 2010 – an annual fee imposed on manufacturers and importers with receipts from branded prescription drug sales.
- Sec. 36B premium assistance credit, effective for tax years ending after December 31, 2013 – lower-income individuals who obtain health insurance coverage through an insurance exchange may qualify for the credit, unless they are eligible for other minimum essential coverage.
- Excise tax on high-dollar insurance, effective for tax years beginning after December 31, 2017 – employer-sponsored health coverage whose cost exceeds a threshold amount ($10,200 for self-on coverage; $27,500 for other coverage) will be subject to a 40-percent excise tax.
Looking ahead
Employers, taxpayers – indeed everyone – must prepare for sweeping changes in health care in coming years. Many of the provisions in the PPACA have already been implemented or are in the process of being implemented. Other provisions, as the above list indicated, are scheduled to take effect after 2012. The Supreme Court's upholding of the PPACA clears the way for full implementation of the new law (unless a future Congress votes to repeal the law, which at this point would be an uphill battle). Our office will keep you posted of developments and the steps you need to take in the coming months.
Yes, penalty relief under the IRS Fresh Start initiative was a one-time offer, which required individuals to file Form 1127-A, Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, by April 17, 2012.
Penalties
The Tax Code imposes penalties on individuals who fail to file a return when one is required to be filed and on individuals who fail to pay any tax by the due date. Often, taxpayers find that penalties can be more onerous than the taxes actually owed.
The penalty for filing a return late is generally five percent of the unpaid taxes for each month or part of a month that a return is late. The IRS has explained that this penalty will not exceed 25 percent of your unpaid taxes. Individuals who fail to pay their taxes by the due date, generally are liable for a failure-to-pay penalty of one-half of one percent of the unpaid taxes for each month or part of a month after the due date that the taxes are not paid. The IRS has cautioned that the penalty can be as much as 25 percent of the unpaid taxes.
If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
Generally, the period of delinquency runs from the day after the due date of the return until the return is actually received by the IRS. In determining the number of months for which the penalty is imposed, the due date of the return determines when months begin and end. Individual returns for 2011 were due April 17, 2012.
Fresh Start relief
In early 2012, the IRS announced special penalty relief for individuals who found themselves unable to pay their taxes by the April 17 due date. This relief was part of the IRS’ “Fresh Start” initiative.
Penalty relief was available to two groups:
- Wage earners who had been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17, 2012 deadline for filing a federal tax return this year.
- Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.
The taxpayer also had to have adjusted gross income of less than $100,000 (or $200,000 for a married couple filing a joint return). Additionally, the amount owed to the IRS had to be less than $50,000.
Under the Fresh Start initiative, interest runs on the 2011 taxes until the tax is paid. However, no failure-to-pay penalties will be incurred if tax, interest and any other penalties are paid in full by October 15, 2012.
Deadline passed
The IRS required taxpayers to file Form 1127-A to request penalty relief by April 17, 2012. At this time, it appears that the IRS is not bending this rule. However, the IRS could adjust its approach. If the IRS announces any changes, our office will keep you posted.
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 tax reporting and filing data for individuals, businesses and other taxpayers for the month of July 2012.
July 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 27–29.
July 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 30–July 3.
July 10
Employees who work for tips. Employees who received $20 or more in tips during June must report them to their employer using Form 4070.
July 11
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 4–6.
July 13
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 7–10.
July 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 11–13.
July 20
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 14–17.
July 25
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 18–20.
July 27
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 21–24.
August 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 25–27.
August 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 28–31.
Hopes for a pre-election resolution to the fate of the Bush-era tax cuts, extenders and other tax incentives are quickly fading as summer approaches. This year is increasingly looking like a replay of 2010, the last time the Bush-era tax cuts were facing imminent expiration. The White House, the Democratic-controlled Senate and the GOP-controlled House all have different opinions on the fate of these tax incentives and negotiations, which have been few and far between, and have quickly bogged down. One solution, which is being talked about more and more, is a temporary extension of the tax cuts. While this would punt the issue to the next Congress, it does little to ease taxpayers’ concerns about tax planning in a climate of constant uncertainty.
Hopes for a pre-election resolution to the fate of the Bush-era tax cuts, extenders and other tax incentives are quickly fading as summer approaches. This year is increasingly looking like a replay of 2010, the last time the Bush-era tax cuts were facing imminent expiration. The White House, the Democratic-controlled Senate and the GOP-controlled House all have different opinions on the fate of these tax incentives and negotiations, which have been few and far between, and have quickly bogged down. One solution, which is being talked about more and more, is a temporary extension of the tax cuts. While this would punt the issue to the next Congress, it does little to ease taxpayers’ concerns about tax planning in a climate of constant uncertainty.
Bush-era tax cuts
Unless extended, the tax cuts in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) (as extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010) will sunset after December 31, 2012. The list of expiring tax incentives is long and includes reduced individual income tax rates and capital gains/dividends tax rates; the $1,000 child tax credit; enhancements to the earned income tax credit (EIC); and much more.
On May 15, House Speaker John Boehner, R-Ohio, said that the House will vote before the November elections on legislation to extend the Bush-era tax cuts. Boehner gave no timetable for a vote. It is unclear at this time if the GOP plans to vote on making the Bush-era tax cuts permanent or merely to extend them one or two more years. Also unclear is whether or not any extension would be offset with revenue raisers elsewhere. Even if the House votes on the tax cuts, there is no guarantee the Senate will take them up.
Complicating matters is the federal budget deficit. After months of partisan wrangling last year, Congress passed the Budget Control Act of 2011 (BCA). The BCA imposes mandatory, across-the-board spending cuts through sequestration. The BCA’s spending cuts are scheduled to take effect in 2013. The GOP wants to repeal the BCA and on May 10, the House approved legislation to effectively do that. The GOP bill has no chance of passage in the Democratic-controlled Senate. So the BCA remains, for now, law.
Few Capitol Hill observers expect Congress to take any meaningful action on the Bush-era tax cuts before the November elections. This leaves the fate of the Bush-era tax cuts to the lame duck Congress. Depending on the outcome of the November elections, the lame duck Congress could do nothing and allow the Bush-era tax cuts to expire, make the tax cuts permanent, or – and this appears to be the most likely scenario – extend the tax cuts for one year. Either way, the uncertainty complicates tax planning for 2012 and beyond.
Small businesses
Lawmakers are also dueling over competing small business tax bills. The House has approved the GOP-sponsored Small Business Tax Cut Act. The GOP bill would, among other provisions, provide a deduction for 20 percent of qualified domestic business income of the taxpayer for the tax year, subject to limitations. In the Senate, the Democrats’ small business bill would give a 10 percent income tax credit to small employers that increase wages or create jobs in 2012 and extend 100 percent bonus depreciation through 2012 (which had expired at the end of 2011). If the Senate approves the Democratic bill, the two chambers could iron-out the differences in the bills in conference.
Tax extenders
Since January, supporters of the tax extenders have tried several times, all unsuccessfully, to attach the extenders to other bills. Some of the extenders were initially attached to the Middle Class Tax Relief and Job Creation Act of 2012, which extended the employee-side payroll tax cut for all of calendar year 2012, but were subsequently dropped. Supporters also tried to include many of the extenders, especially energy-related tax incentives, to the Senate’s highway funding bill: the Moving Ahead for Progress in the 21st Century (MAP-21) Act. At the last minute, the extenders were removed from the Senate bill.
A drag on the extenders is their estimated cost to the federal budget. According to the Congressional Research Service, renewing all of the extenders for 2012 would cost $35 billion. This is one reason why supporters have tried to move only some of the extenders. There have also been calls in Congress to let some of the extenders expire permanently; but every extender has its supporter.
Federal estate tax
Another big question mark hovers over the federal estate tax. Unless Congress acts, the federal estate tax is schedule to revert to its pre-EGTRRA levels (a top tax rate of 55 percent with a $1 million exclusion). In 2010, the White House and the GOP agreed on a top tax rate of 35 percent with a $5 million exclusion (indexed for inflation) for decedents dying in 2011 and 2012 (special rules applied to decedents dying in 2010). The GOP has proposed to eliminate the estate tax entirely or, if not abolished, to retain the 35/$5 million amounts for decedents dying after 2012; the White House has proposed to reduce the exclusion amount to $3.5 million.
Our office will monitor developments and keep you posted of any changes. If you have any questions about legislative developments, please contact our office.
Code Sec. 1231 applies to gains and losses from property used in the trade or business and from involuntary conversions. Normally, you have to determine whether property is a capital asset or is ordinary income property. Property generally can’t be both. However, Code Sec. 1231 allows you to “have it” both ways. Any gains are taxed at low capital gains rates (generally 15 percent for 2012), and any losses are treated as ordinary losses, taxable at more favorable ordinary loss rates, and available (without limit) to offset other ordinary income.
Who qualifies?
Code Sec. 1231 gains include:
--Recognized gains on the sale or exchange of property used in the trade or business; and
--Recognized gains from the involuntary or compulsory conversion (into money or other property) of property used in a trade or business, or of property held for more than one year and either used in the trade or business or used in a transaction entered into for profit.
Property used in a trade or business is property that is subject to depreciation and held by the taxpayer for more than one year.
Code Sec. 1231 losses are any recognized loss from a sale, exchange, or conversion of the same categories of property.
A win-win equation
Gains and losses from these transactions are referred to as Code Sec. 1231 gains and Code Sec. 1231 losses. The character of the gain or loss depends on whether Code Sec. 1231 gains exceed Code Sec. 1231 losses for the tax year. If the Code Sec. 1231 gains exceed the Code Sec. 1231 losses, then all of the Code Sec. 1231 gains and losses are treated as long-term capital gains and losses. The result is a net long-term capital gain. This amount can then be netted with other capital gains and losses.
Code Sec. 1231 does not apply to depreciation that must be recaptured as ordinary income under either Code Sec. 1245 (depreciable personal property and certain real property) or Code Sec. 1250 (depreciable real property that is not Code Sec. 1245 property).
If, however, the Code Sec. 1231 losses equal or exceed the Code Sec. 1231 gains, then all of the Code Sec. 1231 gains and losses are treated as ordinary income and losses. The net result is an ordinary loss, which can offset other ordinary income.
The just-released 2011 IRS Data Book provides statistical information on IRS examinations, collections and other activities for the most recent fiscal year ended in 2011. The 2011 Data Book statistics, when compared to the 2010 version, shows, among other things, a notable increase in the odds of being audited within several high-income categories.
Individual audits
Individual taxpayers collectively were audited at a 1.1% rate over the FY 2011 period, based on 1,564,690 audited returns out of the 140,837,499 returns that were filed. While this rate is about the same as in 2010, variations occurred within the income ranges. An uptick was particularly noticeable in the upper brackets (see statistics, below).
Both correspondence and field audits were counted within the statistics. Correspondence audits accounted for 75% of all audits for FY 2011 (down from 77.1% in FY 2010), while audits conducted face-to-face by revenue agents were only 25% of the total, albeit representing an increase from the 21.7% level in FY 2010. Business returns and higher-income individuals are more likely to experience an audit by a revenue agent; while correspondence audits are generally single-issue audits, a revenue agent is likely to explore other issues "while he or she is there."
Examination coverage: individuals
The following audit statistics taken from the FY 2011 Data Book (and contrasted with FY 2010 Data Book stats) show an increase in the audit rate especially in proportion to adjusted gross income (AGI) level:
- No AGI: 3.42% (3.19% in 2010)
- Under $25K: 1.22% (1.18% in 2010)
- $25K-$50K: 0.73% (0.73% in 2010)
- $50K-$75K: 0.83% (0.78% in 2010)
- $75K-$100K: 0.82% (0.64% in 2010)
- $100K-$200K: 1.00% (0.71% in 2010)
- $200K-$500K: 2.66% (1.92% in 2010)
- $500K-$1M: 5.38% (3.37% in 2010)
- $1M-$5M: 11.80% (6.67% in 2010)
- $5M-$10M: 20.75% (11.55% in 2010)
- $10M and over: 29.93% (18.38% in 2010)
Examination coverage: business returns
For individual income tax returns that include business income (other than farm returns), the 2011 audit rate statistics based upon business income (total gross receipts) reveals the IRS's recognition that audits of small business returns yield proportionately higher deficiency amounts:
- Gross receipts under $25K: 1.3% (1.2% in 2010)
- Gross receipts $25K to $100K: 2.9% (2.5% in 2010)
- Gross receipts $100K to $200K: 4.3% (4.7% in 2010)
- Gross receipts over $200K: 3.8% (3.3% in 2010)
The difference in audit rates between returns with and without business income, as measured by total positive income of at least $200K and under $1M provide further evidence of the IRS's tendency toward auditing business returns: 3.6% for returns with business income versus 3.2% without in FY 2011 (2.9% versus 2.5% in FY 2010).
Corporate/other returns
The audit rates for corporations are consistent with the deficiency experience that the IRS has had examining corporations of varying sizes. Some selected audit rates include:
- For small corporations showing total assets of $250K to $1M, the audit rate for FY 2011 was 1.6% (1.4% in 2010); $1M to $5 million, the rate was 1.9% (1.7% in 2010), and for $5M to $10M, the rate was 2.6% (3% in 2010).
- For larger corporations showing total assets of $10M-$50M, the audit rate was 13.3% (13.4% in 2010) in contrast to those at the top end with total assets from $5B to $20B (50.5% (45.3% in 2010)).
- For S corporations and partnerships, the overall audit rate was 0.4% (same as in 2010), in contrast to an overall 1.5% rate for corporations (1.4% in 2010).
Building on earlier steps to help taxpayers buffeted by the economic slowdown, the IRS recently enhanced its "Fresh Start" initiative. The IRS has announced penalty relief for unemployed individuals who cannot pay their taxes on time and has increased the threshold amount for streamlined installment agreements.
Fresh Start
Many of the actions that economically-distressed taxpayers would like the IRS to take it cannot by law. The IRS cannot stop interest from accruing on unpaid taxes. The IRS also cannot move the filing deadline.
However, the IRS recognized that it can take some actions to help taxpayers who want to pay their taxes but cannot because of job loss or under-employment. In 2011, the IRS launched its Fresh Start initiative. The IRS made some taxpayer-friendly changes to its lien processes and also enhanced its streamlined installment agreement program for small businesses.
Installment agreements
An installment agreement allows taxpayers to pay taxes in smaller amounts over a period of time. Generally, individuals who owe less than $25,000 may qualify for a streamlined installment agreement. "Streamlined" means that taxpayers do not have to file extra information with the IRS, such as Collection Information Statement (Form 433-A or Form 433-F). The streamlined process is intended to be as simple as possible.
Effective immediately, the IRS has increased the threshold for entering into a streamlined installment agreement to $50,000. The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60 month maximum. Taxpayers generally must pay an installment agreement fee and the IRS charges interest.
Before entering into an installment agreement, taxpayers should explore other options. It may be less expensive to pay your taxes on time with a credit card or a loan. Our office can help you weigh the advantages and disadvantages of an installment agreement.
Unemployed taxpayers
Taxes must be paid when due. This year, the deadline for filing individual returns is April 17, 2012. Taxpayers may request an automatic six-month extension but an extension does not provide additional time to pay.
Individuals who do not file by the deadline may be subject to a failure-to-file penalty. The IRS also may impose a failure-to-pay penalty if a taxpayer does not pay by the due date. The rules for the penalties are inter-related and are also complex.
Both the failure-to-file penalty and the failure-to-pay penalty may apply in any month. In these cases, the five percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
Now, the IRS is granting a six-month grace period on failure-to-pay penalties to certain wage earners and self-employed individuals. The IRS explained that the request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by October 15, 2012.
Penalty relief is not available to all individuals. The IRS is limiting penalty relief to:
--Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
--Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.
Penalty relief is also subject to income limits. Your income must not exceed $200,000 if your filing status is married filing jointly or not exceed $100,000 if your filing status is single or head of household.
Additionally, the IRS has imposed a cap on the balance due. Penalty relief is restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.
If you have any questions about the IRS Fresh Start initiative, please contact our office.
Sometimes in a rush to file your income tax return, you may unintentionally overlook some income that had to be reported, or a deduction that you should or should not have taken. Now what? The solution is usually straightforward: you should file what is called an amended return.
Taxable income is measured on an annual basis so you cannot generally wait on correcting a mistake by “making up the difference” on the return that you file next year. You need to make the correction(s) directly on a revised return for the same tax year. Form 1040X, Amended U.S. Individual Income Tax Return, is used to amend any individual income tax return. Income tax returns other than individual income tax returns or returns filed on Form 1120, U.S. Corporation Income Tax Return, or Form 1120-A, U.S. Corporation Short Form Income Tax Return, are amended by filing the same form originally used to file the return. Partnerships may use Form 1065X. Amended returns should clearly be marked as such. Some return forms such as Form 1041, U.S. Income Tax Return for Estates and Trusts, contain a box to be checked if it is being filed as an amended return. For returns other than income tax returns, Form 843, Claim for Refund and Request for Abatement, is used to claim a refund.
To amend a non-income tax return other than to claim a refund, the same form originally used to file the return generally should be used. Estate tax returns cannot be amended after they are due. However, supplemental information may be filed that can change the amount of estate tax due from the amount shown on the return.
When to file an amended return. A taxpayer must file an amended return and pay the additional tax due if the taxpayer omitted an item of income or incorrectly claimed a deduction for a tax year for which the limitation period is still open. A tax year ordinarily remains open for three years from the filing of a return. The three-year period starts running the day after the return is filed. A return that is filed early is treated as filed on the due date of the return. The limitations period on assessment for which a return remains open does not start over if an amended return is filed.
If you realize that you made a mistake on your return that is not in IRS’s favor, it is best to correct it through filing an amended return as soon as possible. If the IRS starts to audit you and finds the mistake first before you file your amended return, it can assess penalties on the original amount and treat you as if you had not come forward voluntarily on your own.
Special disaster loss option. Not all amended returns are filed to correct a mistake. One in particular –claiming a disaster loss—may be filed to effectively accelerate a casualty-loss deduction. A taxpayer may elect to deduct a disaster loss in the year of occurrence or the immediately preceding year. To qualify for the election, the loss must occur in a federally-declared disaster area. The election is made on a return (if you have not filed your return yet for the preceding tax year), an amended return or a refund claim. The amount of the deduction is determined using the casualty loss limitations.
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 tax reporting and filing data for individuals, businesses and other taxpayers for the month of April 2012.
April 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 28–30.
April 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 31–April 3.
April 10
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 11
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 4–6.
April 13
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 7–10.
April 17
Individuals. Individuals file a 2011 income tax return (Form 1040 or Form 1040EZ) and pay any tax due (an automatic six-month extension to file (but not to pay) is available).
Partnerships. File of 2011 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 19
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 11–13.
April 20
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 14–17.
April 25
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 18–20.
April 27
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 21–24.