The Internal Revenue Service is still working on the details of how it is going to help taxpayers that may have fallen for deceptive marketing that led them to improperly receive employee retention tax credits.

The Internal Revenue Service is still working on the details of how it is going to help taxpayers that may have fallen for deceptive marketing that led them to improperly receive employee retention tax credits.

Internal Revenue Service Commissioner Daniel Werfel said that the agency is still working to figure out the process of how to help those who have already received their ERC "and now realize they believe they received it inappropriately," including how to come forward preemptively before the IRS takes collection action against them, as well as "on settlement terms for paying back in a way we hope works out for those companies economically."

He also noted the agency is working on updating its procedures "for how we review credits, how we communicate with stakeholders to make sure there’s exact clarity, and we’re even stronger in our outreach in terms of what are the issues that we see companies in thinking they’re eligible when they are not." Werfel made his comments November 14, 2023, at the AICPA & CIMA National Tax & Sophisticated Tax Conference.

The IRS already has issued procedures on how taxpayers can withdraw claims for the employee retention credit if the claim has not been processed, as well as placed a moratorium on processing claims until at least the end of year.

Werfel also used his speech to reiterate previously highlighted improvements in customer service and compliance and enforcement following the supplemental funding provided by the Inflation Reduction Act.

National Taxpayer Advocate Erin Collins also acknowledged the improvement in the wake of the issues that arose during the COVID-19 pandemic.

"The good news is the IRS is in a much better place than it was over the last three years," Collins said during the conference. "The not-so-good news is we still have a long way to go."

In particular, she targeted the continued filing of paper returns as a key contributor to delays in processing returns and other correspondence. The IRS has been working to improve the abilities to filing tax returns and other correspondence electronically as a means of speeding up the processing, and she noted that what has been accomplished thus far "is a good thing."

However, she noted that another challenge is that even if they are electronically filed, they are still manually processed and more work needs to be done to improve the technology to help get them electronically processed.

By Gregory Twachtman, Washington News Editor

The IRS has announced that calendar year 2023 would continue to be regarded as a transition period for enforcement and administration of the de minimis exception for reporting by third party settlement organizations (TPSO) under Code Sec. 6050W(e).

The IRS has announced that calendar year 2023 would continue to be regarded as a transition period for enforcement and administration of the de minimis exception for reporting by third party settlement organizations (TPSO) under Code Sec. 6050W(e). The IRS has also planned for a threshold of $5,000 for tax year 2024 to phase in implementation. Previously, in Notice 2023-10, the IRS announced that 2022 would be regarded as a transition period for the same issue. Specifically, the transition period focuses on the implementation of the amendment to Code Sec. 6050W(e) by the American Rescue Plan Act of 2021 (P.L. 117-2) that lowered the de minimis exception for TPSOs to $600.

Background

Code Sec. 6050W requires a TPSO to file an information return (Form 1099-K) each calendar year to report the annual gross amount of reportable payment transactions to the IRS and provide a copy of the return to the participating payee. A de minimis exception to this reporting requirement is provided in Code Sec. 6050W(e). Prior to the amendment by the American Rescue Plan Act, a TPSO was exempt from the reporting requirement if the gross amount that would otherwise be reported did not exceed $20,000 and the number of such transactions with that participating payee did not exceed 200. Section 9674(a) of the American Rescue Plan Act amended the de minimis exception to require a TPSO to file an information return if the gross amount of total reportable payment transactions exceeds $600, effective for tax years beginning after December 31, 2021.

Transition Period

Notice 2023-74 extends the transition period issued under Notice 2023-10 to the 2023 calendar tax year. Under the transition period, a TPSO would not be required to file Form 1099-K to report payments in settlement of third-party network transactions unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200. Further, a TPSO exempt from reporting due to the transition period would not be subject to penalties under Code Secs. 6721 or 6722 for the failure to file or furnish Form 1099-K.

The transition period is limited to the amendments made by the American Rescue Plan Act to Code Sec. 6050W(e) and does not apply to other requirements under Code Sec. 6050W. In addition, the transition period does not apply to backup withholdings under Code Sec. 3406(a). TPSOs that have performed backup withholding for a payee during calendar year 2023 must file a Form 945 and a Form 1099-K with the IRS provide copies to the participating payee if total reportable payments to the payee exceeded $600.

The IRS has released the annual inflation adjustments for 2024 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

The IRS has released the annual inflation adjustments for 2024 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2024 Income Tax Brackets

For 2024, the highest income tax bracket of 37 percent applies when taxable income hits:

• $731,200 for married individuals filing jointly and surviving spouses,
• $609,350 for single individuals and heads of households,
• $365,600 for married individuals filing separately, and
• $15,200 for estates and trusts.

2024 Standard Deduction

The standard deduction for 2024 is:

• $29,200 for married individuals filing jointly and surviving spouses,
• $21,900 for heads of households, and
• $14,600 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,300 or
• the sum of $450, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,550 for married taxpayers and surviving spouses, or
• $1,950 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2024

The AMT exemption for 2024 is:

• $133,300 for married individuals filing jointly and surviving spouses,
• $85,700 for single individuals and heads of households,
• $66,650 for married individuals filing separately, and
• $29,900 for estates and trusts.

The exemption amounts phase out in 2024 when AMTI exceeds:

• $1,218,700 for married individuals filing jointly and surviving spouses,
• $609,350 for single individuals, heads of households, and married individuals filing separately, and
• $99,700 for estates and trusts.

Expensing Code Sec. 179 Property in 2024

For tax years beginning in 2024, taxpayers can expense up to $1,220,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $3,050,000.

Estate and Gift Tax Adjustments for 2024

The following inflation adjustments apply to federal estate and gift taxes in 2024:

• the gift tax exclusion is $18,000 per donee, or $185,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $13,610,000; and
• the maximum reduction for real property under the special valuation method is $1,390,000.

2024 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2024 is $126,500.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date of 2024 Adjustments

These inflation adjustments generally apply to tax years beginning in 2024, so they affect most returns that will be filed in 2025. However, some specified figures apply to transactions or events in calendar year 2024.

The 2024 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2023 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2024 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2023 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The SECURE 2.0 Act (P.L. 117-328) made some retirement-related amounts adjustable for inflation beginning in 2024. These amounts, as adjusted for 2024, include:

• The catch up contribution amount for IRA owners who are 50 or older remains $1,000.
• The amount of qualified charitable distributions from IRAs that are not includible in gross income is increased from $100,000 to $105,000.
• The limit on one-time qualified charitable distributions made directly to a split-interest entity is increased from $50,000 to $53,000.
• The dollar limit on premiums paid for a qualifying longevity annuity contract (QLAC) remains $200,000

Highlights of Changes for 2024

The contribution limit has increased from $22,500 to $23,000 for employees who take part in:

• -401(k),
• -403(b),
• -most 457 plans, and
• -the federal government’s Thrift Savings Plan

The annual limit on contributions to an IRA increased from $6,500 to $7,000.

The catch-up contribution limit for individuals aged 50 and over is subject to an annual cost-of-living adjustment beginning in 2024 but remains $1,000.

The income ranges increased for determining eligibility to make deductible contributions to:

• -IRAs,
• -Roth IRAs, and
• -to claim the Saver's Credit.

Phase-Out Ranges

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or their spouse takes part in a retirement plan at work. The phase out depends on the taxpayer's filing status and income.

• -For single taxpayers covered by a workplace retirement plan, the phase-out range is $77,000 to $87,000, up from between $73,000 and $83,000.
• -For joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $123,000 to $143,000, up from between $116,000 and $136,000.
• -For an IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $230,000 and $240,000, up from between $218,000 and $228,000.
• -For a married individual covered by a workplace plan filing a separate return, the phase-out range remains between $0 and $10,000.
• The phase-out ranges for Roth IRA contributions are:
• -$146,000 and $161,000, for singles and heads of household,
• -$230,000 and $240,000, for joint filers, and
• -$0 to $10,000 for married separate filers.

Finally, the income limit for the Saver' Credit is:

• -76,500 for joint filers,
• -$57,375 for heads of household, and
• -$38,250 for singles and married separate filers.

The IRS reminded taxpayers who may be entitled to claim Recovery Rebate Credit (RRC) to file a tax return to claim their credit before the April-May, 2024 deadlines. It has been estimated that certain individuals are still eligible to claim RRC for years 2020 and 2021. The deadlines to file a return and claim the 2020 and 2021 credits are May 17, 2024, and April 15, 2025, respectively. Additionally, the IRS reminded that taxpayers must first file a tax return to make their RRC claims irrespective of income slab and source of income.

The IRS reminded taxpayers who may be entitled to claim Recovery Rebate Credit (RRC) to file a tax return to claim their credit before the April-May, 2024 deadlines. It has been estimated that certain individuals are still eligible to claim RRC for years 2020 and 2021. The deadlines to file a return and claim the 2020 and 2021 credits are May 17, 2024, and April 15, 2025, respectively. Additionally, the IRS reminded that taxpayers must first file a tax return to make their RRC claims irrespective of income slab and source of income.

The Recovery Rebate Credit, is a refundable credit for those who missed out on one or more Economic Impact Payments such as stimulus payments which were issued in 2020 and 2021. The persons eligible to claim the 2020 and 2021 RRC must:

• have been a U.S citizen or U.S resident alien in the respective year;
• not have been a dependent of another taxpayer for the respective year;
• have a social security number issued before the due date of the tax return which is valid for employment in the U.S;
• for 2021 RRC- have a valid social security number as above or claim a dependent who has a Social Security number issued by the due date of the tax return, or claim a dependent with an Adoption Taxpayer Identification Number.

For qualified taxpayers who require one-on-one tax preparation help, they can avail the same through the Free tax return preparation assistance available on the IRS website. The IRS urges people to look into possible benefits available to them under the tax law. People can make use of their IRS Online Account also to keep track of payments due to them.

The Internal Revenue Service is looking to improve its customer service metrics as well as improve its technology offerings in the coming tax filing season.

The Internal Revenue Service is looking to improve its customer service metrics as well as improve its technology offerings in the coming tax filing season.

Building on the supplemental funding from the Inflation Reduction Act, the IRS has already seen improvements to its phone service and is now looking to improve on it.

"Massive investments in customer service mean taxpayers will get the information and support they deserve," Department of the Treasury Secretary Janet Yellen said November 7, 2023, during an event at IRS headquarters.

For the 2024 tax filing season, the IRS is committed to maintaining the 85 percent level of service it achieved in the 2023 filing season on the agency’s main taxpayer help line. It also is targeting a hold time of five minutes or less while offering 95 percent call back availability when projected wait times are expected to exceed 15 minutes.

IRS Commissioner Daniel Werfel, speaking at the event, also highlighted a trust target.

"This past filingseason, 84 percent of taxpayers who interacted with our phone assisters stated that this interaction increased their trust in the IRS," Werfel said. "That’s up from 70 percent two years ago. In the coming filingseason, we want to continue to again [the Office of Management and Budget’s] trust goal of 75 percent."

Yellen also highlighted how the "Where’s My Refund?" tool will be improved for the coming season, including incorporating "conversational voice-bot technology to help taxpayers get answers more quickly, and it will provide clearer and more detailed information so taxpayers can address barriers to processing their returns and receive their refunds quickly."

She also said that Taxpayer Assistance Centers increase the hours of face-to-face assistance provided by more than 8,000 hours compared to what was provided in the 2023 filing season.

Yellen also stated that the IRS has met a technology goal and in the 2024 filing season, taxpayers will be able to "digitally upload all correspondence and responses to notices instead of mailing them. … The impact will be significant and far reaching. Taxpayers will save time and effort. The IRS will reduce errors and storage costs and will speed up processing time for the system as a whole."

Additionally, there will be 20 more forms that taxpayers can electronically file in the 2024 filing season.

Yellen and Werfel also reiterated recent announcements on compliance and enforcement efforts and committed to continuing to ensure everyone is paying their fair share of taxes owed.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service announced the launch of the first phase of rolling out business taxpayer accounts, as well as enable taxpayers to respond to notices online.

The Internal Revenue Service announced the launch of the first phase of rolling out business taxpayer accounts, as well as enable taxpayers to respond to notices online.

In an October 20, 2023, statement, the agency announced that the first phase will allow "unincorporated sole proprietors who have an active Employer Identification Number to set up a business tax account, where they can view their business profits and manage authorized users."

The IRS noted that the business tax accounts will expand to allow taxpayers "to view letters or notices, request transcripts, add third parties for power of attorney or tax information authorizations, schedule or cancel tax payments, and store bank account information."

The business tax accounts were enabled by the agency’s receiving of supplemental funding from the Inflation Reduction Act.

Another technology improvement announced allowing taxpayers to respond online to notices, something that previously required responses via mail.

"During the filing season 2023, taxpayers were able to respond to 10 of the most common notices for credits like the Earned Income and Health Insurance Tax Credits online, saving them time and money," the agency reported, adding that as of September 29, 2023, it has received more than 32,000 responses to notices via the online tool.

Additionally, the IRS will now accept electronic submissions for three forms via a mobile device-friendly forms. Those forms include:

• Form 15109, Request for Tax Deferment;
• Form 14039, Identity Theft Affidavit; and
• Form 14242, Reporting Abusive Tax Promotions and/or Preparers

The next form expected to have a mobile-friendly option later this fall is Form 13909, Tax-Exempt Organization Complaint, and at least 20 more of the most-used tax forms will have mobile device availability in early 2024, the IRS stated.

"An estimated 15 percent of Americans rely solely on mobile phones for their internet access – they do not have broadband at home – so it is important to make forms available in mobile-friendly formats," the agency sad.

For tax professionals, their online accounts also received enhancements, including helping practitioners manage their active client authorizations on file with the Centralized Authorization File database as well as the ability to view their client’s tax information, including balance due.

By Gregory Twachtman, Washington News Editor

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.

Everybody knows that tax deductions aren't allowed without proof in the form of documentation. What records are needed to "prove it" to the IRS vary depending upon the type of deduction that you may want to claim. Some documentation cannot be collected "after the fact," whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS. This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return. We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit.

Everybody knows that tax deductions aren’t allowed without proof in the form of documentation.  What records are needed to “prove it” to the IRS vary depending upon the type of deduction that you may want to claim.  Some documentation cannot be collected “after the fact,” whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS.  This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return.  We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit.

Charitable contributions.  For cash contributions (including checks and other monetary gifts), the donor must retain a bank record or a written acknowledgment from the charitable organization. A cash contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment from the donee.  “Contemporaneous” for this purpose is defined as obtaining an acknowledgment before you file your return.  So save those letters from the charity, especially for your larger donations.

Tip records.  A taxpayer receiving tips must keep an accurate and contemporaneous record of the tip income.  Employees receiving tips must also report the correct amount to their employers.  The necessary record can be in the form of a diary, log or worksheet and should be made at or near the time the income is received.

Wagering losses.  Gamblers need to substantiate their losses. The IRS usually accepts a regularly maintained diary or similar record (such as summary records and loss schedules) as adequate substantiation, provided it is supplemented by verifiable documentation.  The diary should identify the gambling establishment and the date and type of wager, as well as amounts won and lost. Verifiable documentation can include wagering tickets, canceled checks, credit card records, and withdrawal slips from banks.

Vehicle mileage log.  A taxpayer can deduct a standard mileage rate for business, charitable or medical use of a vehicle.  If the car is also used for personal purposes, the taxpayer should keep a contemporaneous mileage log, especially for business use.  If the taxpayer wants to deduct actual expenses for business use of a car also used for personal purposes, the taxpayer has to allocate costs between the business and personal use, based on miles driven for each.

Material participation in business activity.  Taxpayers that materially participate in a business generally can deduct business losses against other income.  Otherwise, they can only deduct losses against passive income.  An individual’s participation in an activity may be established by any reasonable means.  Contemporaneous time reports, logs, or similar documents are not required but can be particularly helpful to document material participation.  To identify services performed and the hours spent on the services, records may be established using appointment books, calendars, or narrative summaries.

Hobby loss.  Taxpayers who do not engage conduct an activity with a sufficient profit motive may be considered to engage in a hobby and will not be able to deduct losses from the activity against other income.  Maintaining accurate books and records can itself be an indication of a profit motive.  Moreover, the time and activities devoted to a particular business can be essential to demonstrate that the business has a profit motive.  Contemporaneous records can be an important indicator.

Travel and entertainment.  Expenses for travel and entertainment are subject to strict substantiation requirements. Taxpayers should maintain records of the amount spent, the time and place of the activity, its business purpose, and the business relationship of the person being entertained. Contemporaneous records are particularly helpful.

A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner.  A single-member LLC ("SMLLC"), for example, is considered to be a disregarded entity. For federal and state tax purposes, the sole member of an SMLLC disregards the separate legal status of the SMLLC otherwise in force under state law.

A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner.  A single-member LLC ("SMLLC"), for example, is considered to be a disregarded entity. For federal and state tax purposes, the sole member of an SMLLC disregards the separate legal status of the SMLLC otherwise in force under state law.

As the result of being “disregarded,” the SMLLC does not file a separate tax return.  Rather, its income and loss is reported on the tax return filed by the single member.

• If the sole owner is an individual, the SMLLC's income and loss is reported on his or her Form 1040, U.S. Individual Income Tax Return. This method is similar to a sole proprietorship.
• If the owner is a corporation, the SMLLC's income or loss is reported on the corporation's Form 1120, U.S. Corporation Income Tax Return (or on Form 1120S in the case of an S Corporation). This treatment is similar to that applied to a corporate branch or division.

An SMLLC is not the only entity treated as a disregarded entity. Two corporate forms are also disregarded: a qualified subchapter S subsidiary and a qualified REIT subsidiary. However, SMLLCs are by far the most common disregarded entity currently in use.

For federal tax purposes, the SMLLC does not exist. All its assets and liabilities are treated as owned by the acquiring corporation.

Even though a disregarded entity’s tax status is transparent for federal tax purposes, it is not transparent for state law purposes. For example, an owner of an SMLLC is not personally liable for the debts and obligations of the entity. However, since the entity is disregarded, the owner is generally treated as the employer of disregarded entity employees for employment tax purposes.

For further details on disregarded entities or how this tax strategy may fit into your business operations, please contact our offices. 

On February 22, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012.  The new law extends the employee-side payroll tax holiday, giving wage earners and self-employed individuals 12 months of reduced payroll taxes in 2012. 

2011 payroll tax holiday

Until 2011, the Old-Age, Survivors and Disability Insurance (OASDI) tax rate for employees was 6.2 percent (12.4 percent for self-employed individuals who pay both the employee-share and the employer-share).  These taxes help to fund Social Security.

In 2011, a payroll tax holiday took effect.  The payroll tax holiday reduced the employee-share of OASDI taxes by two percentage points from 6.2 percent to 4.2 percent for calendar year 2011 up to the Social Security wage base of $106,800.  The payroll tax holiday also gave a similar percentage reduction to self-employed individuals for calendar year 2011.

Two-month extension

The 2011 payroll tax holiday was originally enacted as a one-year tax break.  It was scheduled to expire after December 31, 2011.

In December 2011, Congress approved a two-month extension of the payroll tax holiday for January and February 2012.  The two-month extension provided for a 4.2 percent OASDI tax rate for individuals receiving wages and a comparable benefit for self-employed individuals through the end of February 2012.

Tough negotiations

In early 2012, lawmakers began negotiations over extending the two-month payroll tax holiday for the remainder of the year.  The 2011 payroll tax holiday had not been offset; that is, the lost revenue had not been made up elsewhere.  The two-month extension had been offset by higher fees on certain government-backed mortgages. Some lawmakers wanted any full-year extension of the payroll tax cut to be offset.

Several offsets were proposed and rejected, including a surtax on individuals with incomes over $1 million and repeal of certain business tax preferences.  In the end, lawmakers could not agree on any offsets and decided to extend the payroll tax holiday without paying for it.  They did agree to pay for extended unemployment benefits and the so-called Medicare “doc fix” with offsets.

The House passed the Middle Class Tax Relief and Job Creation Act of February 17 as did the Senate.  President Obama signed the bill on February 22.

2012 payroll tax holiday

The 2012 payroll tax holiday is essentially an extension of the 2011 payroll tax holiday. This means that wage earners pay OASDI taxes at a rate of 4.2 percent for calendar year 2012 up to the Social Security wage base ($110,100 for 2012). Self-employed individuals also benefit from a two-percentage point reduction in OASDI taxes for calendar year 2012.  The OASDI tax rate for employers, however, is not reduced and remains at 6.2 percent for calendar year 2012.

According to the White House, an “average” taxpayer should expect to see about $1,000 in savings in 2012.  An individual who makes at or above the Social Security wage base for 2012 ($110,100) will see a $2,202 benefit.

No recapture rule

In good news for some taxpayers, the Middle Class Tax Relief and Job Creation Act repeals a recapture rule Congress had imposed on the two-month extension.  The recapture rule was intended to prevent higher income individuals from enjoying too great a benefit from the payroll tax cut if it was not extended for all of 2012.  Because the payroll tax cut has been extended through the end of 2012, the recapture rule is expressly removed in the new law.

Employers and payroll processors

Because the 2012 payroll tax cut holiday is essentially an extension of the 2011 payroll tax cut holiday, employers and payroll processors should expect few glitches. The IRS has reported it anticipates no problems in administering the extension through the end of 2012. It has already issued a revised 2012 Form 941, Employer’s Quarterly Federal Tax Return, for use by employers to cover their revised reporting responsibilities. 

If you have any questions about the 2012 payroll tax holiday, please contact our office.

Retired employees often start taking benefits by age 65 and, under the minimum distribution rules, must begin taking distributions from their retirement plans when they reach age 70 ½. According to Treasury, a 65-year old female has an even chance of living past age 86, while a 65-year old male has an even chance of living past age 84. The government has become concerned that taxpayers who normally retire at age 65 or even age 70 will outlive their retirement benefits.

The government has found that most employees want at least a partial lump sum payment at retirement, so that some cash is currently available for living expenses. However, under current rules, most employer plans do not offer a partial lump sum coupled with a partial annuity. Employees often are faced with an “all or nothing” decision, where they would have to take their entire retirement benefit either as a lump sum payment when they retire, or as an annuity that does not make available any immediate lump-sum cash cushion. For retirees who live longer, it becomes difficult to stretch their lump sum benefits.

Longevity solution

To address this dilemma, the government is proposing new retirement plan rules to allow plans to make available a partial lump sum payment while allowing participants to take an annuity with the other portion of their benefits. Furthermore, to address the problem of employees outliving their benefits, the government would also encourage plans to offer “longevity” annuities. These annuities would not begin paying benefits until ages 80 or 85. They would provide you a larger annual payment for the same funds than would an annuity starting at age 70 ½. Of course, one reason for the better buy-in price is that you or your heirs would receive nothing if you die before the age 80 or 85 starting date. But many experts believe that it is worth the cost to have the security of knowing that this will help prevent you from “outliving your money.”

To streamline the calculation of partial annuities, the government would allow employees receiving lump-sum payouts from their 401(k) plans to transfer assets into the employer’s existing defined benefit (DB) plan and to purchase an annuity through the DB plan. This would give employees access to the DB plans low-cost annuity purchase rates.

According to the government, the required minimum distribution (RMD) rules are a deterrent to longevity annuities. Because of the minimum distribution rules, plan benefits that could otherwise be deferred until ages 80 or 85 have to start being distributed to a retired employee at age 70 ½. These rules can affect distributions from 401(k) plans, 403(b) tax-sheltered annuities, individual retirement accounts under Code Sec. 408, and eligible governmental deferred compensation plans under Code Sec. 457.

Tentative limitations

The IRS proposes to modify the RMD rules to allow a portion of a participant’s retirement account to be set aside to fund the purchase of a deferred annuity. Participants would be able to exclude the value of this qualified longevity annuity contract (QLAC) from the account balance used to calculate RMDs. Under this approach, up to 25 percent of the account balance could be excluded. The amount is limited to 25 percent to deter the use of longevity annuities as an estate planning device to pass on assets to descendants.

Coming soon

Many of these changes are in proposed regulations and would not take effect until the government issues final regulations. The changes would apply to distributions with annuity starting dates in plan years beginning after final regulations are published, which could be before the end of 2012. Our office will continue to monitor the progress of this important development.

A reduced corporate tax rate, elimination of many business tax preferences, a new minimum tax on overseas profits, and much more are all part of President Obama's recently released Framework for Business Tax Reform (the "Framework"). The much-anticipated blueprint of the administration's plans for corporate tax reform was unveiled on February 22, 2012, in Washington, D.C.

The Framework contains a large number of general business-oriented proposals which, according to the administration, will make the Tax Code less complicated for businesses and increase the nation's competitiveness in the global economy. A reduction in the corporate tax rate would be fully paid for by repeal of business tax preferences. The Framework also calls for a new minimum tax on overseas profits and encourages companies to return work to the U.S. by offering a new relocation tax incentive.

Congressional reaction to the administration's Framework was mixed. Democrats in Congress generally applauded the Framework for laying out a plan to reduce the corporate tax rate, a proposal that enjoys bipartisan support in Congress. Republicans were less enthusiastic, but some GOP lawmakers said that the Framework could serve as a starting point for comprehensive tax reform. While the November elections certainly play a part in the release of the current proposals, major tax reform now is considered inevitable by most observers. The question remains, however, as to how it will develop over the coming months.

Five-part framework

The President's overall proposal, which currently is framed only in general terms, is grounded in five elements:

--Eliminating tax expenditures and subsidies, broadening the corporate tax base, and cutting the corporate tax rate from 35 percent to 28 percent;

--Strengthening U.S. manufacturing and innovation by effectively lowering the rate for manufacturers to 25 percent (through an enhanced manufacturing credit), making the research tax credit permanent, and providing a number of clean-energy incentives;

--Fixing the international tax system that includes imposing a minimum tax on overseas profits, creating a 20 percent tax credit for moving operations back to the U.S., denying deductions for moving operations overseas, limiting the transfer of patents and other intellectual property to offshore subsidiaries, and delaying deductions for interest paid for overseas investments;

--Simplifying and cutting taxes for small businesses (not just for corporations) through a number of reforms, including a 100 percent expensing up to $1 million; cash accounting for businesses with gross receipts up to $5 million; enhanced deductions for startup expenses, and an enhanced Code Section 45R small employer health insurance tax credit; and

--Restoring fiscal responsibility and not add to the deficit through making reform revenue neutral, including a need to do so for whatever portion of the $250 billion in reoccurring extender tax benefits that Congress deems necessary to continue.

Individual tax reform

In unveiling this framework for business tax reform, Treasury Secretary Timothy Geithner stated that individual tax reform does not necessarily need to be considered at the same time as business tax reform.  With individual tax reform clearly the most politically volatile component to total tax reform, most Washington observers believe that tax reform will follow a sequential route, with business tax reform going first.

The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income.

In light of these dangers, the IRS has taken numerous steps to combat identity theft and protect taxpayers. There are also measures that you can take to safeguard yourself against identity theft in the future and assist the IRS in the process.  

IRS does not solicit financial information via email or social media

The IRS will never request a taxpayer’s personal or financial information by email or social media such as Facebook or Twitter. Likewise, the IRS will not alert taxpayers to an audit or tax refund by email or any other form of electronic communication, such as text messages and social media channels.

If you receive a scam email claiming to be from the IRS, forward it to the IRS at phishing@irs.gov. If you discover a website that claims to be the IRS but does not begin with 'www.irs.gov', forward that link to the IRS at phishing@irs.gov.

How identity thieves operate

Identity theft scams are not limited to users of email and social media tools. Scammers may also use a phone or fax to reach their victims to solicit personal information. Other means include:

-Stealing your wallet or purse
-Looking through your trash
-Accessing information you provide to an unsecured Internet site.

How do I know if I am a victim?

Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice. If you believe the notice is not from the IRS, contact the IRS to determine if the letter is a legitimate IRS notice.

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification, such as a Social Security card, driver's license or passport, along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 1-978-684-4542.

What should I do if someone has stolen my identity?

If you discover that someone has filed a tax return using your SSN you should contact the IRS to show the income is not yours. After the IRS authenticates who you are, your tax record will be updated to reflect only your information. The IRS will use this information to minimize future occurrences.

What other precautions can I take?

There are many things you can do to protect your identity. One is to be careful while distributing your personal information. You should show employers your Social Security card to your employer at the start of a job, but otherwise do not routinely carry your card or other documents that display your SSN.

Only use secure websites while making online financial transactions, including online shopping. Generally a secure website will have an icon, such as a lock, located in the lower right-hand corner of your web browser or the address bar of the website with read “https://…” rather than simply “http://.”

Never open suspicious attachments or links, even just to see what they say. Never respond to emails from unknown senders. Install anti-virus software, keep it updated, and run it regularly.

For taxpayers planning to e-file their tax returns, the IRS recommends use of a strong password. Afterwards, save the file to a CD or flash drive and keep it in a secure location. Then delete the personal return information from the computer hard drive.

Finally, if working with an accountant, query him or her on what measures they take to protect your information.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.

Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.

Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.

The new year brings a new tax filing season. Mid-April may seem like a long time away in January but it is important to start preparing now for filing your 2011 federal income tax return.  The IRS expects to receive and process more than 140 million returns during the 2012 filing season.  Early planning can help avoid any delays in the filing and processing of your return.

Records

Initially, you will need to gather your records for 2011. A helpful jumping-off point is to review your 2010 return. Your personal situation may be unchanged from when you filed your 2010 return or it may have changed significantly.  Either way, your 2010 return is a good vantage point for assembling the materials you will need to prepare your 2011 return.

If you need a copy of your previous year(s) return information, you have several options. You can order a copy of your prior-year return. Alternatively, you may order a tax return transcript or a tax account transcript.  A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules.  However, a tax return transcript does not reflect any changes you or the IRS made after the return was filed. A tax account transcript shows any later adjustments you or the IRS made after the tax return was filed. 

If you changed your name as a result of marriage or divorce since you filed your 2010 return, you must advise the IRS. Your name as it appears on your return needs to match the name registered with the Social Security Administration. A mismatch will likely delay the processing of your return.

Forms W-2

Many taxpayers cannot begin preparing their 2011 income tax returns until they have their Forms W-2, Wage and Tax Statement. Employers have until January 31, 2012 to send you a 2011 Form W-2 earnings statement.  If you do not receive your W-2 by the deadline, contact your employer. If you do not receive your W-2 by mid-February, contact the IRS.  You still must file your return or request an extension to file even if you do not receive your Form W-2. In certain cases, you may be able to file Form 4852, Substitute for Form W-2, Wage and Tax Statement.

Filing deadline

April 15, 2012 is a Sunday. Returns would normally be due the next day, April 16, 2012. However, April 16 is a holiday in the District of Columbia (Emancipation Day). As a result, the due date for 2011 returns is April 17, 2012.  If the mid-April tax deadline clock runs out, you can get an automatic six-month extension of time to file through October 17. However, this extension of time to file does not give you more time to pay any taxes due.  To obtain an extension, you need to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

Casualty losses

Many taxpayers experienced family, business and personal losses from hurricanes, tropical storms, wild fires, floods, and other natural disasters in 2011.  For federal tax purposes, a casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a hurricane, tornado, fire, or other disaster.

Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally-declared disaster, you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened. This means you can deduct a 2011 loss on your 2011 return or amended return for that preceding tax year (2010).   If you have any questions about a casualty loss, please contact our office.

Retirement savings

Just because the calendar moved from 2011 to 2012 doesn’t necessarily mean you missed out on contributing to a retirement savings plan. You can contribute up to $5,000 to a traditional IRA for 2011 and you can make the contribution as late as April 17, 2012. However, if you or your spouse is covered by an employer retirement plan, this will affect how much, if any, of your contribution is tax deductible.  Individuals age 50 and older may qualify for a catch-up contribution of $1,000 on top of the $5,000 maximum.  Different rules apply to other types of retirement savings plans.  Our office can review these rules in detail with you.

IRS Fresh Start Initiative

In 2011, the IRS announced a new program, called the Fresh Start Initiative, to help distressed taxpayers. The IRS adjusted its lien policies, increased the dollar threshold when liens are generally issued, made it easier for taxpayers to obtain lien withdrawals, and extended the streamlined offer-in-compromise program.  Previously, the IRS had given its employees greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances where a taxpayer has recently lost a job, is relying solely on Social Security, or is paying significant medical bills.

If you are experiencing hardship, the most important thing you can do is to remain in compliance with your tax obligations. If you owe back taxes, now is the time to pay them, if possible, or enter into an installment agreement, if you qualify, with the IRS. The IRS wants to see you making a good faith effort to pay your taxes.

Tax law changes

Along with assembling records and reviewing activities in 2011, it’s a good idea to review some of the tax law changes in 2011 that may affect your return.  Our office can review your 2010 return and see which areas may have been affected by tax law changes for your 2011 return.  In some cases, popular tax incentives that were available in 2010 were extended into 2011. You don’t want to miss out on any available tax breaks.

If you have any questions about preparing for the 2012 filing season, please contact our office.