Tuesday, January 31, 2012

More Emotional Distress Settlements May be Excluded from Income

The IRS has new guidance in relation to the on "on account of" test. Previously emotional distress has to be clearly be “on account of” a physical injury in order for settlements related to such distress to be excludable from income. The new guidance supports the exclusion of not only damages directly linked to personal injuries or sickness but also damages for emotional distress, even not necessarily attributable or related to a physical injury or physical sickness, to the extent that the damages for emotional distress are not in excess of amount paid for medical care related to such emotional distress. This is a loosening of the rules apply to damages paid under a written binding agreement, court decree or mediation award entered into or issued after September 13, 1995, and received after January 23, 2012.

Taxpayers who paid tax on a settlement that would be excludable under the new guidance on a return that is within the statutory period for amending to claim a refund (3 years from due date of return) may amend if such amounts were paid under a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995.

Friday, January 27, 2012

2012 IRS Audit Goals

The IRS has stated the following as among the top areas of noncompliance:

• Sham business losses;

• False or inflated business deductions;

• Abusive Schedule A deductions; and

• False claims for the Earned Income Tax Credit (EITC)

The IRS has a stated goal of increasing tax compliance among high-income or high-wealth taxpayers (with income of $200,000 or more). The are testing a new audit approach that will focus on taxpayers who are most at risk for non-compliance such as those who control multiple or tiered entities, or have more than one flow-through business.

The IRS plans to conduct approximately 2,000 compliance visits to return preparers. To determine compliance with the earned income credit requirements, proper recordkeeping, and use of the preparer tax identification number (PTIN).

Thursday, January 26, 2012

Among the most litigated tax issues for FY 2011...

• Trade or business expenses under Code Sec. 162 and related sections (i.e inreimbursed employee expense);

(162: allows as a deduction all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.)

• Gross income under Code Sec. 61 and related sections;

(61: except as otherwise provided in this subtitle gross income means all income from whatever source derived)

• Accuracy-related penalty under Code Sections 6662(b)(1) and 6662(b)(2);

(this penalty of 20% or 40% of the increase in tax is due in the case of substantial understatement of tax, substantial valuation misstatements, transfer pricing adjustments, or negligence or disregard of rules or regulations)

• Innocent spouse relief;

• Charitable deductions

Wednesday, January 25, 2012

US Citizens Living & Working Abroad

Many people do not realize that a U.S. citizen, whether residing at home or abroad, must file a U.S. income tax return if the individual's gross income equals or exceeds the applicable personal exemption or standard deduction even if none of that income was earned in the US. Various credits apply so as to minimize the duplication of tax liabilities with 2 countries involved.

Tuesday, January 24, 2012

Changes to 2011 Form 1040

There is a new box at the end of the form's second page, adjacent to the blank reserved for a spouse's occupation, for certain taxpayers to input their identity theft protection PIN (IP PIN). In 2011, the IRS sent IP PIN numbers by letter to taxpayers who were victims of identity theft. If they do not enter the IP PIN, and they received the letter, the return will probably be rejected.

There has been a drastic reduction in tax credits available for qualified energy efficient home improvements. The federal tax credit now stands at a maximum lifetime credit of $500. In 2010 the maximum was $1,500. Any credits taken in earlier years are subtracted from the $500 limit.

Capital gains and losses must now be reported on Form 8949 and the totals are reported on Schedule D. This schedule provides additional information to the IRS regarding the transaction.

If you own foreign financial assets, you may need to disclose these assets to the IRS on Form 8938.

Monday, January 23, 2012

Max Value for Cents per Mile Method of PUCC Fringe Benefit Calculations

The maximum fair market value (FMV) for employer-provided automobiles, trucks, and vans first made available for personal use of company car (PUCC) in 2012 for which the vehicle cents-per-mile valuation rule may be used are:

• $15,900 for a passenger automobile (up from $15,300 in 2011); and

• $16,700 for a truck or van, including passenger automobiles such as minivans and sport utility vehicles, which are built on a truck chassis (up from $16,200 in 2011).

Taxpayers with employer-provided vehicles within the designated FMV amounts may apply the vehicle cents-per-mile rule or fleet average valuation rule, unless the employee is an owner. The mileage allowance rate for 2012 is 55.5 cents-per-mile. Owner-employees and/or employees availed of more expensive company cars may not use this method to put value on their PUCC.

Sunday, January 22, 2012

Suspended Passive Losses & Yea of Death

Suspended passive losses from rental real estate which is to be moved into a trust may be claimed on the decedent’s final return to the extent that the losses are in excess of the difference between the property’s fair market value and adjusted basis.

Saturday, January 21, 2012

All Mutual Fund Gains Are Not Subject to 15% CG Tax

Sales of mutual funds that invest in gold and silver result in gains taxed at the 28-percent tax rate on collectibles. The 28-percent rate is applies regardless of whether the taxpayer physically holds the cold or simply owns shares in a gold exchange-traded fund.

Friday, January 20, 2012

Recognizing Roth Conversion Income in 2011/12

Taxpayers engaging in one of these transactions during 2010 must report half of the taxable amount from the transfer on their 2011 tax return and half in 2012, unless the taxpayer:

• Elected to include the taxable amount in income in 2010 (this election cannot be revoked after the due date for the 2010 tax return);

• Recharacterized the transfer to a Roth IRA as a traditional IRA (the deadline for recharacterizing a 2010 transfer was October 17, 2011; or

• Received a taxable distribution in 2010 or 2011 from the Roth IRA (in which case, the taxpayer would report a different amount on the 2011 return).

On Form 8606 of the 2010 return taxpayers would have reported the transfer and either made the election to report it in 2010 or identified the 50 percent amounts reportable in 2011 and 2012. Assuming they did not receive a distribution in 2011, the IRS instructed taxpayers this same amount will be included on the 2011 Form 1040 under IRA distributions, and pensions and annuities.

If the taxpayer received a taxable distribution (of the converted amount) in 2010 or 2011 from the Roth IRA, then in 2011 the taxpayer would follow different reporting guidelines.

Thursday, January 19, 2012

IRS Ruling Clarifies Deductibility of Employer-Provided Meals

Meals provided by an airline to its crew members while they are working on a plane are only 50 percent deductible by the airline even though the meals may legally be totally excluded from the employees’ income. The meals in this case are excludable not because they are de minimis fringe benefits but because they are furnished for the convenience of the employer. The code limits the deduction for food and beverages to 50 percent unless an exception applies.

Wednesday, January 18, 2012

Deducting Excess Residence Interest

Taxpayers may deduct interest on up to $1mil of qualified residence initial acquisition interest and up to $100,000 of home equity interest. Many taxpayers do not realize that once you pay down an original mortgage, if you receive proceeds increasing the mortgage upon a refinance, that debt actually falls under the home equity limit for purposes of these calculations. Primary mortgage does not necessarily equal initial acquisition debt.

Interest on debt which exceeds these thresholds, and which was used for other than improving the property is secured by, may be eligible for deduction on a rental or business schedule of the proceeds of the loan can be traced to that endeavor. It may also be nondeductible such as if used to pay off credit card debt, loan to children, go on vacation, purchase non-business assets, etc. There has been a lack of clarity regarding allowable methods for prorating the interest when necessary.

“Chief Counsel has determined that taxpayers can use any reasonable method to allocate debt that exceeds the limits, including the exact method, the simplified method, the Pub 936 method, and a reasonable approximation of those methods. Regardless of the method used, the taxpayer may allocate amounts that exceed the limits, according to the use of the debt proceeds. Taxpayers can elect to treat the debt as not secured by a residence, but do not have to make the election. If an election is made, the entire debt is treated as not secured by the residence; if an election is not made, only the debt portion that exceeds the limits is traced according to the use of the proceeds.” (CCA 201201017)

Tuesday, January 17, 2012

More Guidance on Code DD Reporting on 2012 W2 Forms (issued 2013)

For certain employers and with respect to certain types of coverage listed below, the requirement to report the value of coverage will not apply for the 2012 Forms W-2 AND will not apply for future calendar years until the IRS publishes guidance giving at least six months of advance notice of any change to the transition relief.

The transition relief applies to the following:

(1) employers filing fewer than 250 Forms W-2 for the previous calendar year

(2) multiemployer plans;

(3) Health Reimbursement Arrangements;

(4) dental and vision plans that are not integrated into another group health plan;

There were numerous other clarifications, however, the above will negate this issue for all of our client base so we don’t need to delve into them!

Monday, January 16, 2012

2011 Audit Statistics Released

The IRS audited 1 in 8 individuals with incomes over $1 million during their last fiscal year. In 2011 1.02% of individual returns with incomes under $200k and 3.93% of individual returns with income of $200k + were audited.  C corporations with assets of $10mil and higher were audited 17.64% of the time, $250mil and higher 27.6%, and under $10mil 1.02%. The IRS audited .4% of partnerships and .42% of S corporations. The IRS budget was cut by $305 million for FY12 which will likely have an impact on the number of audits during 2012.

Saturday, January 14, 2012

IRS issues proposed guidelines to provide relief to more innocent spouses

A Notice proposing a new revenue procedure, revises the threshold requirements for requesting equitable relief and revises the factors used by the IRS in evaluating these requests. The new guidelines are available immediately and will remain available until the finalized revenue procedure is published. The IRS will immediately begin using these new guidelines when evaluating equitable relief requests. This is the second major change made to the innocent spouse program. In July, the IRS extended help to more innocent spouses by eliminating the two-year time limit that previously applied to requests seeking equitable relief.

this proposed revenue procedure expands how the IRS will take into account abuse and financial control by the nonrequesting spouse in determining whether equitable relief is warranted

provides that abuse or lack of financial control may mitigate other factors that might otherwise weigh against granting equitable relief

provides for certain streamlined case determinations

provides new guidance on the potential impact of economic hardship

revises the weight to be accorded to certain factual circumstances in determining equitable relief


Friday, January 13, 2012

Binding Temporary Regs Govern Repair Expense vs Capitalize Decisions on or after 1/1/12

The IRS sought to clarify and expand existing standards for capitalization of specific expenses associated with property and provide some bright-line tests for applying the standards. The document is HUGE. Will have to put a pin in this until after tax season!


Thursday, January 12, 2012

Voluntary Classification Settlement Program (VCSP)

This program enables employers to voluntarily reclassify as employees workers misclassified as subcontractors for federal employment tax purposes and take advantage of audit production and a reduced penalty framework. The VCSP is open to taxpayers currently treating their workers as independent contractors or other nonemployees and that want to prospectively treat the workers as employees. Other requirements also must be satisfied such as 1099 forms must have been sent. The reduced penalty framework absolves the employer from the employee’s portion of the tax and assesses a 10% penalty on the unremitted employer’s portion. In round numbers, $8500 may be due on $100,000 of wages misclassified as contractor payments. It is a great deal! Apply with form 8952.


Wednesday, January 11, 2012

The IRS released final Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent

The executor of an estate of a decedent who died in 2010 can elect to apply modified carryover basis treatment to property acquired from the decedent. If the election is made the estate will not be subject to federal estate tax and does not need to file a form 706 even if the value of the estate is $5mil or more. Instead, in most cases the recipient’s basis will be the LESSER of the decedent’s basis or the FMV at the date of death. The election is irrevocable after the due date of return.


Tuesday, January 10, 2012

Tax Cuts Expire

Effective January 1, 2012, a number of popular but temporary tax incentives expired. They include in part: the research tax credit, grants for energy property in lieu of tax credits, transit benefits, the state and local sales tax deduction, and the higher education tuition deduction. There is no AMT patch past 2011, but that is par for the course.

Monday, January 9, 2012

Two Month Payroll Tax Cut

Employers should implement the just-passed two-month extension of the employee-side payroll tax cut as soon as possible – in other words just continue it from last year. Hopefully, if they extend this to all of 2012 they will do so before the 2 months end and not make it retroactive AFTER everyone has withheld the higher amount. In this instance, employers will (1) need to make an adjustment on their Form 941 to obtain and reflect the refunded portions previously remitted to the IRS, and (2) may either need to provide the employees with these funds while awaiting the refund from the IRS or have the employees face a delay in receiving a refund of the overwithheld Social Security taxes.

This time the cut includes a recapture provision which applies only to those individuals who receive more than $18,350 in compensation during the two-month period and only if the cut is not extended to a full year. The recapture of the 2% not withheld would be payable in 2013 when the individual files his or her income tax return for the 2012 tax year. This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions.