Wednesday, October 26, 2011

IRS Proposes Regulations Eliminating De Minimis Partner Rule (NRPM REG-109564-10)

Proposed regulations issued by the IRS would eliminate the de minimis partner rule by removing Reg. §1.704-1(b)(2)(iii)(e) because the rule may have resulted in unintended tax consequences. Under the allocation rule of Code Sec. 704(a), a partner’s distributive share of income, gain, loss, deduction or credit is determined according to the partnership agreement. Code Sec. 704(b) limits the flexibility of this rule by requiring, in cases where the allocation does not have a substantial economic effect, that the allocation be in accordance with the partners’ interests in the partnership. Whether an allocation has a substantial economic effect is determined through a two-part analysis under Reg. §1.704-1(b)(2).

The de minimis partner rule provides that, for purposes of applying the substantiality rules, the tax attributes of de minimis partners (those who own less than 10 percent of the capital and profits of a partnership, and who are allocated less than 10 percent of each partnership item) need not be taken into account. However, the rule was not designed to produce certain outcomes, such as application to a partnership in which no partner meets these 10-percent qualifications. Therefore, the IRS has proposed eliminating the de minimis partner rule to avoid these unwanted effects.

Proposed Regulations, NPRM REG-109564-10, 2011FED ¶49,500

Other References:

Code Sec. 704

CCH Reference – 2011FED ¶25,122N

Tax Research Consultant

CCH Reference – TRC PART: 21,200

CCH Reference - TRC PART: 21,304

Wednesday, October 19, 2011

3 Tax-Savings Deals at Your Job

Open enrollment time is right around the corner. Here's how to take advantage.


Times are tough, and conserving cash is important. One easy way to do that is by taking advantage of tax-saving opportunities at your job. Soon it will be time to sign up for these deals for 2012 during your employer's open-enrollment period. Here's what you need to know to about three options that can painlessly increase your monthly cash flow by reducing your taxes.

Healthcare Flexible Spending Account

Under an employer-sponsored health care flexible spending account (FSA) plan, you make an election this year to contribute a designated amount of next year's salary to your personal FSA. Contributions will be withheld from your 2012 paychecks. You can then use the FSA money to reimburse yourself for uninsured medical expenses (insurance deductibles and co-payments, prescriptions, dental and vision care and so forth).

The total amount withheld from your paychecks is treated as a "salary reduction" for federal income tax, Social Security tax and Medicare tax purposes (usually for state income tax purposes, too). Reimbursements from the FSA are tax-free. (Many employers place an annual cap, often $3,000, on the amount an employee can contribute to a health care FSA.)

The health care FSA deal allows you to pay for all or a portion of your 2012 medical costs with pretax dollars. That's the same as getting an income tax deduction combined with a reduction in your Social Security and Medicare tax withholding. The tax savings are permanent, not just a timing difference. However, you must enroll in your company's FSA plan to benefit, and the deadline for 2012 will likely be in the next month or two (check with your employer).

The only downside of the FSA deal is the dreaded "use it or lose it" rule. If you fail to incur enough qualified health care expenses to drain your health care FSA each year, any leftover balance reverts to your employer. In other words, you cannot carry over unused 2012 FSA contributions to cover 2013 expenses. However, your company's plan may allow a 2 -month grace period to ease this concern. If so, you will have until March 3, 2013, to incur expenses to be reimbursed out of your 2012 contributions. In any case, you should carefully estimate your expected health care expenditures before deciding how much to contribute for 2012.

Dependent Care Flexible Spending Account

Many FSA plans are also set up to reimburse employees for qualified dependent care expenses, which means costs to care for an under-age-13 dependent child, a disabled spouse, or a disabled person for whom you provide over half the support. The dependent care expenses must be necessary in order for you to work, or for both you and your spouse to work if you are married. The annual amount contributed for dependent care expenses cannot exceed $5,000, or $2,500 if you are married and file separately from your spouse. If you are married and file jointly, the $5,000 limit represents a combined maximum for both you and your spouse.

The total amount of dependent care FSA contributions withheld from your paychecks for the year is treated as a salary reduction for federal income tax, Social Security tax, and Medicare tax purposes (and usually for state income tax purposes as well). Reimbursements from the FSA are tax-free. So, once again, this deal allows you to pay expenses with pretax dollars, which puts extra cash in your pocket. Once again, the tax savings are permanent, but you must sign up during the upcoming open enrollment period to benefit.

Note that the "use it or lose it" rule also applies to dependent care FSAs, so make sure you don't contribute more than the qualified expenses you expect to incur.

Transportation Expenses

Your employer may also allow you to sign up to reduce your 2012 salary to pay for transit passes, van pooling, and parking to get to and from work. The maximum monthly amount you can set aside in 2012 for transit passes and van pooling (separately or together) will probably be $240 (or $125 if our beloved Congress fails to extend the current higher limit). The maximum monthly amount for parking in 2012 will be $240. If you sign up for both deals (say for the train to go to and from work and for parking at a park-and-ride lot near your home), you can combine the two limits.

Once again, the total amount withheld from your 2012 paychecks will be treated as a salary reduction for federal income tax, Social Security tax and Medicare tax purposes (and usually for state income tax purposes as well). So, once again, this deal allows you to pay expenses with pretax dollars, which puts extra cash in your pocket every month.

The Bottom Line

Surveys repeatedly show that most folks fail to participate in these employer-sponsored tax-saving arrangements, apparently because they figure the tax savings don't really add up to that much. Not true. For example, say your combined federal and state income tax rate for 2012 will be 33%, and you sign up to reduce next year's salary by a total of $10,880 ($3,000 for health care FSA contributions, $5,000 for dependent care FSA contributions, and $2,880 for monthly parking). Your income tax savings would be $3,590 ($10,880 x 33%), and your Social Security and Medicare tax savings could be as much as $832 ($10,880 x 7.65%). So we are talking about putting an extra $4,422 in your pocket, which amounts to $368 a month, just for filling out the enrollment forms. Be smart: Sign up to participate. It's worth the small effort.

Free Lunch: Deducting Expenses You Never Paid

In certain situations, you can claim tax deductions for expenses that someone else paid.


In a 2010 decision, the U.S. Tax Court concluded that a daughter could deduct medical expenses and real estate taxes on her Form 1040 -- even though they were paid by her mother. This outcome may surprise you, because you probably think a taxpayer can never deduct expenses that were paid by someone else. As this Tax Court decision proved, that is not necessarily true. Here are some cases where you can claim tax deductions for expenses you didn't pay.

Medical Expenses

You can deduct medical expenses to the extent they exceed 7.5% of your adjusted gross income. In the 2010 Tax Court decision, the Internal Revenue Service argued that the daughter could not deduct the expenses because she did not pay for them with her own money. The Tax Court disagreed. The facts of the case demonstrated that the mother intended the payments, which were paid directly to the medical-service providers and local government, to be gifts. Therefore, the Tax Court characterized the transactions as gifts from the mother to the daughter, followed by payment of the expenses by the daughter using those gifted funds. The daughter was allowed to count nearly $25,000 of medical expenses that were actually paid by the mother, plus some expenses the daughter paid with her own funds, in calculating her medical-expense deduction.

Thanks to the tax-law exemption for gifts that are made in the form of direct payments to medical-service providers, the mother's payment of the medical expenses had no federal gift tax consequences for her.

Important Point: When you directly pay medical expenses for a person who is your dependent (meaning you pay over 50% of that person's total support), you can add the expenses you pay for the dependent to your own expenses and claim a deduction for the total to the extent it exceeds 7.5% of your adjusted gross income. In the Tax Court case, the daughter was evidently not the mother's dependent, so the deduction for the daughter's expenses belonged to the daughter rather than the mother.

Real Estate Taxes

The daughter in the 2010 Tax Court decision was also allowed to claim an itemized deduction for more than $5,500 of local real estate taxes that were actually paid by the mother, plus some taxes that the daughter paid with her own funds. Thanks to the annual federal gift tax exclusion (currently $13,000), the mother's payment of the real estate taxes had no federal gift tax consequences because it was less than the $12,000 gift tax exclusion that applied for the year in question (2006).

Seller-Paid Points for Home Mortgage

Assuming you itemize deductions, you can write off points (including loan origination fees) that you pay to take out a mortgage to buy your principal residence. Surprisingly enough, you can also deduct mortgage points paid by the seller on your behalf to sweeten the deal. In fact, IRS Revenue Procedure 94-27 actually requires you to claim the deduction. Don't ask questions. Just follow directions and claim that deduction, even though the seller paid for it.

The Moral of the Story

When it comes to deductions for certain expenditures, the question of who actually paid for them may not decide who is entitled to deduct them. Do not automatically assume you can't deduct expenses that were actually paid by someone else. Sometimes there is such a thing as a free lunch. Contact your friendly tax pro when you have questions about who is allowed to claim write-offs in various circumstances. You may be surprised by what you hear.

First Class stamp will rise to 45 cents in 2012

Phoenix Business Journal by Jeff Clabaugh, Broadcast/Web Reporter

The U.S. Postal Service has announced rate increases for 2012 that will raise the cost of a Forever Stamp one penny to 45 cents, the first increase in First Class postage in more than two years.

The Postal Service will also raise the cost of a post card 3 cents to 32 cents, raise the cost of letters to Canada or Mexico by 5 cents to 85 cents and raise the cost of letters to other international destinations by 7 cents to $1.05.

“The overall price increase is small and is needed to help address our current financial crisis,” said Postmaster General Patrick Donahoe. “We continue to take actions within our control to increase revenue in other ways and to aggressively cut costs.”

The new prices go into effect Jan. 22, 2012.

Monday, October 17, 2011

Success-based Fees

California CPA: October 2011

IRS Revenue Procedure & Directive Offer Favorable Taxpayer Developments

By Jeffrey M. Hurok

Revenue Procedure 2011-29, released by the IRS April 8, addresses the federal income tax treatment of success-based fees incurred in connection with certain acquisitive transactions for fees incurred within taxable years ending on or after April 8, 2011.

Rev. Proc. 2011-29 provides a safe harbor that may simplify the analysis of—and potentially results in—favorable treatment for fees within its scope. However, one must keep in mind that it does not address the treatment of all acquisition cost issues. Also, a taxpayer may be entitled to more favorable treatment than the revenue procedure provides.

Accordingly, Rev. Proc. 2011-29 complements, rather than replaces, an analysis of acquisition-related costs.

Soon after it issued Rev. Proc. 2011-29, the IRS directed the Large Business & International (LB&I) examiners July 28 not to challenge a taxpayer’s treatment of success-based fees paid or incurred in connection with transactions described within Rev. Proc. 2011-29 for fees incurred in taxable years ended before April 8, 2011—provided that the taxpayer’s original return position to capitalize such fees consistent with the safe harbor amount described in Rev. Proc. 2011-29.

Tax Treatment of Transaction Related Costs

Treasury Regulation Sec. 1.263(a)-5 (the Transaction Cost Regulations), generally requires a taxpayer to capitalize costs incurred to investigate or otherwise pursue a variety of corporate transactions, including certain stock acquisitions, asset acquisitions, reorganizations, IPOs and borrowings.

One exception: A taxpayer is not required to capitalize all costs incurred to investigate or pursue certain acquisitive transactions, generally including taxable asset acquisitions of a trade or business, certain taxable stock acquisitions and certain tax-free reorganizations (defined to be covered transactions).

This exception requires a taxpayer to capitalize costs incurred to investigate or otherwise pursue a covered transaction only if the fees relate to activities performed on or after the “bright line date,” or if such fees are for certain “inherently facilitative” activities, regardless of when they occur.

Put another way, the Transaction Cost Regulations don’t require capitalization for fees and costs incurred before the bright line date and are for non-inherently facilitative activities.

The Transaction Cost Regulations generally define the bright line date as the earlier of the date that the parties enter into a letter of intent, exclusivity or similar arrangement, or the date that a taxpayer’s board of directors authorizes the material terms of the deal.

The Transaction Cost Regulations define inherently facilitative activities to be:

* Securing a fairness opinion

* Structuring the transaction

* Preparing and reviewing the documents that effectuate the transaction (e.g., purchase agreement)

* Obtaining shareholder approval

* Obtaining regulatory approval

* Conveying property

Because the Transaction Cost Regulations do not require a taxpayer undertaking a covered transaction to capitalize amounts incurred for non-inherently facilitative activities performed before the bright line date, a taxpayer must analyze whether such costs are deductible or amortizable under IRC secs. 162 or 195.

To take advantage of this exception to the general rule of capitalization, a taxpayer undertaking a covered transaction must be able to allocate a portion of its fees to non-inherently facilitative activities performed before the bright line date. While some service providers (e.g., law firms) may make this allocation easier by keeping detailed time records, allocations for service providers that charge on a success-based fee basis, such as investment bankers, are more difficult because they tend not to keep time-based records.

To allocate success-based fees prior to Rev. Proc. 2011-29, a taxpayer generally would obtain an allocation letter from the service provider and assemble other documentation corroborating the provider’s activities performed for the taxpayer. Typical documentation includes reports produced by the service provider (e.g., a confidential information memorandum), board presentations (e.g., made by the service provider or referencing the service provider’s work), meeting records, emails and other documents that describe the nature and timing of services performed by the provider.

Supporting this allocation is even more critical in the case of success-based fees because the Transaction Cost Regulations have a substantive documentation requirement that requires a taxpayer to capitalize success-based fees unless it assembles certain documentation and does so before the due date of its return.

The Transaction Cost Regulations give some vague guidelines regarding the sufficiency of the documentation under this rule, requiring that the documentation consist of “supporting records” that are more than “merely an allocation” of time. The regulations require the documentation to identify the activities performed by the service provider, the fee amount (or percentage of time) allocable to each of the activities performed and the amount of fee (or percentage of time) allocable to activities performed before and after the bright line date. There has always been some uncertainty regarding the nature and sufficiency of the documentation required by this rule.

Summary of the Procedure & Directive

Rev. Proc. 2011-29 addresses the uncertainty of the substantive documentation requirement by permitting a taxpayer to elect to treat 70 percent of its success-based fees for a covered transaction as an amount that does not facilitate the covered transaction. The remaining 30 percent must be capitalized. This election is in lieu of the substantive documentation requirement for success-based fees described above.

A taxpayer makes this election on a transaction-by-transaction basis and must attach a statement to the original federal income tax return for the taxable year the success-based fee is paid or incurred. The statement must affirm that the taxpayer is electing the safe harbor, identify the transaction and state the success-based fee amounts that are deducted and capitalized.

The election is irrevocable and only applies to the transaction for which the election is made. Rev. Proc. 2011-29 states that an election does not constitute a change in method of accounting, hence a Sec. 481(a) adjustment is not permitted or required.

The IRS’ July 28 directive (LB&I 04-0511-012) states that Large Business & International examiners should not challenge a taxpayer’s treatment of success-based fees paid or incurred in a transaction described in Treas. Reg. Sec. 1.263(a)-5(e)(3) in taxable years ended before April 8, 2011, if the taxpayer’s original return position is consistent with Rev. Proc. 2011-29. For such fees in taxable years ended before April 8, 2011, if a taxpayer capitalizes at least 30 percent on its tax return, IRS examiners are directed not to challenge the allocation. LB&I 04-0511-012 applies only to transaction related costs paid or incurred by either an acquiring or target corporation in a covered transaction.

LB&I 04-0511-012 does not eliminate the need for documentation to substantiate the allocation of success-based fees incurred before Rev. Proc. 2011-29 is effective. Such documentation must be in place before the date the tax return is filed. Also, LB&I 04-0511-012 does not relate to attorney, accountant or other fees that are not success-based.

Analyze This

While Rev. Proc. 2011-29 and LB&I 04-0511-012 are taxpayer favorable, they do not resolve all issues regarding a taxpayer’s treatment of transaction costs. Consider:

Because Rev. Proc. 2011-29 and LB&I 04-0511-012 only address success-based fees, it is still necessary to analyze costs that are not success based, such as attorney and other non-investment banker adviser fees. Also, if an investment banker fee has non-success-based components (e.g., fairness opinion fees, milestone payments) and success-based components, Rev. Proc. 2011-29 and LB&I 04-0511-012 only apply to the success-based component. Because, depending on the case, such a bifurcation of the fee can have significant positive or negative effects that are beyond the scope of this article, a taxpayer should consider the effect of such a bifurcation when it negotiates its engagement letter with its investment banker.

While Rev. Proc. 2011-29 requires an electing taxpayer to capitalize 30 percent of its success-based fees, it does not describe the treatment of the remaining 70 percent. Accordingly, it is necessary to determine whether that 70 percent is deductible under IRC Sec. 162, amortizable over 15 years under IRC Sec. 195 or treated in another manner. Also, it may be necessary to allocate within the 70 percent portion if it consists of more than one type of service. For example, if an investment banker undertook services regarding the issuance of debt in addition to its pre-bright line date investigatory services, although it is not clear, the 70 percent portion may be allocated between borrowing services and investigatory services.

Rev. Proc. 2011-29 and LB&I 04-0511-012 do not address which entity is entitled to potential tax benefits for transaction costs when one entity incurs fees “on behalf of” a related entity. For example, if a U.S. corporation incurs fees on behalf of its non-U.S. subsidiary that undertakes the acquisition, determining whether such costs are incurred by the U.S. parent or the foreign subsidiary can have significant federal tax consequences.

Depending on the transaction’s timeline, it may be the case that more than 70 percent of a taxpayer’s fees were for pre-bright line date non-inherently facilitative services. Accordingly, before making the election under Rev. Proc. 2011-29, a taxpayer should undertake preliminary inquiries to determine whether its facts could yield a tax result more favorable than that provided by the revenue procedure. A taxpayer must weigh the risk of a challenge to the higher deduction against the certainty of Rev. Proc. 2011-29’s 70-30 allocation.

Effective Date Issues

Rev. Proc. 2011-29 applies for success-based fees incurred for taxable years ending on or after April 8, 2011. This may give different effective date results for the acquiring entity and the target. For example, if the target and acquiring corporations are on a calendar taxable year and the acquiring corporation is part of a federal consolidated group, the acquiring corporation’s 100 percent acquisition of the shares of the target for cash generally would require the target to close its taxable year at the end of the day on which the acquisition closes. The acquiring corporation’s taxable year should not close before its normal year-end.

For example, if a calendar year acquiring corporation acquired all of the stock of the target March 1, 2011, the target’s year would have closed at the end of March 1, while the acquiring corporation’s year would not close until Dec. 31. Therefore, under these facts, the target would not be able to elect under Rev. Proc. 2011-29 because the March 1 transaction occurred in a year that closed prior to April 8. On the other hand, the acquiring corporation would be able to make an election for its costs because the March 1 transaction occurred in a year that will end after April 8.

If, however, the target timely obtained documentation that 70 percent of the success-based fee it incurred was not required to be capitalized under the Transaction Cost Regulations, the target could use that information and analyze the potential deductibility of 70 percent of such success-based fees for its tax return for the taxable year ended March 1, 2011. Under the Directive, the IRS should not challenge the allocation.

Jeffrey M. Hurok is a managing director, mergers & acquisitions, tax services, with KPMG LLP in Los Angeles. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author and does not necessarily represent the views or professional advice of KPMG LLP. John Geracimos, managing director, tax, in KPMG’s Washington National Tax practice, contributed to this article.

State-Tax Deadbeats Face Tough New Measures

Here's a wake-up call for state-tax scofflaws: On Oct. 4, California Gov. Jerry Brown signed a bill requiring the Golden State's motor vehicle department to suspend the driver's licenses of its worst delinquents.

"If you don't pay your California taxes, you can't drive—we mean it," says Assembly member Henry Perea, who sponsored the bill. The suspensions will apply to those in what some call the Hall of Shame—the state's list of top tax debtors.

With the economy still reeling, California isn't alone in its quest for unpaid taxes. All states have the traditional recourse of liens and wage garnishment. But these actions are labor-intensive.

"States are looking for smarter ways to raise collections," says Verenda Smith, a researcher at the Federation of Tax Administrators.

At least 19 states, including Wisconsin, North Carolina, New York, Florida, Montana, Connecticut, Kentucky and New Jersey, follow California's approach by publishing the names of tax delinquents online, according to data from CCH, a unit of WoltersKluwer.

As states become more aggressive about collecting taxes, residents need to realize that ignoring a debt could mean public exposure or loss of a privilege.

The California driver's license suspensions will affect the state's top 1,000 tax debtors, whose names will be published online in two lists of 500 each. One list will be drawn from the income-tax rolls, with those on the second drawn from sales and other tax rolls. The new law expands an existing program by doubling the number of names on the published lists and adding the license suspensions.

California's get-tough program applies to more than driver's licenses. It also affects those for physicians, nurses, opticians and beauticians, among others. Liquor and legal licenses are a bit different: The Alcoholic Beverage Control board and state bar association will receive the tax-debtor lists and are allowed to suspend liquor and legal licenses, but they aren't required to.

What about due process? All the taxpayers listed have had liens filed against them, and they'll have at least 90 days after formal notice is issued before licenses are suspended, according to state officials. The first lists used for license suspension will be published next July, with the first suspensions beginning in October.

Mr. Perea and state tax officials are hoping the program will prod big debtors to make amends. California has had both its debtor lists since 2007, and since then the state has received over $85 million from named taxpayers.

Some of the names on the current roster are well known. Halsey Minor, a founder of CNET, is said to owe $14.2 million in income taxes. Former Playboy model and "Baywatch" star Pamela Anderson appears on the list with an income-tax debt of $607,000.

Mr. Minor disputes the amount of his debt, which he says may not take into account capital losses owed to him in a brokerage dispute currently in litigation. Ms. Anderson's tax attorney, Robert Leonard, says she has a payment agreement with the state and anticipates the liability will be resolved by the end of next year.

The total debt of all 250 taxpayers now on California's income-tax list is $152.3 million. The largest is Mr. Minor's; the smallest is $306,500.

States also are turning to special analytic programs to maximize collections. "Age is the No. 1 enemy of debt collection," says Jeff Scott, head of tax collection for Kansas. He has given state revenue agents the power to waive penalties that can amount to 30% or more of a total balance if the taxpayer agrees to settle the matter within 60 days. The offers are made on recorded phone lines, Mr. Scott says.

Kansas also avoids imposing liens whenever possible in order to avoid damaging credit scores. "We don't want to kill the credit rating and make it impossible to finance a business," Mr. Scott says. The state cooperates with neighbor Missouri as well. Many residents of one state work in the other, so Kansas has an agreement to withhold refunds to Missouri residents with home-state tax debts, and vice versa.

As a result of these and other measures, Mr. Scott says, the average recovery time for tax debts has fallen from 270 days to 74 since 2006.

Unlike California, Kansas rarely suspends professional or driver's licenses—but other states do. Iowa blocks vehicle registrations for tax debts that linger too long.

Others seem to take a tack more tailored to their population: In Minnesota, tax delinquents risk losing the ability to rent a booth at the state fair. In Louisiana, residents with tax debts greater than $500 may not be able to renew their hunting and fishing licenses.

Says Lousiana official Gary Matherne: "That really gets people's attention here."

See complete article at:

Friday, October 14, 2011

IRS Urges Tax Professionals to Prepare Now for New e-File Rules

WASHINGTON — The Internal Revenue Service today advised tax professionals and tax firms that do not have Electronic Filing Identification Numbers (EFINs) to start the process to obtain EFINs now so they can meet new e-file requirements for 2012.
Starting in January 2012, any paid preparer or firm that reasonably anticipates preparing and filing 11 or more Form 1040 series returns, Form 1041 returns, or a combination of Form 1040 series returns and Form 1041 returns generally must use IRS e-file. Their clients who file these forms, however, may independently choose to file by paper.

To become Authorized IRS e-file Providers, preparers must create an e-Services account, submit an EFIN application and pass a suitability check. The approval process can take 45 days or more. For a firm or an individual, only one EFIN is needed.

The 2012 requirement will mark the second and final phase of implementing a law that was intended to boost the electronic filing rate of income tax returns for individuals, trusts and estates. In 2011, the e-file mandate pertained to any paid preparer or firm that anticipated preparing and filing 100 or more returns. The e-file rate by paid preparers increased 12 percent in 2011.

Currently, nearly 80 percent of individual tax returns are filed electronically. The IRS has processed more than 1 billion individual tax returns safely and securely since the nationwide debut of electronic filing in 1990.

Preparers can review the process on at Become an Authorized e-file Provider or find additional guidance at the Frequently Asked Questions section.

If the requirement will cause undue hardship, preparers may seek a one-year waiver by submitting Form 8944, Preparer e-file Hardship Waiver Request. If a client wants to file a paper return, the preparer should include Form 8948, Preparer Explanation for Not Filing Electronically, with the return. A taxpayer choice statement should be obtained and kept with the preparer’s records.

Form 8948 does not have to be submitted with returns that are not currently accepted electronically by the IRS or the IRS has instructed taxpayers not to file them electronically. These returns are exempt from the federal e-file requirement. Other limited exemptions may apply.

Go to the Taxpros page for more information.

Wednesday, October 5, 2011

IRS Updates Rules on Using Per Diem Rates to Substantiate Expenses Incurred Away from Home (Rev. Proc. 2011-47)

The IRS has updated the rules for determining the amount of an employee’s ordinary and necessary business expenses for lodging, meals, and incidental expenses while traveling away from home that are deemed substantiated under Code Sec. 274(d) and Reg. §1.274-5. The guidance provides rules for using a per diem rate to substantiate lodging, meal and incidental expenses of an employee, or meal and incidental expenses only, that an employer reimburses.

If a per diem allowance is paid in lieu of reimbursement for actual lodging, meal and incidental expenses incurred by an employee for travel away from home, the amount of expenses deemed to be substantiated is the lesser of the per diem allowance for that day or the amount computed using the federal per diem rate for that locality, under §4.01. Similarly, if a per diem amount is paid for meal and incidental expenses only, the amount deemed substantiated is the lesser of the per diem allowance or the federal M&IE rate for that locality, per §4.02 and §4.03. Special rules are provided for the transportation industry in §4.04. The method for deducting incidental expenses only, without meal expenses, is provided in §4.05.

The IRS had announced its intention to discontinue the high-low substantiation method, but based on feedback received, it will continue authorization of that method. In addition, beginning with the rates for 2011-2012, the IRS will publish an annual notice containing the special per diem rates for purposes of the revenue procedure, and will update the revenue procedure only as needed, instead of annually. The high-low method may be used in lieu of the per diem method of §4.01 or the M&IE method of §4.02, with the lower of those per diem rates or the high-low rate under §5.02 being the amount deemed substantiated. The high and low rates, applicable to high-cost locations and other locations, respectively, apply as if they were federal per diem rates, and will be published in an annual notice. Under §5.03, if the high-low substantiation method is used to pay an employee, it must be used consistently for the entire year with respect to that employee.

Transition rules are set forth in §4.06 and §5.04. Special rules in §6 address the lack of necessity for a lodging receipt, situations where meals are provided in kind, proration of the relevant federal rate (regular per diem or M&IE), application of the appropriate limitation under Code Sec. 274(n), prohibition of double reimbursement or deduction, and situations where the employer and the employee are related parties. Application of the applicable rates is discussed in §7, and withholding and payment of employment taxes are covered in §8.

The revenue procedure is effective for per diem allowances for lodging, meal and incidental expenses, or M&IE expenses, that are paid to an employee on or after October 2, 2011, for travel away from home on or after that date. Rev. Proc. 2010-39, I.R.B. 2010-42, 459, is modified, amplified, and superseded.

Rev. Proc. 2011-47, 2011FED ¶46,494

Other References:

Code Sec. 162

CCH Reference – 2011FED ¶180.01

CCH Reference – 2011FED ¶1070.11

CCH Reference – 2011FED ¶8856.17

Code Sec. 274

CCH Reference – 2011FED ¶14,417.035

CCH Reference – 2011FED ¶14,417.037

CCH Reference – 2011FED ¶14,417.038

CCH Reference – 2011FED ¶14,417.039

CCH Reference – 2011FED ¶14,417.04

CCH Reference – 2011FED ¶14,417.041

CCH Reference – 2011FED ¶14,417.421

Tax Research Consultant

CCH Reference – TRC BUSEXP: 24,808

CCH Reference – TRC BUSEXP: 24,904

CCH Reference – TRC BUSEXP: 24,906.25

CCH Reference – TRC BUSEXP: 24,912.05

CCH Reference – TRC BUSEXP: 24,912.15

CCH Reference – TRC BUSEXP: 24,912.20

CCH Reference – TRC BUSEXP: 24,912.25

Tax hikes and jobs: The whole story

NEW YORK (CNNMoney) -- Raise taxes on the rich, and you'll put the nation's "job creators" at risk.

It's a ubiquitous Republican talking point: Congress must keep the top two rates at 33% and 35% -- instead of 36% and 39.6% as President Obama wants.

The argument: Many small businesses file taxes under the individual tax code.

But while that argument makes for a good bumper sticker, it's a misleading simplification of a complex policy issue.

"The Republican claim that this is a tax increase on a large fraction of employers is just not true," said Howard Gleckman, a resident fellow at the Urban Institute.

In sharp contrast to the rhetoric, current data suggests small businesses don't create an outsized number of jobs, very few small business owners fall into the top two tax brackets, and tax cuts for small businesses are ineffective stimulus measures.

Relatively few small businesses would be affected: Extending the tax cuts for top earners for another decade would come at a significant cost -- nearly $1 trillion in added debt over a decade.

But small businesses wouldn't see much of that cash.

Obama's 17 tax breaks for small business: Big whoop!

Only 2.5% to 3.5% of small businesses would be affected by an increase in those two rates, according to the nonpartisan Congressional Research Service.

Instead, almost all individuals who report business income fall into lower tax brackets, where both Democrats and Republicans want to retain current rates.

And some of the businesses that do fall into the top two brackets are not what Americans typically consider "small businesses." They are doctors and lawyers and members of limited partnerships, not mom-and-pop store owners.

According to CRS, 80% of tax cuts in the top two brackets would go to non-businesses.

Small businesses are not job-creation heavyweights: It's the central premise of the argument to keep the current rates: Small businesses drive hiring. While frequently cited in political circles, it's not quite true.

First off, definitions of what exactly constitutes a small business vary greatly.

But a new report from the Treasury Department found that only 20% of small businesses in 2007 even had employees.

"It turns out most of the firms those politicians define as small businesses don't hire or invest very much at all," Gleckman wrote in a blog post on the subject.

Of course, small businesses do create a lot of jobs -- but at the same time, new ventures fail at a prodigious rate -- wiping out jobs just as fast as they are created.

According to CRS, "small businesses contribute only slightly more jobs that other firms relative to their employment share."

And a smaller, very specific, subset of that group -- startups -- drive most of the job growth. Established firms, even small ones, hire far fewer workers.

Tax cuts aren't powerful stimulus: Would an increase in tax rates mean fewer jobs are created? Maybe not.

"The primary thing standing in the way of hiring is not taxes, it's lack of demand in the economy," said Leonard Burman, a professor at Syracuse University's Maxwell School.

Would tax reform really lead to jobs?

Over the long run, most research suggests modest tax rate increases "would have little negative impact on long-term economic growth and job creation," according to CRS.

Alan Viard, a resident scholar at the conservative American Enterprise Institute, said that tax cuts do little to stimulate aggregate demand in the economy. But, he added, higher marginal rates would cut into some firms' incentive to earn additional income.

Still, the rhetoric? Unconvincing.

"Politicians have this irrational romanticization of small businesses," Viard said. "There are no economic grounds why a small firm is better than a large firm."

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Calif. federal grand jury indicts 55 in $250 million income-tax fraud scheme

By Associated Press

SANTA ANA, Calif. — The owners of two Southern California firms were among 55 people indicted by a federal grand jury in a $250 million income-tax fraud scheme claiming refunds were available through a secret government account, prosecutors and the Internal Revue Service said Monday.

The defendants also claimed the United States was bankrupt, and the country was actually owned by England.

The IRS investigation dubbed Operation Stolen Treasures targeted Fontana-based Old Quest Foundation Inc. and Rancho Cucamonga-based De la Fuente and Ramirez and Associates for filing federal income-tax returns with bogus claims for refunds.

There are 32 federal indictments, most alleging conspiracy to defraud the United States.

Hundreds of false tax returns were filed with the IRS seeking refunds. Refund checks for $5 million went out in error, IRS Special Agent Felicia McCain said Monday.

Eighteen defendants were arrested Friday and 10 defendants are fugitives or agreed to surrender Monday. Twenty-seven defendants will get a summons to appear for arraignment in coming weeks.

During presentations throughout Southern California, people falsely claiming to be attorneys, accountants and former IRS employees told potential customers that tax refunds were available through a secret government account.

Their tax defiance arguments also included claims the U.S. was penniless and Great Britain actually owned the country.

“Frivolous arguments were made by both groups,” McCain said, adding the IRS continually tries to stop such fraudulent schemes.

Those who signed up were required pay Old Quest up to $10,000 as well as a percentage of any refund they fraudulently received, authorities alleged. In exchange, Old Quest prepared and filed false income tax returns seeking huge income tax refunds, one of them for nearly $4.7 million.

When Old Quest customers received IRS letters warning that their tax returns were frivolous, members of the conspiracy prepared responses and assured customers the IRS letters were meant to intimidate them because the “IRS did not want to pay,” according to the indictments.

De la Fuente and Ramirez and Associates filed more than 35 false income tax returns seeking more than $19 million in income tax refunds, prosecutors said. The indictments said they also used seminars and one-on-one consultations to recruit customers who were each charged $2,500.

Telephone listings couldn’t be found in San Bernardino County for Old Quest Foundation Inc. and De la Fuente and Ramirez and Associates.

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4 arrested in alleged government bribery case

By ERIC TUCKER and NEDRA PICKLER - Associated Press

WASHINGTON (AP) — Two employees of the U.S. Army Corps of Engineers and two others were arrested Tuesday in a $20 million bribery and kickback case that prosecutors say helped pay for the purchase of more than a dozen properties, Rolex and Cartier watches, fancy sports cars and hotel accommodations, first-class airline tickets and a trove of other personal luxuries.

Prosecutors say the case may be one of the largest procurement fraud schemes in the nation's history.

An indictment unsealed Tuesday includes charges of bribery, conspiracy and unlawful kickbacks. The two Army Corps employees, Kerry F. Khan, a program manager, and Michael A. Alexander, a program director, received kickbacks in exchange for directing government contracts to a subcontractor specializing in software encryption devices and other information technology, prosecutors say. The men had the authority either to order products and services through government contracts or to secure funding for projects.

Also charged are Khan's son, Lee A. Khan, who prosecutors say controlled a consulting company with his father and also benefited from the scheme, and Harold F. Babb, the director of contracts for Eyak Technology LLC. Eyak Technology is a subsidiary of an Alaska native corporation with Virginia operations. It was the prime contractor for a five-year, $1 billion contract administered by the Army Corps of Engineers.

The alleged scheme, which authorities say spanned roughly four years, involved phony and inflated invoices for government contracts and millions of dollars in kickbacks that were funneled through a network of shell companies in the United States and around the world.

U.S. Attorney Ronald Machen, the top prosecutor in the District of Columbia, said at a news conference that the indictment alleges "one of the most brazen federal procurement scandals in our nation's history."

"This scheme was staggering in scope," he later said. "I think it surprised all of us."

All four defendants appeared in federal court for an arraignment a few hours after their arrest. They wore street clothes but with their feet shackled so they could only take tiny steps into the courtroom. Their attorneys entered pleas of not guilty on their behalf but said they hadn't even had time to closely read the 42-page indictment.

Prosecutors say Khan and Alexander received the kickbacks in exchange for causing the government to award contracts to a Virginia-based subcontractor identified in the indictment only as Company A and as a subcontractor for EyakTek. The company's chief technology officer, who was also not named in the indictment but is described as a co-conspirator, submitted fake and inflated invoices to the Army Corps of Engineers, either directly or through EyakTek, and the work was certified as completed, prosecutors say.

Prosecutors say the money, approximately $20 million in inflated expenses, was then funneled back to the four defendants. The Khans also agreed to transfer money to a relative imprisoned for a drug trafficking crime to prevent him from snitching on them to law enforcement, according to the indictment.

In a separate scheme that prosecutors say was halted Tuesday, the defendants allegedly conspired to steer a $780 million contract to Company A, which was going to serve as the prime contractor on an Army Corps contract.

Prosecutors say they've obtained warrants to seize funds in 29 bank accounts holding millions of dollars and are seeking to forfeit 16 properties.

All four were arrested Tuesday morning as federal agents served search warrants at more than a half-dozen locations in D.C. and Virginia. The investigation is continuing.

Prosecutors argued they should be held in jail because the 25- to 40-year maximum entences they face and their connections overseas make them a flight risk. Assistant U.S. Attorney Michael Atkinson also said Kerry and Lee Khan should be kept behind bars because they "threatened serious physical harm against a potential government witness."

The defense lawyers said the government had no reason to keep their clients behind bars, with Alexander attorney Christopher Davis arguing that his client needed to be set free to care for his cancer-stricken wife as she faces continuing chemotherapy treatments. Alexander appeared especially distraught, alternatively covering his downturned face with his hands and pinching the bridge of his nose while shaking his head.

U.S. Magistrate Judge Deborah Robinson scheduled a hearing for Thursday to decide whether the four should be detained pending trial.

A woman who picked up the phone at Kerry Khan's Alexandria home hung up on a reporter. Current phone listings for Lee Khan and Harold Babb could not immediately be found. Stephanie Alexander, Alexander's wife, told The Associated Press that her husband is a "good person" who works hard.

"I was in shock" over the arrest, she said.

Curry Graham director of public affairs for the Army Corps of Engineers, referred questions to the Justice Department but said in a phone interview: "We hold our employees to a high standard and we cooperate with all federal authorities to make sure that we get to the bottom of all these cases and allegations."

Sen. Claire McCaskill, a longtime critic of the advantage tapped by Alaska Native corporations in obtaining billions of dollars in federal contracts through a Small Business Administration program, said the charges expose problems with the "large no bid contracts that Alaska Native Corporations are allowed to enjoy at the expense of American taxpayers."

"The Alaska Native Corporations should compete for these large contracts and further should not be allowed to 'front' for other corporations that are actually doing the work," McCaskill, a Missouri Democrat and chair of the Senate Committee on Contracting Oversight, said in a written statement.

But the Native 8(a) Works coalition, which advocates for Alaska Native Corporations, said the allegations concerned just a few people and shouldn't reflect poorly on the law-abiding corporations that "provide excellent products and services to the federal government."

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