By Daily Herald Editorial Board
Apparently, only one thing remains to hold up the sale of the little-used state penitentiary in Thomson to the federal government: Assurance from the president that it will not be used to house suspected terrorists from Guantanamo.
So, come on, Mr. President. How about saying the word so this deal can be done and everyone can move on?
U.S. Sen. Dick Durbin told reporters on Monday that a deal for the maximum security prison in northwest Illinois is nearly complete.
“The federal government needs more prison space. The State of Illinois has a surplus prison. It works,” Durbin said.
So, the only question remaining is why isn’t it working?
Durbin, a Springfield Democrat, and Sen. Mark Kirk, a Highland Park Republican, recently wrote the U.S. attorney general seeking assurances that the prison won’t house Gitmo detainees, and, joined by other Republicans, Kirk reiterated the call in a letter to President Obama after a tour of the site last week.
The story of the Thomson prison, unfortunately, is all too familiar in Illinois politics. Built in 2001 at a cost of $120 million after a complicated series of political and turf disputes, the state-of-the-art compound has never been used for its intended purpose. In the national and state economic downturn that followed the terrorist attacks of Sept. 11, the state ran out of money to staff and operate the prison, so now it’s paying millions of dollars a year just to keep the facility operable in the event of a sale.
That possibility first emerged nearly a year and a half ago, when the Obama administration announced it was thinking of buying the Thomson penitentiary and using it to house transferees from Guantanamo. The proposal stirred a nationwide furor and was eventually shelved, but the controversy renewed the public’s awareness of the prison, and the possibility remained for a sale to house federal inmates who are not terrorists.
An Associated Press report said the prison has been valued at around $220 million, about $50 million more than Obama has asked Congress for. So, no doubt, some squabbling over price may still be going on in addition to the wait for the government’s promise.
In the grand tradition of real estate negotiations, we don’t want to sound too eager, but the project is said to mean more than 1,000 jobs in a region desperate for work. The Thomson penitentiary by itself won’t solve Illinois’ unemployment crisis, and even if it sells for $200 million or more, it will barely make a dent in the multibillion-dollar budget deficit the state faces.
But it’s a good start. And if the only thing holding it up is a promise from the president not to do something that’s not going to happen anyway, what’s the holdup?
Thursday, March 31, 2011
Tips for dealing with mandatory IRA distributions
By Sandra Block, USA TODAY
We all know that Dec.31 is the deadline for completing certain fiscal errands, such as depleting flexible spending accounts and making charitable contributions. April15 — actually, April18 this year — is the deadline for filing your federal income taxes. But April1? That’s a day associated with whoopee cushions and snakes-in-a-can, not financial responsibilities.
For the estimated 1million Americans who turned 70½ last year, though, April Fool’s Day is as serious as a heart attack. The reason: It’s the deadline for taking a mandatory distribution from your individual retirement account.
Ordinarily, IRA holders who are 70½ or older must take their withdrawal by Dec.31. For those who are taking a distribution for the first time, though, the deadline is extended until April1 of the following year. The amount of the withdrawal is based on your life expectancy and the value of your IRA.
Fidelity Investments says more than a third of its IRA account holders who turned 70½ last year hadn’t taken their first withdrawal by Dec.31. Some may be deliberately waiting as long as possible to withdraw the money, thus giving it more time to grow tax-deferred. But a more worrisome possibility is that some of these IRA holders don’t realize they have to start taking money out of their accounts.
That’s a costly oversight, because where mandatory withdrawals are concerned, the IRS has no sense of humor. Miss the deadline, and you’ll have to forfeit 50% of the amount you should have withdrawn, says Ken Hevert, vice president of retirement products for Fidelity.
Retirees who delay their first distribution until April1 are still required to take another distribution in the same calendar year, Hevert says. The first withdrawal represents your 2010 distribution and is based on the value of your IRA at the end of 2009. The second, which must be taken by Dec.31, will be based on the value of your IRA at the end of 2010.
Depending on the size of your IRA, taking two distributions in one year could push you into a higher tax bracket, Hevert says.
If you turned 70½ last year, or will hit that milestone in 2011, it’s time to start thinking about how you’re going to manage this annual ritual. If you need the money for living expenses, you probably won’t have to worry about withdrawing less than the minimum required.
Don’t need the money to pay bills? Consider these tax-saving strategies:
• Convert to a Roth IRA. Once you convert your IRA to a Roth, you’re no longer required to take minimum withdrawals. In the past, there were income restrictions on conversions, but a law that took effect last year allows all IRA owners to convert to a Roth.
When you convert, though, you must pay taxes on all pretax contributions and earnings. For that reason, this strategy primarily makes sense for IRA owners who want to leave the money to their children, says Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research.
Your heirs will be required to take distributions from the Roth, but they won’t have to pay taxes on the money, Spiegelman says.
“A Roth conversion can be a really nifty estate-planning tool,” he says. “You’re doing your heirs a big favor by leaving them a tax-free account.”
You’re allowed to convert to a Roth after you turn 70½, but you must take your minimum distribution — and pay taxes on that money — before you convert, Hevert says.
You don’t have to convert your entire IRA to a Roth in one year, Spiegelman adds. You can convert just part of your IRA, which will reduce the tax you’ll owe on the transaction.
• Donate money from your IRA to charity. In 2011, seniors who are 70½ or older can contribute up to $100,000 from their IRAs directly to charity and have it counted toward their minimum distribution, Hevert says. The contribution isn’t deductible, but the money won’t be included in your adjusted gross income (AGI), Spiegelman says.
Reducing your AGI could benefit you in several ways: It could reduce taxes on your Social Security benefits, for example, or make you eligible for tax breaks that are tied to AGI. In addition, the contribution will reduce the overall balance in your IRA, which will reduce the size of future mandatory distributions, Hevert says.
You can find more information about IRA withdrawal requirements in IRS Publication 590, available at www.irs.gov. Your IRA provider should also be able to help.
“Get as educated as you can on this stuff,” Spiegelman says. “The last thing you want to do is lose 50 cents on the dollar because you missed a deadline.”
Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays.
We all know that Dec.31 is the deadline for completing certain fiscal errands, such as depleting flexible spending accounts and making charitable contributions. April15 — actually, April18 this year — is the deadline for filing your federal income taxes. But April1? That’s a day associated with whoopee cushions and snakes-in-a-can, not financial responsibilities.
For the estimated 1million Americans who turned 70½ last year, though, April Fool’s Day is as serious as a heart attack. The reason: It’s the deadline for taking a mandatory distribution from your individual retirement account.
Ordinarily, IRA holders who are 70½ or older must take their withdrawal by Dec.31. For those who are taking a distribution for the first time, though, the deadline is extended until April1 of the following year. The amount of the withdrawal is based on your life expectancy and the value of your IRA.
Fidelity Investments says more than a third of its IRA account holders who turned 70½ last year hadn’t taken their first withdrawal by Dec.31. Some may be deliberately waiting as long as possible to withdraw the money, thus giving it more time to grow tax-deferred. But a more worrisome possibility is that some of these IRA holders don’t realize they have to start taking money out of their accounts.
That’s a costly oversight, because where mandatory withdrawals are concerned, the IRS has no sense of humor. Miss the deadline, and you’ll have to forfeit 50% of the amount you should have withdrawn, says Ken Hevert, vice president of retirement products for Fidelity.
Retirees who delay their first distribution until April1 are still required to take another distribution in the same calendar year, Hevert says. The first withdrawal represents your 2010 distribution and is based on the value of your IRA at the end of 2009. The second, which must be taken by Dec.31, will be based on the value of your IRA at the end of 2010.
Depending on the size of your IRA, taking two distributions in one year could push you into a higher tax bracket, Hevert says.
If you turned 70½ last year, or will hit that milestone in 2011, it’s time to start thinking about how you’re going to manage this annual ritual. If you need the money for living expenses, you probably won’t have to worry about withdrawing less than the minimum required.
Don’t need the money to pay bills? Consider these tax-saving strategies:
• Convert to a Roth IRA. Once you convert your IRA to a Roth, you’re no longer required to take minimum withdrawals. In the past, there were income restrictions on conversions, but a law that took effect last year allows all IRA owners to convert to a Roth.
When you convert, though, you must pay taxes on all pretax contributions and earnings. For that reason, this strategy primarily makes sense for IRA owners who want to leave the money to their children, says Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research.
Your heirs will be required to take distributions from the Roth, but they won’t have to pay taxes on the money, Spiegelman says.
“A Roth conversion can be a really nifty estate-planning tool,” he says. “You’re doing your heirs a big favor by leaving them a tax-free account.”
You’re allowed to convert to a Roth after you turn 70½, but you must take your minimum distribution — and pay taxes on that money — before you convert, Hevert says.
You don’t have to convert your entire IRA to a Roth in one year, Spiegelman adds. You can convert just part of your IRA, which will reduce the tax you’ll owe on the transaction.
• Donate money from your IRA to charity. In 2011, seniors who are 70½ or older can contribute up to $100,000 from their IRAs directly to charity and have it counted toward their minimum distribution, Hevert says. The contribution isn’t deductible, but the money won’t be included in your adjusted gross income (AGI), Spiegelman says.
Reducing your AGI could benefit you in several ways: It could reduce taxes on your Social Security benefits, for example, or make you eligible for tax breaks that are tied to AGI. In addition, the contribution will reduce the overall balance in your IRA, which will reduce the size of future mandatory distributions, Hevert says.
You can find more information about IRA withdrawal requirements in IRS Publication 590, available at www.irs.gov. Your IRA provider should also be able to help.
“Get as educated as you can on this stuff,” Spiegelman says. “The last thing you want to do is lose 50 cents on the dollar because you missed a deadline.”
Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays.
Beware of Tax Scams During Tax Season
By Kay Bell
As the tax-filing deadline approaches, people wanting your money are coming at you from all sides. No, they're not with the Internal Revenue Service. They're con artists.
Tax season is prime hunting season for these financial predators. Folks are worried enough about correctly filing their returns, so they take any indication that they've done something wrong very seriously.
Scammers know this, and use that trepidation to hook and reel in taxpayers through phishing schemes. Phishing is a scam where criminals send fake emails to trick unsuspecting victims into revealing personal and financial information. Although this identity theft technique goes on year-round, it's a tax-time perennial.
"Hackers leverage people's fear or top-of-mind thinking about tax season, asking them to visit a malicious website and trying to capture user names or other information or to download malware onto personal computers," says Brendan Ziolo, vice president of marketing at Kindsight, a provider of identity theft protection.
Phishing Season Coincides With Tax Time
A recurring tax phishing scam is an email alerting you of a problem with your filing or tax refund. Don't fall for it.
When the IRS does have a question about your return, it doesn't communicate via email. The federal tax agency still uses paper correspondence sent via the U.S. Postal Service.
Also, remember that the IRS never asks taxpayers for sensitive financial and personal information. Neither does it request financial account security information, such as PINs, from filers. Any emailer asking for those details is not from the IRS.
Tax Help Offer That Can Hurt
Some phishers opt for more positive tax lures, promising surefire tax-saving opportunities or creative tax deduction or tax credit techniques. One such unsolicited tax email making the rounds this year is an offer of free tax preparation services. To get the "help," all you have to do is click the enclosed link. Don't do it.
Such links are gateways for a virus that can infect your computer or programs that will grant criminals access to your personal financial life. "They give them complete control over your computer," says Ziolo. "They log on and steal files, statements, photos, the list is long.
"With more and more people using tax software, people are saving tax returns and other documents on their computers. These contain personally identifiable information that hackers can use to steal your identity or sell the information to others."
The Wrath of Zeus
Kevin McNamee, security architect at Kindsight, says that many fake tax links also now utilize the banking Trojan virus called Zeus. True to its name as the supreme Greek mythological god, this spyware meddles with victims' financial lives.
A click on a fake IRS email link starts installing Zeus. "It hooks into your browser and when you go to your bank for online banking, it provides the hacker with that (banking) information," says McNamee.
From there, the hacker can modify your online banking screens so that they appear to be your bank's, but your transactions are transferred to facilities in other countries.
"The spyware has nothing to do with tax filing itself," says McNamee. "It uses the hook since it's this time of year."
As the tax-filing deadline approaches, people wanting your money are coming at you from all sides. No, they're not with the Internal Revenue Service. They're con artists.
Tax season is prime hunting season for these financial predators. Folks are worried enough about correctly filing their returns, so they take any indication that they've done something wrong very seriously.
Scammers know this, and use that trepidation to hook and reel in taxpayers through phishing schemes. Phishing is a scam where criminals send fake emails to trick unsuspecting victims into revealing personal and financial information. Although this identity theft technique goes on year-round, it's a tax-time perennial.
"Hackers leverage people's fear or top-of-mind thinking about tax season, asking them to visit a malicious website and trying to capture user names or other information or to download malware onto personal computers," says Brendan Ziolo, vice president of marketing at Kindsight, a provider of identity theft protection.
Phishing Season Coincides With Tax Time
A recurring tax phishing scam is an email alerting you of a problem with your filing or tax refund. Don't fall for it.
When the IRS does have a question about your return, it doesn't communicate via email. The federal tax agency still uses paper correspondence sent via the U.S. Postal Service.
Also, remember that the IRS never asks taxpayers for sensitive financial and personal information. Neither does it request financial account security information, such as PINs, from filers. Any emailer asking for those details is not from the IRS.
Tax Help Offer That Can Hurt
Some phishers opt for more positive tax lures, promising surefire tax-saving opportunities or creative tax deduction or tax credit techniques. One such unsolicited tax email making the rounds this year is an offer of free tax preparation services. To get the "help," all you have to do is click the enclosed link. Don't do it.
Such links are gateways for a virus that can infect your computer or programs that will grant criminals access to your personal financial life. "They give them complete control over your computer," says Ziolo. "They log on and steal files, statements, photos, the list is long.
"With more and more people using tax software, people are saving tax returns and other documents on their computers. These contain personally identifiable information that hackers can use to steal your identity or sell the information to others."
The Wrath of Zeus
Kevin McNamee, security architect at Kindsight, says that many fake tax links also now utilize the banking Trojan virus called Zeus. True to its name as the supreme Greek mythological god, this spyware meddles with victims' financial lives.
A click on a fake IRS email link starts installing Zeus. "It hooks into your browser and when you go to your bank for online banking, it provides the hacker with that (banking) information," says McNamee.
From there, the hacker can modify your online banking screens so that they appear to be your bank's, but your transactions are transferred to facilities in other countries.
"The spyware has nothing to do with tax filing itself," says McNamee. "It uses the hook since it's this time of year."
Wednesday, March 30, 2011
IRS Trying To Overhaul Program For Examining Taxpayer Returns
IRS is trying to overhaul its program for examining taxpayer returns, but more must be done to reduce taxpayer burden, the Treasury Inspector General for Tax Administration (TIGTA) said in an audit released on March 24. (Audit Report No. 2011-30-016) As described in the audit, IRS's Correspondence and Discretionary Examination (CDE) Program conducts examinations exclusively by mail to reduce operational costs and minimize the burden on taxpayers. “However, taxpayers have expressed concerns with the length of the examination process, the lack of consideration given to information they send to the IRS, and treatment by IRS employees,” TIGTA said. Auditors determined that IRS's progress to date could ultimately lessen taxpayer burden and increase taxpayer rights and entitlements. Significant improvements were noted in certain areas. “However, audit findings showed that IRS employees did not always adhere to established procedures and/or guidelines when processing correspondence that taxpayers submit for examinations of their tax returns,” TIGTA said. In a statistical sample of cases where taxpayers agreed to additional tax assessments, 28 of 62 cases contained errors. The majority of these errors related to the untimely closing of cases. In cases where the taxpayer did not agree with an additional assessment, agency employees did not always consider the taxpayer's correspondence before closing the case. “It is critical that examiners follow all established procedures, including taking fully into consideration the information that taxpayers provide,” said J. Russell George, the inspector general. The audit is located at http://www.treasury.gov/tigta/auditreports/2011reports/201130016fr.pdf.
IRS Identifies Benefits Of Modernizing The Management Of Individual Taxpayer Accounts
IRS has been able to identify 20 service, compliance, and other benefits for the first phase of its strategy for modernizing the management of individual taxpayer accounts, the Government Accountability Office (GAO) said in a report released on March 24. (GAO-11-168) The strategy is known as the Customer Account Data Engine (CADE) 2. It is being implemented in three phases, with the first phase expected to be delivered in 2012. The benefits identified by IRS include increasing the percentage of returns that are processed daily and reducing the number of erroneous notices due to better account information. IRS also has set quantitative targets for most of the identified benefits, an accomplishment GAO found especially noteworthy. The total preliminary lifecycle budget for the first two phases of the CADE 2 program is estimated to be $1.3 billion through 2024—$377 million for development costs and $922 million for operations and maintenance. Although IRS's process for arriving at those numbers “was generally consistent with best practices,” GAO said, “the agency did not follow three practices intended to improve the credibility of cost estimates.” IRS did, however, win praise for its work to identify possible risks. “To its credit, IRS has developed mitigation strategies for each identified risk,” GAO said. In conclusion, GAO noted that IRS can still improve its efforts at identifying possible benefits and producing better cost estimates. The report is available at http://www.gao.gov/new.items/d11168.pdf.
IRS Released Information Regarding Processing Issues Affecting First Time Homebuyer Credit
IRS on March 23 released information regarding processing issues affecting a “small percentage” of tax returns involving repayment of the First Time Homebuyer Credit (FTHB), most of which involve 2008 home purchases. Most of these returns are processing normally, the agency said. However, it “recognizes the hardship caused by delayed refunds, and it has assigned additional staff and resources to address the issues promptly,” IRS added. According to IRS, there are three sources for the processing problems: married filing jointly taxpayers who received the FTHB credit on a 2008 purchase; taxpayers who received the FTHB credit and are now reporting the sale or disposition of their home; and taxpayers who received the FTHB credit and are attempting to pay back more than the amount required (typically $500). Additional information can be found at http://www.irs.gov/newsroom/article/0,,id=237695,00.html.
Debtor's Inherited IRA Qualified For Bankruptcy Exemption
Chilton v. Moser, (DC TX 3/16/2011) 107 AFTR 2d ¶2011-594
A district court, reversing a bankruptcy court, has determined that a debtor's inherited IRA met the requirements for bankruptcy exemption under 11 USC 522(d)(12).
Background on Bankruptcy Code exemption for IRAs. The Bankruptcy Code provides for two basic exemption regimes: (1) the statutory federal exemptions under 11 USC 522(d)(12); and (2) exemptions under state or local law (or federal nonbankruptcy law). A state can choose to “opt out” of the federal exemption scheme by prohibiting its citizens from selecting the exemptions set out in 11 USC 522(d)(12).
Under 11 USC 522(d)(12), a federal bankruptcy exemption applies for certain tax-qualified retirement funds and accounts, including the following:
... Code Sec. 401 (qualified defined benefit and defined contribution plans, including 401(k) plans);
... Code Sec. 403 (qualified annuity plans and tax-sheltered 403(b) annuities);
... Code Sec. 408 (traditional IRAs, SEP-IRAs, and SIMPLE IRAs);
... Code Sec. 408A (Roth IRAs);
... Code Sec. 414 (qualified governmental plans);
... Code Sec. 457 (deferred compensation plans of state or local governments or tax-exempt organizations); or
... Code Sec. 501(a) (tax-exempt organizations). (11 USC 522(d)(12))
Under 11 USC 522(b)(4)(C), a direct transfer of retirement funds from one fund or account that is exempt from taxation under Code Sec. 408 does not cease to qualify for exemption under 11 USC 522(d)(12) by reason of that direct transfer.
Background on inherited IRAs. If an IRA owner designates his spouse as beneficiary of his IRA and dies before the account is exhausted, the surviving spouse may roll over the decedent's IRA into the spouse's own IRA, or elect to treat the decedent's IRA as the spouse's own IRA. (Code Sec. 408(d)(3)(C), Reg. §1.408-8 Q&A 5(a))
A designated nonspouse beneficiary can't treat an inherited IRA as his own, but can make trustee-to-trustee transfers of the inherited amount to another IRA if the ownership of the new IRA is set up in the same way as the ownership of the old IRA, that is, in the name of the decedent for the benefit of the IRA beneficiary.
Facts. Janice Chilton's mother, Shirley Heil, established an IRA account and named Janice as beneficiary. On Nov. 28, 2007, Shirley died. As a designated nonspouse beneficiary, Janice couldn't treat her mother's IRA as her own, but she was allowed to make a trustee-to-trustee transfer of the inherited amount to another IRA (an “inherited IRA”) if the ownership of the new IRA was set up in the same way as the ownership of the old IRA (i.e., in the name of the decedent for the benefit of the IRA beneficiary). Thus, on Jan. 21, 2008, Janice established an IRA account, titled “Janice Chilton, Beneficiary, Shirley Heil, Decedent,” to receive the funds from her mother's IRA. The assets in her mother's IRA were transferred directly to the trustee for the account that Janice had set up. Janice made no contributions to the funds or assets in the account.
Janice filed for relief under Chapter 7 of the Bankruptcy Code on December 18, 2008 (although the proceeding was later converted to a Chapter 13 case), and listed the inherited IRA on her bankruptcy schedule. She claimed that the inherited IRA was property exempt from creditors under 11 USC 522(d)(12). The bankruptcy trustee objected to the exemption claim.
The bankruptcy court, noting that it had found no published case that addressed the exemption of inherited IRAs under 11 USC 522(d)(12), concluded as a matter of first impression that an inherited IRA is not equivalent to an ordinary IRA for purposes of determining whether the account contains “retirement funds” that may be exempted under 11 USC 522(d)(12). The bankruptcy court further determined that, even if the inherited IRA did contain “retirement funds,” the account that Janice set up to receive the funds from the IRA account was not a traditional IRA exempt from taxation under Code Sec. 408(e)(1). On that basis, the bankruptcy court denied the bankruptcy exemption for the inherited IRA.
Bankruptcy court reversed. The district court reversed the bankruptcy court and held that Janice's inherited IRA could be exempted from her bankruptcy estate. Since the bankruptcy court's March 5, 2010 decision, five other courts have found that inherited IRAs do meet the requirements for a Bankruptcy Code exemption. (See, eg., In re Nessa, (Bktcy Appellate Panel CA 8, 4/9/2010) 105 AFTR 2d 2010-1825) In that case, the 8th Circuit BAP relied on the broad language in Code Sec. 408(e) providing that “[a]ny individual retirement account is exempt from taxation,” and noted that under 11 USC 522(b)(4)(C), retirement funds that are directly transferred from a Code Sec. 408(a) tax-exempt account to another such account continue to qualify for exemption under 11 USC 522(d)(12).
Agreeing with the reasoning of Nessa and the other cases, the district court concluded that the funds in a debtor's inherited IRA do not have to be the “retirement funds” of the debtor to satisfy the bankruptcy exemption requirements. The court emphasized that 11 USC 522(b)(4)(C), which had not been discussed by the bankruptcy court, provides that a direct transfer of funds from one account that is tax-exempt under Code Sec. 408 to another such account (like the type of transfer that created Janice's inherited IRA) does not make the funds ineligible for a bankruptcy exemption.
The district court also concluded that inherited IRAs are among the IRAs that are exempt from taxation under Code Sec. 408(e)(1), which provides that any IRA is exempt from taxation. Thus, because an inherited IRA meets this requirement, any differences between a traditional IRA and an inherited IRA are irrelevant for purposes of the bankruptcy exemption.
References: For Federal bankruptcy exemption for IRAs, see FTC 2d/FIN ¶H-12207.1; TG ¶8063.
A district court, reversing a bankruptcy court, has determined that a debtor's inherited IRA met the requirements for bankruptcy exemption under 11 USC 522(d)(12).
Background on Bankruptcy Code exemption for IRAs. The Bankruptcy Code provides for two basic exemption regimes: (1) the statutory federal exemptions under 11 USC 522(d)(12); and (2) exemptions under state or local law (or federal nonbankruptcy law). A state can choose to “opt out” of the federal exemption scheme by prohibiting its citizens from selecting the exemptions set out in 11 USC 522(d)(12).
Under 11 USC 522(d)(12), a federal bankruptcy exemption applies for certain tax-qualified retirement funds and accounts, including the following:
... Code Sec. 401 (qualified defined benefit and defined contribution plans, including 401(k) plans);
... Code Sec. 403 (qualified annuity plans and tax-sheltered 403(b) annuities);
... Code Sec. 408 (traditional IRAs, SEP-IRAs, and SIMPLE IRAs);
... Code Sec. 408A (Roth IRAs);
... Code Sec. 414 (qualified governmental plans);
... Code Sec. 457 (deferred compensation plans of state or local governments or tax-exempt organizations); or
... Code Sec. 501(a) (tax-exempt organizations). (11 USC 522(d)(12))
Under 11 USC 522(b)(4)(C), a direct transfer of retirement funds from one fund or account that is exempt from taxation under Code Sec. 408 does not cease to qualify for exemption under 11 USC 522(d)(12) by reason of that direct transfer.
Background on inherited IRAs. If an IRA owner designates his spouse as beneficiary of his IRA and dies before the account is exhausted, the surviving spouse may roll over the decedent's IRA into the spouse's own IRA, or elect to treat the decedent's IRA as the spouse's own IRA. (Code Sec. 408(d)(3)(C), Reg. §1.408-8 Q&A 5(a))
A designated nonspouse beneficiary can't treat an inherited IRA as his own, but can make trustee-to-trustee transfers of the inherited amount to another IRA if the ownership of the new IRA is set up in the same way as the ownership of the old IRA, that is, in the name of the decedent for the benefit of the IRA beneficiary.
Facts. Janice Chilton's mother, Shirley Heil, established an IRA account and named Janice as beneficiary. On Nov. 28, 2007, Shirley died. As a designated nonspouse beneficiary, Janice couldn't treat her mother's IRA as her own, but she was allowed to make a trustee-to-trustee transfer of the inherited amount to another IRA (an “inherited IRA”) if the ownership of the new IRA was set up in the same way as the ownership of the old IRA (i.e., in the name of the decedent for the benefit of the IRA beneficiary). Thus, on Jan. 21, 2008, Janice established an IRA account, titled “Janice Chilton, Beneficiary, Shirley Heil, Decedent,” to receive the funds from her mother's IRA. The assets in her mother's IRA were transferred directly to the trustee for the account that Janice had set up. Janice made no contributions to the funds or assets in the account.
Janice filed for relief under Chapter 7 of the Bankruptcy Code on December 18, 2008 (although the proceeding was later converted to a Chapter 13 case), and listed the inherited IRA on her bankruptcy schedule. She claimed that the inherited IRA was property exempt from creditors under 11 USC 522(d)(12). The bankruptcy trustee objected to the exemption claim.
The bankruptcy court, noting that it had found no published case that addressed the exemption of inherited IRAs under 11 USC 522(d)(12), concluded as a matter of first impression that an inherited IRA is not equivalent to an ordinary IRA for purposes of determining whether the account contains “retirement funds” that may be exempted under 11 USC 522(d)(12). The bankruptcy court further determined that, even if the inherited IRA did contain “retirement funds,” the account that Janice set up to receive the funds from the IRA account was not a traditional IRA exempt from taxation under Code Sec. 408(e)(1). On that basis, the bankruptcy court denied the bankruptcy exemption for the inherited IRA.
Bankruptcy court reversed. The district court reversed the bankruptcy court and held that Janice's inherited IRA could be exempted from her bankruptcy estate. Since the bankruptcy court's March 5, 2010 decision, five other courts have found that inherited IRAs do meet the requirements for a Bankruptcy Code exemption. (See, eg., In re Nessa, (Bktcy Appellate Panel CA 8, 4/9/2010) 105 AFTR 2d 2010-1825) In that case, the 8th Circuit BAP relied on the broad language in Code Sec. 408(e) providing that “[a]ny individual retirement account is exempt from taxation,” and noted that under 11 USC 522(b)(4)(C), retirement funds that are directly transferred from a Code Sec. 408(a) tax-exempt account to another such account continue to qualify for exemption under 11 USC 522(d)(12).
Agreeing with the reasoning of Nessa and the other cases, the district court concluded that the funds in a debtor's inherited IRA do not have to be the “retirement funds” of the debtor to satisfy the bankruptcy exemption requirements. The court emphasized that 11 USC 522(b)(4)(C), which had not been discussed by the bankruptcy court, provides that a direct transfer of funds from one account that is tax-exempt under Code Sec. 408 to another such account (like the type of transfer that created Janice's inherited IRA) does not make the funds ineligible for a bankruptcy exemption.
The district court also concluded that inherited IRAs are among the IRAs that are exempt from taxation under Code Sec. 408(e)(1), which provides that any IRA is exempt from taxation. Thus, because an inherited IRA meets this requirement, any differences between a traditional IRA and an inherited IRA are irrelevant for purposes of the bankruptcy exemption.
References: For Federal bankruptcy exemption for IRAs, see FTC 2d/FIN ¶H-12207.1; TG ¶8063.
Payments To Remedy Unfair Lending Practices Weren't Reportable Income
Chief Counsel Advice 201112008
In Chief Counsel Advice (CCA), IRS has concluded that the payments made by a company to settle allegations of unfair lending practices weren't gross income to the borrowers under Code Sec. 61(a)(12), and weren't reportable by the company as trade or business payments under Code Sec. 6041 or debt discharge income under Code Sec. 6050P. The settlement had the effect of equitably reforming loans financed by the company by adjusting principal amounts to amounts that borrowers would have obtained in the absence of unfair lending practices.
Background. Generally, gross income includes income from the discharge of debt. (Code Sec. 61(a)(12)) If a debt is forgiven, the amount of cancellation of debt income is the amount of the unpaid balance of the debt.
Under Code Sec. 6050P, an applicable financial entity (or an executive, legislative or judicial agency) is required to file information returns with IRS, and to furnish information statements to debtors, reporting debt discharges of $600 or more. Among the entities that are an applicable financial entity are any financial institution described in Code Sec. 581 (relating to banks) or Code Sec. 591(a) (relating to savings institutions), any credit union, and any organization a significant trade or business of which is the lending of money (e.g., finance companies and credit card companies).
Under Code Sec. 6041, every person engaged in a trade or business (including state governments and their agencies) must: (1) file an information return for each calendar year in which the person makes in the course of its trade or business payments to another person of fixed and determinable income aggregating $600 or more; and (2) furnish a copy of the information return to that person. Effective for payments made after 2010, a person receiving rental income from real estate is treated as engaged in the trade or business of renting property for reporting purposes. (Code Sec. 6041(h)) Effective for payments made after 2011, payments of amounts in consideration for property and gross proceeds—i.e., payments for goods—are subject to information reporting. In addition, payments to corporations (that are not tax-exempt)—which under prior law had been exempt from the reporting requirement—are subject to information reporting. (Code Sec. 6041(i))
Observation: Several pending bills provide for the retroactive repeal of the above Code Sec. 6041 provisions that are noted as being effective after 2010 and 2011 (e.g., see House-passed H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011”). The call for repeal of these provisions would seem to have widespread, bipartisan support.
Facts. Company provided funding to Bank to finance loans to Borrowers. Borrowers used the loan proceeds to finance Assets, which secured the Borrowers' obligations under the loans. State investigated Company's financing of the loans and alleged that it had engaged in unfair lending practices under State law. To avoid further investigation and possible legal action by State, Company entered into a Settlement with State.
The Settlement stated that Company enabled Bank to make unfair loans with principal amounts in excess of that which the Borrowers would have obtained in the absence of the unfair lending practices. Company agreed to pay a certain amount to an independent trustee of a settlement fund. The trustee will make payments to a loan holder and/or servicer of a borrower's loan to reduce the amount borrowers will repay on their loans.
Consequence of the transaction. The CCA concluded that the Settlement had the effect of equitably reforming the loans by adjusting the principal amounts to the amounts that the borrowers would have obtained in the absence of the unfair lending practices. The trustee's payments to the loan holders and/or servicers did not result in an accession to wealth to the borrowers. As a result, the CCA found that the payments were not gross income to the borrowers under Code Sec. 61 (including Code Sec. 61(a)(12)) and did not subject the company to the information reporting requirements under Code Sec. 6041 or Code Sec. 6050P.
References: For cancellation of debt income, see FTC 2d/FIN ¶J-7000; United States Tax Reporter ¶614.114; TaxDesk ¶186,001; TG ¶12890. For information returns on business payments of $600 or more, see FTC 2d/FIN ¶S-3656; United States Tax Reporter ¶60,414; TaxDesk ¶814,001; TG ¶60202. For reporting debt cancellation, see FTC 2d/FIN ¶S-4250; United States Tax Reporter ¶60,50P4; TaxDesk ¶816,008; TG ¶60243.
In Chief Counsel Advice (CCA), IRS has concluded that the payments made by a company to settle allegations of unfair lending practices weren't gross income to the borrowers under Code Sec. 61(a)(12), and weren't reportable by the company as trade or business payments under Code Sec. 6041 or debt discharge income under Code Sec. 6050P. The settlement had the effect of equitably reforming loans financed by the company by adjusting principal amounts to amounts that borrowers would have obtained in the absence of unfair lending practices.
Background. Generally, gross income includes income from the discharge of debt. (Code Sec. 61(a)(12)) If a debt is forgiven, the amount of cancellation of debt income is the amount of the unpaid balance of the debt.
Under Code Sec. 6050P, an applicable financial entity (or an executive, legislative or judicial agency) is required to file information returns with IRS, and to furnish information statements to debtors, reporting debt discharges of $600 or more. Among the entities that are an applicable financial entity are any financial institution described in Code Sec. 581 (relating to banks) or Code Sec. 591(a) (relating to savings institutions), any credit union, and any organization a significant trade or business of which is the lending of money (e.g., finance companies and credit card companies).
Under Code Sec. 6041, every person engaged in a trade or business (including state governments and their agencies) must: (1) file an information return for each calendar year in which the person makes in the course of its trade or business payments to another person of fixed and determinable income aggregating $600 or more; and (2) furnish a copy of the information return to that person. Effective for payments made after 2010, a person receiving rental income from real estate is treated as engaged in the trade or business of renting property for reporting purposes. (Code Sec. 6041(h)) Effective for payments made after 2011, payments of amounts in consideration for property and gross proceeds—i.e., payments for goods—are subject to information reporting. In addition, payments to corporations (that are not tax-exempt)—which under prior law had been exempt from the reporting requirement—are subject to information reporting. (Code Sec. 6041(i))
Observation: Several pending bills provide for the retroactive repeal of the above Code Sec. 6041 provisions that are noted as being effective after 2010 and 2011 (e.g., see House-passed H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011”). The call for repeal of these provisions would seem to have widespread, bipartisan support.
Facts. Company provided funding to Bank to finance loans to Borrowers. Borrowers used the loan proceeds to finance Assets, which secured the Borrowers' obligations under the loans. State investigated Company's financing of the loans and alleged that it had engaged in unfair lending practices under State law. To avoid further investigation and possible legal action by State, Company entered into a Settlement with State.
The Settlement stated that Company enabled Bank to make unfair loans with principal amounts in excess of that which the Borrowers would have obtained in the absence of the unfair lending practices. Company agreed to pay a certain amount to an independent trustee of a settlement fund. The trustee will make payments to a loan holder and/or servicer of a borrower's loan to reduce the amount borrowers will repay on their loans.
Consequence of the transaction. The CCA concluded that the Settlement had the effect of equitably reforming the loans by adjusting the principal amounts to the amounts that the borrowers would have obtained in the absence of the unfair lending practices. The trustee's payments to the loan holders and/or servicers did not result in an accession to wealth to the borrowers. As a result, the CCA found that the payments were not gross income to the borrowers under Code Sec. 61 (including Code Sec. 61(a)(12)) and did not subject the company to the information reporting requirements under Code Sec. 6041 or Code Sec. 6050P.
References: For cancellation of debt income, see FTC 2d/FIN ¶J-7000; United States Tax Reporter ¶614.114; TaxDesk ¶186,001; TG ¶12890. For information returns on business payments of $600 or more, see FTC 2d/FIN ¶S-3656; United States Tax Reporter ¶60,414; TaxDesk ¶814,001; TG ¶60202. For reporting debt cancellation, see FTC 2d/FIN ¶S-4250; United States Tax Reporter ¶60,50P4; TaxDesk ¶816,008; TG ¶60243.
Venture Capitalist's Bad Debt Deduction For Loan To Business Associate Upheld
Dagres, (2011) 136 TC No. 12
The Tax Court has determined that a venture capitalist was entitled to claim a Code Sec. 166(a) business bad debt deduction for the amount that he forgave on a loan made to a business acquaintance to ensure that the borrower would first inform him of any promising investment opportunities. In so holding, the Court determined that the taxpayer was in the trade or business of managing venture capital funds and that his bad debt loss was proximately related to that trade or business, and rejected IRS's argument that the debt was personal in nature.
Background. Business bad debts are deductible as ordinary deductions. They are deductible if partially worthless as well as when wholly worthless. (Code Sec. 166(a)) A corporation's debts are always business debts. (Code Sec. 166(d))
Nonbusiness bad debts are deducted only as short-term capital losses, and only when wholly worthless. (Code Sec. 166(d)(1))
A nonbusiness debt is defined as any debt other than:
... a debt created or acquired in connection with the trade or business of the taxpayer; (Code Sec. 166(d)(2)(A), Reg. §1.166-5(b)(1)) or
... a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. (Code Sec. 166(d)(2)(B), Reg. §1.166-5(b)(2))
Facts. From 2000 to 2003, Todd Dagres engaged in venture capital activities with a group of associated entities generally referred to as Battery Ventures. Battery Ventures consisted of: venture capital funds, each of which was organized as a limited partnership (LP); “General Partner LLCs” that served as the general partners of the Venture Fund LPs and provided management and investment services, each of which had a 1% investment interest as well as a 20% “carried interest” in the profits of its respective Venture Fund LP; and management companies that provided services to assist the operation of the Venture Fund LPs and their General Partner LLCs. BMC was a management company of which Dagres was a salaried employee and shareholder, and he also served as a Member-Manager of a General Partner LLC. Dagres and other Battery Ventures generally provided management and investment services for the Venture Fund LPs pursuant to a service agreement.
BMC assumed all the normal operating expenses of the General Partner LLCs, including compensating the officers and employees of BMC and paying the salaries of the Member Managers of the General Partner LLCs. Each Venture Fund LP paid annual service fees of 2 to 2.5% of the partners' total committed capital in the fund. The Venture Fund LPs paid these service fees to their respective General Partner LLCs, which in turn agreed to reimburse BMC for organizational expenses and pay a service fee to BMC. These service fees were used to pay BMC's salaries to its employees. However, the most significant financial incentive to BMC's employees, including Dagres, was the 20% carried interest in the Venture Fund LPs' profits.
Dagres earned substantial income while working for Battery Ventures: his salary, as a BMC employee; his share of service fees, as a BMC stockholder; and his share of carried interest as a Member-Manager of the General Partner LLCs. From’99 to 2003, he earned over $10 million in salary and over $43 million in capital gains attributable to carried interest. In 2000, the year of the disputed loan, he had over $40 million in capital gains.
Dagres had met William Schrader back in’94 when he served as the lead investment banker for the initial public offering of Schrader's company. Dagres viewed Schrader as an “early pioneer” of the commercial internet and found him to be an influential and useful contact and an important part of Dagres' professional network. Among other things, Schrader was an important source of leads on promising companies for Dagres to consider as potential investments for the venture funds.
Schrader was hard hit when the Internet stock bubble burst in 2000. After exhausting his personal funds and the money he could obtain from family and friends, he asked Dagres to lend him $5 million. Dagres made the loan on Nov. 7, 2000. It was evidenced by a demand note and included 8% interest. It was understood that in return for the loan, whenever Schrader learned about any promising new companies, Dagres would be the first he would tell about any opportunities.
Schrader repaid $800,000 in 2002. Then, to avoid forcing Schrader to file for bankruptcy, Dagres forgave the original loan and got a non-demand promissory note for $4 million with 1.84% interest. Schrader made six payments of $5,000 in 2003, then notified Dagres that he would not be able to make any further monthly payments on the note. They executed a settlement in which Dagres accepted $364,782 in securities from Schrader and forgave the balance of the $4 million loan. During the negotiations, Schrader again reinforced his commitment to giving any investment leads to Dagres.
Dagres claimed business bad debt losses on his Forms 1040 for 2002 and 2003. He attached a Schedule C, Profit or Loss From Business, to each year's returns that reported a sole proprietorship for which the principal business or profession in line A was “Loan and Business Promotions.” He didn't report any business income in 2003 despite receiving payments and securities from Schrader, and claimed a $3,635,218 loss (i.e., the difference between the forgiven debt and the value of the securities).
IRS disallowed the bad debt deduction as a personal loan not connected to Dagres' trade or business. Alternatively, IRS argued that the loan was incurred in Dagres' capacity as an employee; therefore, any loss arising from its worthlessness is deductible as an employee business expense subject to Code Sec. 67’s 2% floor.
Tax Court's analysis. The Tax Court determined that Dagres was in the trade or business of venture capital management, and his dominant motivation for lending $5 million to Schrader was to gain preferential access to companies and deals in order to use that information in his venture capital activities. Thus, the loan was made in connection with his trade or business and was deductible as a business bad debt loss in 2003.
The Court first found that, although an individual's investment and management of his money don't amount to a trade or business, an activity with an investment component can still qualify as a business. The Court then stated that, in cases such as this one where there are significant business promotion activities in addition to investing, one key way to distinguish between mere investment and the conduct of a trade or business is the presence of compensation beyond a return on investment, the existence of which tends to show that the taxpayer's activities rise above that of a passive investor.
The Tax Court then analyzed Dagres' dominant motive in making the loan, noting that a taxpayer can be in multiple lines of business within a year and that the tax consequences of the loan depend on whether it was made in respect to his employment, his investment, or his trade and business. Looking to the overall activities of Battery Ventures, the Court concluded that the General Partner LLCs were in the trade or business of managing venture capital funds, a service for which the fund manager (i.e., Dagres) received both service fees and a profits interest. It further found that Dagres was engaged in this trade or business where he provided management services continuously, regularly, and with the intent of making a profit. In so holding, the Tax Court stated that the General Partner LLCs were more like brokers, which buy and sell securities as inventory for commissions, than mere investment vehicles.
IRS's argument that the character of the General Partner LLCs' activities was governed by their 1% investments in their Venture Fund LPs was belied by the overall financial structure of the deal. Notably, the fact that the General Partner LLCs stood to make 20% of their Venture Fund LPs' profits showed that the “overwhelmingly predominant activity” of the General Partner LLCs was the management of their funds, the compensation for which was the 20% interest. The Court also found that a 1% interest wasn't de minimis, given that such an interest yielded millions of dollars during the years at issue. IRS's other argument that the capital gain character of the funds' income showed that it was derived from an investment activity rather than business was also rejected.
The Court then turned to the issue of to which activity—Dagres' employment, his trade or business, or his investment in the funds—the loan was proximately related. Considering that Dagres' 20% carried interest was by far his most significant source of revenue, the Court determined that the loan was made in regard to such interest (i.e., his venture capital business). And, although Dagres failed to clearly indicate this on his Schedule C, the Court found that wasn't dispositive, especially where “business promotions” was sufficiently broad to cover the management of venture capital funds.
References: For bad debt deductions, see FTC 2d/FIN ¶M-2401; FTC 2d/FIN ¶M-2901; United States Tax Reporter ¶1664.300; TaxDesk ¶320,501; TG ¶17126.
The Tax Court has determined that a venture capitalist was entitled to claim a Code Sec. 166(a) business bad debt deduction for the amount that he forgave on a loan made to a business acquaintance to ensure that the borrower would first inform him of any promising investment opportunities. In so holding, the Court determined that the taxpayer was in the trade or business of managing venture capital funds and that his bad debt loss was proximately related to that trade or business, and rejected IRS's argument that the debt was personal in nature.
Background. Business bad debts are deductible as ordinary deductions. They are deductible if partially worthless as well as when wholly worthless. (Code Sec. 166(a)) A corporation's debts are always business debts. (Code Sec. 166(d))
Nonbusiness bad debts are deducted only as short-term capital losses, and only when wholly worthless. (Code Sec. 166(d)(1))
A nonbusiness debt is defined as any debt other than:
... a debt created or acquired in connection with the trade or business of the taxpayer; (Code Sec. 166(d)(2)(A), Reg. §1.166-5(b)(1)) or
... a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. (Code Sec. 166(d)(2)(B), Reg. §1.166-5(b)(2))
Facts. From 2000 to 2003, Todd Dagres engaged in venture capital activities with a group of associated entities generally referred to as Battery Ventures. Battery Ventures consisted of: venture capital funds, each of which was organized as a limited partnership (LP); “General Partner LLCs” that served as the general partners of the Venture Fund LPs and provided management and investment services, each of which had a 1% investment interest as well as a 20% “carried interest” in the profits of its respective Venture Fund LP; and management companies that provided services to assist the operation of the Venture Fund LPs and their General Partner LLCs. BMC was a management company of which Dagres was a salaried employee and shareholder, and he also served as a Member-Manager of a General Partner LLC. Dagres and other Battery Ventures generally provided management and investment services for the Venture Fund LPs pursuant to a service agreement.
BMC assumed all the normal operating expenses of the General Partner LLCs, including compensating the officers and employees of BMC and paying the salaries of the Member Managers of the General Partner LLCs. Each Venture Fund LP paid annual service fees of 2 to 2.5% of the partners' total committed capital in the fund. The Venture Fund LPs paid these service fees to their respective General Partner LLCs, which in turn agreed to reimburse BMC for organizational expenses and pay a service fee to BMC. These service fees were used to pay BMC's salaries to its employees. However, the most significant financial incentive to BMC's employees, including Dagres, was the 20% carried interest in the Venture Fund LPs' profits.
Dagres earned substantial income while working for Battery Ventures: his salary, as a BMC employee; his share of service fees, as a BMC stockholder; and his share of carried interest as a Member-Manager of the General Partner LLCs. From’99 to 2003, he earned over $10 million in salary and over $43 million in capital gains attributable to carried interest. In 2000, the year of the disputed loan, he had over $40 million in capital gains.
Dagres had met William Schrader back in’94 when he served as the lead investment banker for the initial public offering of Schrader's company. Dagres viewed Schrader as an “early pioneer” of the commercial internet and found him to be an influential and useful contact and an important part of Dagres' professional network. Among other things, Schrader was an important source of leads on promising companies for Dagres to consider as potential investments for the venture funds.
Schrader was hard hit when the Internet stock bubble burst in 2000. After exhausting his personal funds and the money he could obtain from family and friends, he asked Dagres to lend him $5 million. Dagres made the loan on Nov. 7, 2000. It was evidenced by a demand note and included 8% interest. It was understood that in return for the loan, whenever Schrader learned about any promising new companies, Dagres would be the first he would tell about any opportunities.
Schrader repaid $800,000 in 2002. Then, to avoid forcing Schrader to file for bankruptcy, Dagres forgave the original loan and got a non-demand promissory note for $4 million with 1.84% interest. Schrader made six payments of $5,000 in 2003, then notified Dagres that he would not be able to make any further monthly payments on the note. They executed a settlement in which Dagres accepted $364,782 in securities from Schrader and forgave the balance of the $4 million loan. During the negotiations, Schrader again reinforced his commitment to giving any investment leads to Dagres.
Dagres claimed business bad debt losses on his Forms 1040 for 2002 and 2003. He attached a Schedule C, Profit or Loss From Business, to each year's returns that reported a sole proprietorship for which the principal business or profession in line A was “Loan and Business Promotions.” He didn't report any business income in 2003 despite receiving payments and securities from Schrader, and claimed a $3,635,218 loss (i.e., the difference between the forgiven debt and the value of the securities).
IRS disallowed the bad debt deduction as a personal loan not connected to Dagres' trade or business. Alternatively, IRS argued that the loan was incurred in Dagres' capacity as an employee; therefore, any loss arising from its worthlessness is deductible as an employee business expense subject to Code Sec. 67’s 2% floor.
Tax Court's analysis. The Tax Court determined that Dagres was in the trade or business of venture capital management, and his dominant motivation for lending $5 million to Schrader was to gain preferential access to companies and deals in order to use that information in his venture capital activities. Thus, the loan was made in connection with his trade or business and was deductible as a business bad debt loss in 2003.
The Court first found that, although an individual's investment and management of his money don't amount to a trade or business, an activity with an investment component can still qualify as a business. The Court then stated that, in cases such as this one where there are significant business promotion activities in addition to investing, one key way to distinguish between mere investment and the conduct of a trade or business is the presence of compensation beyond a return on investment, the existence of which tends to show that the taxpayer's activities rise above that of a passive investor.
The Tax Court then analyzed Dagres' dominant motive in making the loan, noting that a taxpayer can be in multiple lines of business within a year and that the tax consequences of the loan depend on whether it was made in respect to his employment, his investment, or his trade and business. Looking to the overall activities of Battery Ventures, the Court concluded that the General Partner LLCs were in the trade or business of managing venture capital funds, a service for which the fund manager (i.e., Dagres) received both service fees and a profits interest. It further found that Dagres was engaged in this trade or business where he provided management services continuously, regularly, and with the intent of making a profit. In so holding, the Tax Court stated that the General Partner LLCs were more like brokers, which buy and sell securities as inventory for commissions, than mere investment vehicles.
IRS's argument that the character of the General Partner LLCs' activities was governed by their 1% investments in their Venture Fund LPs was belied by the overall financial structure of the deal. Notably, the fact that the General Partner LLCs stood to make 20% of their Venture Fund LPs' profits showed that the “overwhelmingly predominant activity” of the General Partner LLCs was the management of their funds, the compensation for which was the 20% interest. The Court also found that a 1% interest wasn't de minimis, given that such an interest yielded millions of dollars during the years at issue. IRS's other argument that the capital gain character of the funds' income showed that it was derived from an investment activity rather than business was also rejected.
The Court then turned to the issue of to which activity—Dagres' employment, his trade or business, or his investment in the funds—the loan was proximately related. Considering that Dagres' 20% carried interest was by far his most significant source of revenue, the Court determined that the loan was made in regard to such interest (i.e., his venture capital business). And, although Dagres failed to clearly indicate this on his Schedule C, the Court found that wasn't dispositive, especially where “business promotions” was sufficiently broad to cover the management of venture capital funds.
References: For bad debt deductions, see FTC 2d/FIN ¶M-2401; FTC 2d/FIN ¶M-2901; United States Tax Reporter ¶1664.300; TaxDesk ¶320,501; TG ¶17126.
IRS Provides Guidance On Preparer's E-File Mandate And Taxpayer's Choice To File A Paper Return
Rev Proc 2011-25, 2011-17 IRB, Notice 2011-27, 2011-17 IRB
In a Notice, IRS has provided transitional guidance on when an individual return is considered “filed” by a return preparer for the 2011 requirement that preparers who reasonably expect to file 100 or more returns must file electronically, where the preparer submits the return to IRS on the taxpayer's behalf. IRS has also provided guidance to return preparers in a Revenue Procedure, effective Jan. 1, 2011, on how to document a taxpayer's choice to file a paper return that's prepared by the preparer.
For final regs on return preparers' electronic filing requirements, see the discussion at ¶6. For guidance on exemptions and undue hardship waivers from the preparers' electronic filing requirement, see the discussion at ¶20.
Background. The Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA, P.L. 111-92) provides that for returns filed after Dec. 31, 2010, IRS must require that any individual income tax return prepared by a tax return preparer who reasonably expects to file more than ten individual income tax returns in a calendar year (a specified tax return preparer) must be filed on magnetic media (that is, filed electronically). For this purpose, an individual income tax return also includes income tax returns for estates and trusts. (Code Sec. 6011(e)(3))
However, under transitional relief, IRS provided that solely for the 2011 calendar year, a specified tax return preparer is any person who is a tax return preparer (as defined in Code Sec. 7701(a)(36) and Reg. §301.7701-15) who reasonably expects to file 100 or more individual income tax returns in a calendar year. If a person who is a tax return preparer is a member of a firm, that person is a specified tax return preparer if the person's firm members in the aggregate reasonably expect to file 100 or more individual income tax returns in a calendar year. Beginning in calendar year 2012, however, the filing threshold is lowered from 100 to 11 individual income tax returns (i.e., income tax returns for individuals, estates, and trusts, such as the Form 1040 series and Form 1041).
In December of 2010, IRS issued Notice 2010-85, 2010-51 IRB 877, which contained a proposed revenue procedure that set out guidance on how to submit an undue hardship waiver request and how to document a taxpayer's choice to file the taxpayer's individual return in paper format when the return is prepared by a tax return preparer but filed by the taxpayer.
Under the final regs (see ¶6), an individual income tax return is considered “filed” by a return preparer if he submits the individual income tax return to IRS on the taxpayer's behalf. Submission of a tax return in non-electronic (paper) form includes the transmission, sending, mailing or otherwise delivering of the paper return to IRS by the preparer, any member, employee, or agent of the preparer, or any member, employee, or agent of the preparer's firm. (Reg. §301.6011-7(a)(4)) In Frequently Asked Questions (FAQs) on its website, IRS has said that submission includes the preparer or a member of his firm dropping the return in the mailbox for the taxpayer. Acts such as providing filing or delivery instructions, an addressed envelope, postage estimates, stamps, etc., do not constitute filing by the return preparer as long as he actually mails or otherwise delivers the paper individual income tax return to IRS.
Under the final regs, an individual income tax return will not be considered to be filed by a return preparer (or the preparer's firm), if the preparer who prepared the return obtains a hand-signed statement from the taxpayer that states that the taxpayer chooses to file the return in paper format and that the taxpayer, and not the preparer, is filing the paper return with IRS (e.g., submitting it by mail to IRS). (Reg. §301.6011-7(a)(4)(ii)) Rev Proc 2011-25 provides guidance on how preparers can document a taxpayer's choice to file in paper format.
Interim guidance on when returns are “filed.” Notice 2011-27 provides that solely for calendar year 2011, a specified tax return preparer who prepares individual income tax returns may mail the return in paper format to IRS, at the request of the taxpayer. The specified tax return preparer must obtain and retain a hand-signed (by either spouse if a joint return) and dated (on or before the date mailed) statement containing the taxpayer's choice to have the return filed in paper format, and the taxpayer's unambiguous request to have the preparer mail the return to IRS. The following language in the statement will be sufficient to show that a taxpayer chooses to have his return filed in paper format and has requested that the preparer mail the return on the taxpayer's behalf: “I do not want to have my income tax return electronically filed, and I choose to have my return filed on paper forms. I have asked my tax return preparer to mail my paper return to IRS on my behalf.”
If the taxpayer, and not the specified tax return preparer, intends to mail or otherwise file the taxpayer's individual income tax return with IRS, the return preparer should not obtain the above statement. Instead, the preparer should obtain a taxpayer choice statement in Rev Proc 2011-25, Sec. 9.04.
Documenting taxpayer's choice to file paper return. If a return preparer obtains a hand-signed and dated statement documenting a taxpayer's choice to file in paper return in the manner and format described in Rev Proc 2011-25, Sec. 9, it will demonstrate compliance with the regs. The taxpayer's choice must be in writing, must affirm that the taxpayer is choosing to file the return in paper format and that the taxpayer, and not the preparer, is filing the return (e.g., submitting it by mail to IRS). This statement (to be retained by the preparer) must be hand-signed and dated by the taxpayer (by either spouse if a joint return) on or before the date the taxpayer's return is filed with IRS. An e-mail message from the taxpayer is insufficient to demonstrate a taxpayer's choice to file a return in paper format, but a scanned attachment to an email that complies with the above requirement will suffice. A sample statement is provided:
My tax return preparer [INSERT PREPARER'S NAME] has informed me that [INSERT s/he] may be required to electronically file my [INSERT TAX YEAR] individual income tax return [INSERT TYPE OF RETURN: Form 1040, Form 1040A, Form 1040EZ, Form 1041, Form 990-T] if [INSERT s/he] files it with the IRS on my behalf (e.g., submits it by mail to the IRS). I understand that electronic filing may provide a number of benefits to taxpayers, including an acknowledgement that the IRS received the returns, a reduced chance of errors in processing the returns, and faster refunds. I do not want to have my return electronically filed, and I choose to file my return on paper forms. I will mail or otherwise submit my paper return to the IRS myself. My preparer will not file or otherwise mail or submit my paper return to the IRS.
IRS says that neither the fact that IRS receives a taxpayer's paper return in the mail nor the fact that the preparer's general business practice is to not mail paper individual income tax returns for clients necessarily establishes that the preparer did not file a particular individual income tax return with IRS.
Rev Proc 2011-25, Sec. 9, doesn't apply either to returns or return preparers that meet the criteria for an administrative exemption in Rev Proc 2011-25, Sec. 4 (see ¶20).
References: For when return preparers must file electronic returns, see FTC 2d/FIN ¶S-1601; United States Tax Reporter ¶60,114.075; TaxDesk ¶572,002; TG ¶60802.
In a Notice, IRS has provided transitional guidance on when an individual return is considered “filed” by a return preparer for the 2011 requirement that preparers who reasonably expect to file 100 or more returns must file electronically, where the preparer submits the return to IRS on the taxpayer's behalf. IRS has also provided guidance to return preparers in a Revenue Procedure, effective Jan. 1, 2011, on how to document a taxpayer's choice to file a paper return that's prepared by the preparer.
For final regs on return preparers' electronic filing requirements, see the discussion at ¶6. For guidance on exemptions and undue hardship waivers from the preparers' electronic filing requirement, see the discussion at ¶20.
Background. The Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA, P.L. 111-92) provides that for returns filed after Dec. 31, 2010, IRS must require that any individual income tax return prepared by a tax return preparer who reasonably expects to file more than ten individual income tax returns in a calendar year (a specified tax return preparer) must be filed on magnetic media (that is, filed electronically). For this purpose, an individual income tax return also includes income tax returns for estates and trusts. (Code Sec. 6011(e)(3))
However, under transitional relief, IRS provided that solely for the 2011 calendar year, a specified tax return preparer is any person who is a tax return preparer (as defined in Code Sec. 7701(a)(36) and Reg. §301.7701-15) who reasonably expects to file 100 or more individual income tax returns in a calendar year. If a person who is a tax return preparer is a member of a firm, that person is a specified tax return preparer if the person's firm members in the aggregate reasonably expect to file 100 or more individual income tax returns in a calendar year. Beginning in calendar year 2012, however, the filing threshold is lowered from 100 to 11 individual income tax returns (i.e., income tax returns for individuals, estates, and trusts, such as the Form 1040 series and Form 1041).
In December of 2010, IRS issued Notice 2010-85, 2010-51 IRB 877, which contained a proposed revenue procedure that set out guidance on how to submit an undue hardship waiver request and how to document a taxpayer's choice to file the taxpayer's individual return in paper format when the return is prepared by a tax return preparer but filed by the taxpayer.
Under the final regs (see ¶6), an individual income tax return is considered “filed” by a return preparer if he submits the individual income tax return to IRS on the taxpayer's behalf. Submission of a tax return in non-electronic (paper) form includes the transmission, sending, mailing or otherwise delivering of the paper return to IRS by the preparer, any member, employee, or agent of the preparer, or any member, employee, or agent of the preparer's firm. (Reg. §301.6011-7(a)(4)) In Frequently Asked Questions (FAQs) on its website, IRS has said that submission includes the preparer or a member of his firm dropping the return in the mailbox for the taxpayer. Acts such as providing filing or delivery instructions, an addressed envelope, postage estimates, stamps, etc., do not constitute filing by the return preparer as long as he actually mails or otherwise delivers the paper individual income tax return to IRS.
Under the final regs, an individual income tax return will not be considered to be filed by a return preparer (or the preparer's firm), if the preparer who prepared the return obtains a hand-signed statement from the taxpayer that states that the taxpayer chooses to file the return in paper format and that the taxpayer, and not the preparer, is filing the paper return with IRS (e.g., submitting it by mail to IRS). (Reg. §301.6011-7(a)(4)(ii)) Rev Proc 2011-25 provides guidance on how preparers can document a taxpayer's choice to file in paper format.
Interim guidance on when returns are “filed.” Notice 2011-27 provides that solely for calendar year 2011, a specified tax return preparer who prepares individual income tax returns may mail the return in paper format to IRS, at the request of the taxpayer. The specified tax return preparer must obtain and retain a hand-signed (by either spouse if a joint return) and dated (on or before the date mailed) statement containing the taxpayer's choice to have the return filed in paper format, and the taxpayer's unambiguous request to have the preparer mail the return to IRS. The following language in the statement will be sufficient to show that a taxpayer chooses to have his return filed in paper format and has requested that the preparer mail the return on the taxpayer's behalf: “I do not want to have my income tax return electronically filed, and I choose to have my return filed on paper forms. I have asked my tax return preparer to mail my paper return to IRS on my behalf.”
If the taxpayer, and not the specified tax return preparer, intends to mail or otherwise file the taxpayer's individual income tax return with IRS, the return preparer should not obtain the above statement. Instead, the preparer should obtain a taxpayer choice statement in Rev Proc 2011-25, Sec. 9.04.
Documenting taxpayer's choice to file paper return. If a return preparer obtains a hand-signed and dated statement documenting a taxpayer's choice to file in paper return in the manner and format described in Rev Proc 2011-25, Sec. 9, it will demonstrate compliance with the regs. The taxpayer's choice must be in writing, must affirm that the taxpayer is choosing to file the return in paper format and that the taxpayer, and not the preparer, is filing the return (e.g., submitting it by mail to IRS). This statement (to be retained by the preparer) must be hand-signed and dated by the taxpayer (by either spouse if a joint return) on or before the date the taxpayer's return is filed with IRS. An e-mail message from the taxpayer is insufficient to demonstrate a taxpayer's choice to file a return in paper format, but a scanned attachment to an email that complies with the above requirement will suffice. A sample statement is provided:
My tax return preparer [INSERT PREPARER'S NAME] has informed me that [INSERT s/he] may be required to electronically file my [INSERT TAX YEAR] individual income tax return [INSERT TYPE OF RETURN: Form 1040, Form 1040A, Form 1040EZ, Form 1041, Form 990-T] if [INSERT s/he] files it with the IRS on my behalf (e.g., submits it by mail to the IRS). I understand that electronic filing may provide a number of benefits to taxpayers, including an acknowledgement that the IRS received the returns, a reduced chance of errors in processing the returns, and faster refunds. I do not want to have my return electronically filed, and I choose to file my return on paper forms. I will mail or otherwise submit my paper return to the IRS myself. My preparer will not file or otherwise mail or submit my paper return to the IRS.
IRS says that neither the fact that IRS receives a taxpayer's paper return in the mail nor the fact that the preparer's general business practice is to not mail paper individual income tax returns for clients necessarily establishes that the preparer did not file a particular individual income tax return with IRS.
Rev Proc 2011-25, Sec. 9, doesn't apply either to returns or return preparers that meet the criteria for an administrative exemption in Rev Proc 2011-25, Sec. 4 (see ¶20).
References: For when return preparers must file electronic returns, see FTC 2d/FIN ¶S-1601; United States Tax Reporter ¶60,114.075; TaxDesk ¶572,002; TG ¶60802.
IRS Explains Exemptions And Undue Hardship Waiver From Preparers' Electronic Filing
Rev Proc 2011-25, 2011-17 IRB, Notice 2011-26, 2011-17 IRB
In a Notice, IRS has provided administrative exemptions to the Code Sec. 6011(e)(3)(B) electronic filing requirement for return preparers. These exemptions are applicable retroactively, as of Jan. 1, 2011. IRS has also provided guidance to return preparers in a Revenue Procedure, effective Jan. 1, 2011, on the format, content, and time for filing a request for waiver of the electronic filing requirement because of undue hardship.
For final regs on return preparers' electronic filing requirements, see the discussion at ¶6. For guidance to return preparers where taxpayers choose to file a paper return, see the discussion at ¶24.
Background. Under Code Sec. 6011(e)(3)(B), tax return prepares must electronically file individual income tax returns (which for this purpose includes estate and trust returns) after 2010, unless the return preparer neither files nor reasonably expects to file 10 or more individual income tax returns in a calendar year (a specified tax return preparer). However, under transitional relief, IRS provided that solely for the 2011 calendar year, a specified tax return preparer is any person who reasonably expects to file 100 or more individual income tax returns in the calendar year.
In December of 2010, IRS issued Notice 2010-85, 2010-51 IRB 877, which contained a proposed revenue procedure that set out guidance on how to submit an undue hardship waiver request. (Ann. 2010-96, 2010-52 IRB 936)
Final regs (see ¶6) authorize IRS to grant to a specified tax return preparer a waiver of this requirement in the case of undue hardship. (Reg. §301.6011-7(c)(1)) Under Reg. §301.6011-7(c)(2), IRS may provide administrative exemptions for certain classes of specified tax return preparers or types of individual income tax returns, as the IRS determines necessary to promote the effective and efficient administration of Code Sec. 6011(e)(3) and the regs. Notice 2011-26 sets out administrative exemptions to the electronic filing requirement, which are to remain in effect until modified or superseded.
Exemptions to electronic filing. Notice 2011-26 provides administrative exemptions for certain types of exempt preparers and for certain returns due to either the return preparer's technological difficulties or IRS e-file limitations. A tax return preparer's classification as a specified tax return preparer is based upon the number of non-exempt individual income tax returns he reasonably expects to file in a given calendar year, and exempt returns do not count towards the more than 10 (100 or more in 2011) individual income tax return filing threshold. Further, specified tax return preparers are affected by administrative exemptions because they are not required to electronically file any individual income tax return that qualifies for an administrative exemption. An exemption, however, is not needed for any tax return preparer who is not required to file individual income tax returns electronically, i.e., tax return preparers who reasonably expect to file, or if a member of a firm whose firm's members in the aggregate reasonably expect to file, fewer than 100 individual income tax returns during calendar year 2011 (10 or fewer in calendar year 2012 and thereafter).
Exempt return preparers. The following categories of tax return preparers and specified tax return preparers are exempt from the electronic filing requirement under Code Sec. 6011(e)(3) and the corresponding regs:
... Members of certain religious groups. A tax return preparer who is a member of a recognized religious group that is conscientiously opposed to its members using electronic technology, including for the filing of income tax returns electronically, and that has existed continuously since Dec. 31,’50.
... Foreign preparers without Social Security Numbers. A specified tax return preparer who is a foreign person without a Social Security number and is so ineligible to file electronically because the IRS e-file program currently doesn't accept foreign tax return preparers without Social Security numbers who live and work abroad. The specified tax return preparer (1) must not be a member of a firm that is eligible to e-file, and (2) must have applied for a preparer tax identification number (PTIN) and either submitted Form 8946, PTIN Supplemental Application For Foreign Persons Without a Social Security Number or qualify for the relief provided by Rev Proc 2010-41, 2010-48 IRB 781, Sec. 5.
... Preparers ineligible for IRS e-file. A tax return preparer who is currently ineligible for the IRS e-file program due to an IRS e-file sanction. The exemption ends on the date the sanction period ends or the date the IRS accepts the tax return preparer into the IRS e-file program, whichever date occurs first. If, however, the tax return preparer has a pending application for the IRS e-file program filed with the IRS at the time the sanction period ends, the exemption will continue until the date the IRS renders a decision on the tax return preparer's application.
Returns exempt due to preparer's technological difficulties. The following individual income tax returns are exempt from the electronic filing requirement due to technological difficulties experienced by a return preparer:
... Rejected return. This is a return that a specified tax return preparer attempted to e-file but was unable to e-file because the return was rejected and he attempted to but could not resolve the reject condition or code.
... Forms or schedules not supported by preparer's software package. A return prepared by a tax return preparer or specified tax return preparer whose e-file software package does not support one or more forms or schedules that are part of the return.
... Other technological difficulties. A return or returns prepared by a tax return preparer or specified tax return preparer who experiences a short-term inability to electronically file the return or returns due to some other verifiable and documented technological problem.
Returns exempt due to IRS e-file limitations. The following individual income tax returns and attachments to returns are exempt from the electronic filing requirement, due to IRS barriers or other systemic limitations that currently prevent the returns and attachments from being filed electronically:
... Returns currently not accepted electronically. Any individual income tax return that is not currently accepted electronically by IRS e-file or that IRS has instructed taxpayers not to file electronically.
... Required documentation or attachments not accepted electronically. Any required documentation or attachments that IRS doesn't yet provide the capability to file electronically such as documentation for Code Sec. 6707A disclosures or required appraisals to support charitable contributions are exempt.
A return preparer who qualifies for an exemption described in Notice 2011-26 does not have to request an exemption from IRS or otherwise obtain IRS's approval. These exemptions are automatic, but the burden is on the preparer to show entitlement to an administrative exemption. Undue hardship waiver requests are unnecessary for purposes of claiming an administrative exemption and should not be submitted by or for an exempt preparer or return.
IRS has created Form 8948, Preparer Explanation for Not Filing Electronically, for specified tax return preparers to explain why an individual income tax return that is able to be filed electronically was prepared and filed in paper format. Form 8948 is to be attached to the paper copy of the tax return that a specified tax return preparer prepares and furnishes to the taxpayer. But returns currently not acceptable by IRS electronically do not require the use of Form 8948.
Undue hardship waiver. Rev Proc 2011-25 provides IRS will ordinarily grant undue hardship waivers only in rare cases. A waiver may be granted for a specified period of time or for a series or class of individual income tax returns, although it will not ordinarily be granted for more than one calendar year period. IRS will generally grant an undue hardship waiver only when the specified tax return preparer can demonstrate the undue hardship that would result by complying with the electronic filing requirement, including, but not limited to, any incremental costs to the preparer.
The fact that a preparer doesn't have a computer or appropriate software or doesn't desire to obtain or use a computer or software doesn't, standing alone, constitute an undue hardship. An undue hardship waiver request based solely on this fact or personal desire, without any further explanation or justification (e.g., disability or financial hardship), will be denied.
An undue hardship waiver is requested by submitting a signed and dated Form 8944, Preparer e-file Hardship Waiver Request, to IRS. Form 8944 and any IRS notice granting an undue hardship waiver should not be attached to a taxpayer's paper return. A return preparer must ordinarily submit a request for an undue hardship waiver between October 1 of the calendar year preceding the applicable calendar year and February 15 of the applicable calendar year, or within the time-frame specified in the instructions to Form 8944. Untimely requests for undue hardship waivers will not be considered absent the existence of unusual or unforeseen and unavoidable circumstances.
References: For when return preparers must file electronic returns, see FTC 2d/FIN ¶S-1601; United States Tax Reporter ¶60,114.075; TaxDesk ¶572,002; TG ¶60802.
In a Notice, IRS has provided administrative exemptions to the Code Sec. 6011(e)(3)(B) electronic filing requirement for return preparers. These exemptions are applicable retroactively, as of Jan. 1, 2011. IRS has also provided guidance to return preparers in a Revenue Procedure, effective Jan. 1, 2011, on the format, content, and time for filing a request for waiver of the electronic filing requirement because of undue hardship.
For final regs on return preparers' electronic filing requirements, see the discussion at ¶6. For guidance to return preparers where taxpayers choose to file a paper return, see the discussion at ¶24.
Background. Under Code Sec. 6011(e)(3)(B), tax return prepares must electronically file individual income tax returns (which for this purpose includes estate and trust returns) after 2010, unless the return preparer neither files nor reasonably expects to file 10 or more individual income tax returns in a calendar year (a specified tax return preparer). However, under transitional relief, IRS provided that solely for the 2011 calendar year, a specified tax return preparer is any person who reasonably expects to file 100 or more individual income tax returns in the calendar year.
In December of 2010, IRS issued Notice 2010-85, 2010-51 IRB 877, which contained a proposed revenue procedure that set out guidance on how to submit an undue hardship waiver request. (Ann. 2010-96, 2010-52 IRB 936)
Final regs (see ¶6) authorize IRS to grant to a specified tax return preparer a waiver of this requirement in the case of undue hardship. (Reg. §301.6011-7(c)(1)) Under Reg. §301.6011-7(c)(2), IRS may provide administrative exemptions for certain classes of specified tax return preparers or types of individual income tax returns, as the IRS determines necessary to promote the effective and efficient administration of Code Sec. 6011(e)(3) and the regs. Notice 2011-26 sets out administrative exemptions to the electronic filing requirement, which are to remain in effect until modified or superseded.
Exemptions to electronic filing. Notice 2011-26 provides administrative exemptions for certain types of exempt preparers and for certain returns due to either the return preparer's technological difficulties or IRS e-file limitations. A tax return preparer's classification as a specified tax return preparer is based upon the number of non-exempt individual income tax returns he reasonably expects to file in a given calendar year, and exempt returns do not count towards the more than 10 (100 or more in 2011) individual income tax return filing threshold. Further, specified tax return preparers are affected by administrative exemptions because they are not required to electronically file any individual income tax return that qualifies for an administrative exemption. An exemption, however, is not needed for any tax return preparer who is not required to file individual income tax returns electronically, i.e., tax return preparers who reasonably expect to file, or if a member of a firm whose firm's members in the aggregate reasonably expect to file, fewer than 100 individual income tax returns during calendar year 2011 (10 or fewer in calendar year 2012 and thereafter).
Exempt return preparers. The following categories of tax return preparers and specified tax return preparers are exempt from the electronic filing requirement under Code Sec. 6011(e)(3) and the corresponding regs:
... Members of certain religious groups. A tax return preparer who is a member of a recognized religious group that is conscientiously opposed to its members using electronic technology, including for the filing of income tax returns electronically, and that has existed continuously since Dec. 31,’50.
... Foreign preparers without Social Security Numbers. A specified tax return preparer who is a foreign person without a Social Security number and is so ineligible to file electronically because the IRS e-file program currently doesn't accept foreign tax return preparers without Social Security numbers who live and work abroad. The specified tax return preparer (1) must not be a member of a firm that is eligible to e-file, and (2) must have applied for a preparer tax identification number (PTIN) and either submitted Form 8946, PTIN Supplemental Application For Foreign Persons Without a Social Security Number or qualify for the relief provided by Rev Proc 2010-41, 2010-48 IRB 781, Sec. 5.
... Preparers ineligible for IRS e-file. A tax return preparer who is currently ineligible for the IRS e-file program due to an IRS e-file sanction. The exemption ends on the date the sanction period ends or the date the IRS accepts the tax return preparer into the IRS e-file program, whichever date occurs first. If, however, the tax return preparer has a pending application for the IRS e-file program filed with the IRS at the time the sanction period ends, the exemption will continue until the date the IRS renders a decision on the tax return preparer's application.
Returns exempt due to preparer's technological difficulties. The following individual income tax returns are exempt from the electronic filing requirement due to technological difficulties experienced by a return preparer:
... Rejected return. This is a return that a specified tax return preparer attempted to e-file but was unable to e-file because the return was rejected and he attempted to but could not resolve the reject condition or code.
... Forms or schedules not supported by preparer's software package. A return prepared by a tax return preparer or specified tax return preparer whose e-file software package does not support one or more forms or schedules that are part of the return.
... Other technological difficulties. A return or returns prepared by a tax return preparer or specified tax return preparer who experiences a short-term inability to electronically file the return or returns due to some other verifiable and documented technological problem.
Returns exempt due to IRS e-file limitations. The following individual income tax returns and attachments to returns are exempt from the electronic filing requirement, due to IRS barriers or other systemic limitations that currently prevent the returns and attachments from being filed electronically:
... Returns currently not accepted electronically. Any individual income tax return that is not currently accepted electronically by IRS e-file or that IRS has instructed taxpayers not to file electronically.
... Required documentation or attachments not accepted electronically. Any required documentation or attachments that IRS doesn't yet provide the capability to file electronically such as documentation for Code Sec. 6707A disclosures or required appraisals to support charitable contributions are exempt.
A return preparer who qualifies for an exemption described in Notice 2011-26 does not have to request an exemption from IRS or otherwise obtain IRS's approval. These exemptions are automatic, but the burden is on the preparer to show entitlement to an administrative exemption. Undue hardship waiver requests are unnecessary for purposes of claiming an administrative exemption and should not be submitted by or for an exempt preparer or return.
IRS has created Form 8948, Preparer Explanation for Not Filing Electronically, for specified tax return preparers to explain why an individual income tax return that is able to be filed electronically was prepared and filed in paper format. Form 8948 is to be attached to the paper copy of the tax return that a specified tax return preparer prepares and furnishes to the taxpayer. But returns currently not acceptable by IRS electronically do not require the use of Form 8948.
Undue hardship waiver. Rev Proc 2011-25 provides IRS will ordinarily grant undue hardship waivers only in rare cases. A waiver may be granted for a specified period of time or for a series or class of individual income tax returns, although it will not ordinarily be granted for more than one calendar year period. IRS will generally grant an undue hardship waiver only when the specified tax return preparer can demonstrate the undue hardship that would result by complying with the electronic filing requirement, including, but not limited to, any incremental costs to the preparer.
The fact that a preparer doesn't have a computer or appropriate software or doesn't desire to obtain or use a computer or software doesn't, standing alone, constitute an undue hardship. An undue hardship waiver request based solely on this fact or personal desire, without any further explanation or justification (e.g., disability or financial hardship), will be denied.
An undue hardship waiver is requested by submitting a signed and dated Form 8944, Preparer e-file Hardship Waiver Request, to IRS. Form 8944 and any IRS notice granting an undue hardship waiver should not be attached to a taxpayer's paper return. A return preparer must ordinarily submit a request for an undue hardship waiver between October 1 of the calendar year preceding the applicable calendar year and February 15 of the applicable calendar year, or within the time-frame specified in the instructions to Form 8944. Untimely requests for undue hardship waivers will not be considered absent the existence of unusual or unforeseen and unavoidable circumstances.
References: For when return preparers must file electronic returns, see FTC 2d/FIN ¶S-1601; United States Tax Reporter ¶60,114.075; TaxDesk ¶572,002; TG ¶60802.
Prospectively Effective Final Regs Detail E-Filing Mandate For Specified Tax Return Preparers
Preamble to TD 9518, 03/29/2011; Reg. §1.6011-7, Reg. §301.6011-7
IRS has issued prospectively effective final regs explaining the Worker, Homeownership, and Business Assistance Act of 2009 (WHBBA, P.L. 111-92) requirement for specified tax return preparers to e-file individual, estate, or trust returns. For 2011, the rule applies only if a specified tax return preparer expects to file 100 or more such returns. After 2011, e-filing will be required for those who expect to file 11 or more individual, estate or trust returns. In accompanying guidance, IRS explains how preparers may obtain hardship waivers, how to document an exception for paper returns filed by clients, and administrative exemptions that may apply (see ¶20 and ¶24).
Background. Under Code Sec. 6011(e)(3), as amended by WHBAA, P.L. 111-92), for returns filed after 2010, “specified tax return preparers” who expect to file more than 10 individual returns must file them electronically. For this purpose, an individual income tax return also includes income tax returns for estates and trusts. (Code Sec. 6011(e)(3))
Last summer, IRS informally indicated that it was phasing in the new e-filing requirement over 2 years. Last December, IRS formally announced the transitional relief in proposed regs explaining the e-file mandate. In addition, IRS issued a notice containing a proposed revenue procedure on hardship waivers and documenting an exception for paper returns filed by clients.
Now, IRS has finalized the proposed regs explaining the e-file mandate, making a few changes in response to practitioner comments. Separately, it issued two Notices and a Revenue Procedure explaining administrative exemptions, transitional guidance, and waiver requests (see ¶20 and ¶24).
Required filings. With certain exclusions (e.g., for undue hardship, covered below), any individual income tax return prepared and filed by a specified tax return preparer must be filed using magnetic media, which generally includes magnetic tape, tape cartridge, and diskette, as well as other media, such as electronic filing, specifically allowed under the applicable regs, procedures, or publications. (Reg. §301.6011-7(a)(1), Reg. §301.6011-7(b)) An individual income tax return is any return of income tax imposed by subtitle A on individuals, estates, and trusts, including any income tax return in the Form 1040 series and Form 1041 series. It also includes Form 990-T, Exempt Organization Business Income Tax Return, when the exempt organization is a trust subject to the Code Sec. 511(b) tax on unrelated business taxable income. At this time, certain individual income tax returns such as Form 990-T, Form 1040-NR (U.S. Nonresident Alien Income Tax Return), Form 1041-QFT (U.S. Income Tax Return for 4 Qualified Funeral Trusts), and all amended individual income tax returns, such as Form 1040X (Amended U.S. Individual Income Tax Return), cannot be filed electronically and, therefore, currently are exempt from the electronic filing requirement. (Reg. §301.6011-7(a)(3), Preamble to TD 9518, 03/29/2011)
Specified return preparer. For calendar year 2011, a specified tax return preparer is a tax return preparer who reasonably expects to file—or if the preparer is a member of a firm, the firm's members in the aggregate reasonably expect to file—100 or more individual income tax returns during the year. Beginning Jan. 1, 2012 a specified tax return preparer will be a tax return preparer who reasonably expects to file 11 or more individual income tax returns in a calendar year. (Reg. §301.6011-7(a)(3))
Definition of preparer. A tax return preparer is any person who is a tax return preparer under Code Sec. 7701(a)(36) and Reg. §301.7701-15. (Reg. §301.6011-7(a)(3)) Thus, the regs do not apply to individuals described in Code Sec. 7701(a)(36)(B)(i) through Code Sec. 7701(a)(36)(B)(iv) and Reg. §301.7701-15(f) who aren't defined as tax return preparers—such as an individual who provides tax assistance under a Volunteer Income Tax Assistance (VITA) program, a person who merely prepares a return of the employer (or of an officer or employee of the employer) by whom the person is regularly and continuously employed, or a person who prepares a return as a fiduciary for any person.
Meaning of “filed.” An individual income tax return is treated as “filed” by a tax return preparer or a specified tax return preparer if the preparer submits the tax return to IRS on the taxpayer's behalf, either electronically (by e-file or other magnetic media) or in non-electronic or non-magnetic media (paper) form. (Reg. §301.6011-7(a)(4))
The proposed regs said that submission in non-electronic (paper) form would include the direct or indirect transmission, sending, mailing or otherwise delivering of the paper tax return to IRS by the preparer and would include any act or acts of assistance beyond providing filing or delivery instructions to the taxpayer. In response to commentators' concerns about the broad wording of the proposed regs, the phrases “direct or indirect” and “and includes any act or acts of assistance beyond providing filing or delivery instructions to the taxpayer” were deleted from the final regs. Acts such as providing filing or delivery instructions, an addressed envelope, postage estimates, stamps, or similar acts designed to assist the taxpayer in his efforts to correctly mail or otherwise deliver an individual income tax return to IRS do not constitute filing by the tax return preparer or specified tax return preparer as long as the taxpayer actually mails or otherwise delivers the paper individual income tax return to IRS. (Preamble to TD 9518, 03/29/2011)
Exception for client filed returns. Under Reg. §301.6011-7(a)(4), an individual income tax return isn't treated as filed by a tax return preparer or specified tax return preparer if the tax return preparer or specified tax return preparer who prepared the return obtains, on or before the date the return is filed, a signed and dated written statement from the taxpayer stating that the taxpayer chooses to file the return in paper format, and that the taxpayer, and not the preparer, will submit the paper return to IRS. If it's a joint return, only one spouse needs to sign (the proposed regs would have required both spouses to sign). Notice 2011-27, 2011-17 IRB, provides guidance for calendar year 2011 only, on how to document a taxpayer's choice to file in paper format (see ¶24).
Waiver of e-file mandate. Under Reg. §301.6011-7(c), the overall e-filing mandate is waived for:
1. Specified tax return preparers who request an undue hardship waiver, in the manner prescribed in IRS forms, instructions, or other appropriate guidance. Rev Proc 2011-25, 2011-17 IRB, explains how to submit an undue hardship waiver request (see ¶20).
2. IRS-provided administrative exemptions, for certain class of preparers or returns. Notice 2011-26, 2011-17, carries currently applicable administrative exemptions (see ¶20).
Meaning of “reasonably expect to file.” The determination of whether a tax return preparer (or if the preparer is a member of a firm, the preparer's firm members in the aggregate) reasonably expects to file 10 or fewer individual income tax returns (or, for the 2011 calendar year, fewer than 100 individual income tax returns) is made by adding together all of the individual income tax returns (as defined above) the tax return preparer and, if the preparer is a member of a firm, the firm's members, reasonably expect to prepare and file in each calendar year. In making this determination, returns that are excluded from the electronic filing requirement due to taxpayer choice or under the administrative exemption exclusion, are not counted. (Reg. §301.6011-7(d)(1))
The “reasonably expected” determination is made separately for each calendar year to determine whether the e-filing requirement applies to a tax return preparer for that year. For each calendar year, the “reasonably expected” determination is made based on all relevant, objective, and demonstrable facts and circumstances before the time the tax return preparer and the preparer's firm first file an individual income tax return during the calendar year. (Reg. §301.6011-7(d)(2))
Effective date. The news regs are effectively on Mar. 30, 2011, and apply to individual income tax returns filed after Dec. 31, 2010. (Reg. §301.6011-7(g))
References: For when return preparers must file electronic returns, see FTC 2d/FIN ¶S-1601; United States Tax Reporter ¶60,114.075; TaxDesk ¶572,002; TG ¶60802.
IRS has issued prospectively effective final regs explaining the Worker, Homeownership, and Business Assistance Act of 2009 (WHBBA, P.L. 111-92) requirement for specified tax return preparers to e-file individual, estate, or trust returns. For 2011, the rule applies only if a specified tax return preparer expects to file 100 or more such returns. After 2011, e-filing will be required for those who expect to file 11 or more individual, estate or trust returns. In accompanying guidance, IRS explains how preparers may obtain hardship waivers, how to document an exception for paper returns filed by clients, and administrative exemptions that may apply (see ¶20 and ¶24).
Background. Under Code Sec. 6011(e)(3), as amended by WHBAA, P.L. 111-92), for returns filed after 2010, “specified tax return preparers” who expect to file more than 10 individual returns must file them electronically. For this purpose, an individual income tax return also includes income tax returns for estates and trusts. (Code Sec. 6011(e)(3))
Last summer, IRS informally indicated that it was phasing in the new e-filing requirement over 2 years. Last December, IRS formally announced the transitional relief in proposed regs explaining the e-file mandate. In addition, IRS issued a notice containing a proposed revenue procedure on hardship waivers and documenting an exception for paper returns filed by clients.
Now, IRS has finalized the proposed regs explaining the e-file mandate, making a few changes in response to practitioner comments. Separately, it issued two Notices and a Revenue Procedure explaining administrative exemptions, transitional guidance, and waiver requests (see ¶20 and ¶24).
Required filings. With certain exclusions (e.g., for undue hardship, covered below), any individual income tax return prepared and filed by a specified tax return preparer must be filed using magnetic media, which generally includes magnetic tape, tape cartridge, and diskette, as well as other media, such as electronic filing, specifically allowed under the applicable regs, procedures, or publications. (Reg. §301.6011-7(a)(1), Reg. §301.6011-7(b)) An individual income tax return is any return of income tax imposed by subtitle A on individuals, estates, and trusts, including any income tax return in the Form 1040 series and Form 1041 series. It also includes Form 990-T, Exempt Organization Business Income Tax Return, when the exempt organization is a trust subject to the Code Sec. 511(b) tax on unrelated business taxable income. At this time, certain individual income tax returns such as Form 990-T, Form 1040-NR (U.S. Nonresident Alien Income Tax Return), Form 1041-QFT (U.S. Income Tax Return for 4 Qualified Funeral Trusts), and all amended individual income tax returns, such as Form 1040X (Amended U.S. Individual Income Tax Return), cannot be filed electronically and, therefore, currently are exempt from the electronic filing requirement. (Reg. §301.6011-7(a)(3), Preamble to TD 9518, 03/29/2011)
Specified return preparer. For calendar year 2011, a specified tax return preparer is a tax return preparer who reasonably expects to file—or if the preparer is a member of a firm, the firm's members in the aggregate reasonably expect to file—100 or more individual income tax returns during the year. Beginning Jan. 1, 2012 a specified tax return preparer will be a tax return preparer who reasonably expects to file 11 or more individual income tax returns in a calendar year. (Reg. §301.6011-7(a)(3))
Definition of preparer. A tax return preparer is any person who is a tax return preparer under Code Sec. 7701(a)(36) and Reg. §301.7701-15. (Reg. §301.6011-7(a)(3)) Thus, the regs do not apply to individuals described in Code Sec. 7701(a)(36)(B)(i) through Code Sec. 7701(a)(36)(B)(iv) and Reg. §301.7701-15(f) who aren't defined as tax return preparers—such as an individual who provides tax assistance under a Volunteer Income Tax Assistance (VITA) program, a person who merely prepares a return of the employer (or of an officer or employee of the employer) by whom the person is regularly and continuously employed, or a person who prepares a return as a fiduciary for any person.
Meaning of “filed.” An individual income tax return is treated as “filed” by a tax return preparer or a specified tax return preparer if the preparer submits the tax return to IRS on the taxpayer's behalf, either electronically (by e-file or other magnetic media) or in non-electronic or non-magnetic media (paper) form. (Reg. §301.6011-7(a)(4))
The proposed regs said that submission in non-electronic (paper) form would include the direct or indirect transmission, sending, mailing or otherwise delivering of the paper tax return to IRS by the preparer and would include any act or acts of assistance beyond providing filing or delivery instructions to the taxpayer. In response to commentators' concerns about the broad wording of the proposed regs, the phrases “direct or indirect” and “and includes any act or acts of assistance beyond providing filing or delivery instructions to the taxpayer” were deleted from the final regs. Acts such as providing filing or delivery instructions, an addressed envelope, postage estimates, stamps, or similar acts designed to assist the taxpayer in his efforts to correctly mail or otherwise deliver an individual income tax return to IRS do not constitute filing by the tax return preparer or specified tax return preparer as long as the taxpayer actually mails or otherwise delivers the paper individual income tax return to IRS. (Preamble to TD 9518, 03/29/2011)
Exception for client filed returns. Under Reg. §301.6011-7(a)(4), an individual income tax return isn't treated as filed by a tax return preparer or specified tax return preparer if the tax return preparer or specified tax return preparer who prepared the return obtains, on or before the date the return is filed, a signed and dated written statement from the taxpayer stating that the taxpayer chooses to file the return in paper format, and that the taxpayer, and not the preparer, will submit the paper return to IRS. If it's a joint return, only one spouse needs to sign (the proposed regs would have required both spouses to sign). Notice 2011-27, 2011-17 IRB, provides guidance for calendar year 2011 only, on how to document a taxpayer's choice to file in paper format (see ¶24).
Waiver of e-file mandate. Under Reg. §301.6011-7(c), the overall e-filing mandate is waived for:
1. Specified tax return preparers who request an undue hardship waiver, in the manner prescribed in IRS forms, instructions, or other appropriate guidance. Rev Proc 2011-25, 2011-17 IRB, explains how to submit an undue hardship waiver request (see ¶20).
2. IRS-provided administrative exemptions, for certain class of preparers or returns. Notice 2011-26, 2011-17, carries currently applicable administrative exemptions (see ¶20).
Meaning of “reasonably expect to file.” The determination of whether a tax return preparer (or if the preparer is a member of a firm, the preparer's firm members in the aggregate) reasonably expects to file 10 or fewer individual income tax returns (or, for the 2011 calendar year, fewer than 100 individual income tax returns) is made by adding together all of the individual income tax returns (as defined above) the tax return preparer and, if the preparer is a member of a firm, the firm's members, reasonably expect to prepare and file in each calendar year. In making this determination, returns that are excluded from the electronic filing requirement due to taxpayer choice or under the administrative exemption exclusion, are not counted. (Reg. §301.6011-7(d)(1))
The “reasonably expected” determination is made separately for each calendar year to determine whether the e-filing requirement applies to a tax return preparer for that year. For each calendar year, the “reasonably expected” determination is made based on all relevant, objective, and demonstrable facts and circumstances before the time the tax return preparer and the preparer's firm first file an individual income tax return during the calendar year. (Reg. §301.6011-7(d)(2))
Effective date. The news regs are effectively on Mar. 30, 2011, and apply to individual income tax returns filed after Dec. 31, 2010. (Reg. §301.6011-7(g))
References: For when return preparers must file electronic returns, see FTC 2d/FIN ¶S-1601; United States Tax Reporter ¶60,114.075; TaxDesk ¶572,002; TG ¶60802.
IRS Further Delays Health Insurance Coverage Information Reporting For Small Employers
Notice 2011-28, 2011-16 IRB; IR 2011-31
A new Notice provides interim guidance significantly relaxing the Patient Protection and Affordable Care Act's (PPACA's) information reporting requirement for employer-sponsored health coverage. Under the new guidance, reporting continues to be voluntary for all employers in 2011, and it will be voluntary for small employers until further guidance is issued, but at least through 2012. The Notice also provides guidance on the nuts and bolts of the information reporting rule for employers who will be subject to it, and those employers that choose to voluntarily comply with it.
Background. For tax years beginning on or after Jan. 1, 2011, Code Sec. 6051(a)(14), which was added by PPACA §9002, generally provides that the aggregate cost of the applicable employer-sponsored health insurance coverage (as defined in Code Sec. 4980I(d)(1)) must be reported on Form W-2. For this purpose, the aggregate cost is to be determined under rules similar to the rules of Code Sec. 4980B(f)(4), referring to the definition of the “applicable premium” under the rules providing for COBRA continuation coverage. Code Sec. 6041(a)(14) does not, however, apply to reporting the amount contributed to an Archer MSA or the health savings account of an employee or the employee's spouse, any salary reduction contributions to a flexible spending agreement, or certain “excepted benefits” described in Code Sec. 9832(c)(1) including worker's compensation and disability income insurance.
In Notice 2010-69, 2010-44 IRB 576, IRS made this new reporting requirement optional for all employers for the 2011 Forms W-2 (which would generally be given to employees in January 2012).
Interim guidance. Notice 2011-28 provides further relief for small employers (i.e., those filing fewer than 250 Forms W-2) by making Code Sec. 6051(a)(14) reporting optional for health coverage provided through at least 2012, or until further guidance is issued by IRS. In other words, small employers won't have to report the cost of health care coverage on any forms required to be furnished to employees before January 2014, at the earliest.
Notice 2011-28 also provides additional guidance, in question and answer (Q&A) format, to employers who are subject to the information reporting requirement for the 2012 Forms W-2, and to employers that choose to voluntarily comply with it for either 2011 or 2012. The Q&As are generally categorized as follows: general requirements; methods for reporting the cost of coverage on Form W-2; definitions of terms relating to the cost of coverage required to be reported; the types of coverage for which the cost is required to included on Form W-2; calculation methods used to determine the cost of coverage; and issues that an employer may have to address in determining the cost of coverage. These subjects are briefly addressed below:
... In general. IRS emphasizes that Code Sec. 6051(a)(14)’s new reporting requirement is purely information and has no effect on whether any particular coverage is excludible under Code Sec. 106 or otherwise. Rather, the purpose of the reporting is to “provide useful and comparable consumer information to employees on the cost of their health care coverage.” (Q&A-2)
... Employers subject to the reporting requirement. Except as otherwise provided, all employers that provide applicable employer-sponsored coverage during a calendar year are subject to the reporting requirement, beginning with the 2012 Forms W-2. This includes governmental entities and religious organizations, but not Federally recognized Indian tribal governments. However, employers that file 250 or fewer Forms W-2 for the preceding year are exempted from the reporting requirement for 2012 Forms W-2 (and possibly later, depending on when IRS issues further guidance). (Q&A-3)
... Method of reporting on the Form W-2. The aggregate reportable cost is reported in box 12 of Form W-2, using code “DD.” (Q&A-5) An employer is not required to issue a Form W-2 with the aggregate reportable cost to an individual for whom the employer is not otherwise required to file a Form W-2 (Q&A-9), nor is the employer required to report the total aggregate reportable costs attributable to its employees on Form W-3. (Q&A-10) IRS also provided guidance relating to employees who have coverage provided by the employer for a period during the calendar year after the employee terminated employment (Q&A-6); individuals with multiple employers during the year, or with multiple employers who are related and have a common paymaster (Q&A-7); and individuals who transfer to a new employer that qualifies as a successor employer under Code Sec. 3121(a)(1) (Q&A-8).
... Aggregate cost of applicable employer-sponsored coverage. The “aggregate cost” of applicable employer-sponsored coverage is the total cost of coverage under all “applicable employer-sponsored coverage” provided to an employee (Q&A-11), which is defined as coverage under any “group health plan” made available to the employee that is excludable under Code Sec. 106. (Q&A-12) A “group health plan” refers to a plan of, or contributed to by, an employer or employee organization to provide health care to current and former employees, others currently or formerly associated with the employer in a business relationship, or their families. (Q&A-13) The “aggregate reportable cost” includes both the portions paid by the employer and the employee, regardless of whether the employee's contributions were made on a pre-tax or after-tax basis (Q&A-14), and it also includes the cost of coverage includible in the employee's gross income. (Q&A-15)
... Cost of coverage required to be included in the aggregate reportable cost. Except as otherwise provided, the cost of coverage under all applicable employer-sponsored coverage is included in the aggregate reportable cost, except contributions to an Archer MSA or Health Savings Account, and any salary reduction election to a flexible spending arrangement. (Q&A-16) The aggregate reportable cost does not include: the amount that an employer contributes to a multiemployer plan (Q&A-17); the cost of coverage under a Health Reimbursement Arrangement (Q&A-18); the cost of coverage under a dental or vision plan that isn't integrated into a group health plan (Q&A-20); the cost of coverage provided under a self-insured group health plan that isn't subject to any federal contribution coverage requirements (Q&A-21); or the cost of coverage provided by the federal government, the government of any State or political subdivision thereof, or any agency or instrumentality of any such government, under a plan maintained primarily for members of the military and their families (Q&A-22). If an employer offers a health flexible spending arrangement (FSA) through a Code Sec. 125 cafeteria plan, the amount of the health FSA required to be included is reduced (not below zero) by the employee's salary reduction contribution. (Q&A-19)
... Methods of calculating the cost of coverage. An employer may calculate the reportable cost under a plan using: the COBRA applicable premium method (reportable cost for a period equals the COBRA applicable premium for that coverage during that period) (Q&A-25); the premium charged method (the premium charged by the insurer for an employee's coverage during the applicable period) (Q&A-26); or the modified COBRA premium method (an employer that subsidizes the cost of COBRA determines the reportable cost based on a good faith estimate of the COBRA applicable premium for that period) (Q&A-27). An employer doesn't have to use the same method for every plan, but must use the same method for every employee receiving coverage under a particular plan. (Q&A-24)
... Other issues relating to calculating the cost of coverage. IRS also provides guidance on: how an employer that charges a composite rate to an employee calculates its reportable cost (Q&A-28); how the reportable cost must account for increases or decreases to the cost during the year (Q&A-29); and how the reportable cost under a plan is calculated if an employee commences, changes or terminates coverage during the year (Q&A-30). IRS also clarified that the reportable cost under a plan must be determined on a calendar year basis.
References: For reporting of health insurance on Form W-2, see FTC 2d/FIN ¶S-3152; United States Tax Reporter ¶60,514; TaxDesk ¶812,002; TG ¶60301.
A new Notice provides interim guidance significantly relaxing the Patient Protection and Affordable Care Act's (PPACA's) information reporting requirement for employer-sponsored health coverage. Under the new guidance, reporting continues to be voluntary for all employers in 2011, and it will be voluntary for small employers until further guidance is issued, but at least through 2012. The Notice also provides guidance on the nuts and bolts of the information reporting rule for employers who will be subject to it, and those employers that choose to voluntarily comply with it.
Background. For tax years beginning on or after Jan. 1, 2011, Code Sec. 6051(a)(14), which was added by PPACA §9002, generally provides that the aggregate cost of the applicable employer-sponsored health insurance coverage (as defined in Code Sec. 4980I(d)(1)) must be reported on Form W-2. For this purpose, the aggregate cost is to be determined under rules similar to the rules of Code Sec. 4980B(f)(4), referring to the definition of the “applicable premium” under the rules providing for COBRA continuation coverage. Code Sec. 6041(a)(14) does not, however, apply to reporting the amount contributed to an Archer MSA or the health savings account of an employee or the employee's spouse, any salary reduction contributions to a flexible spending agreement, or certain “excepted benefits” described in Code Sec. 9832(c)(1) including worker's compensation and disability income insurance.
In Notice 2010-69, 2010-44 IRB 576, IRS made this new reporting requirement optional for all employers for the 2011 Forms W-2 (which would generally be given to employees in January 2012).
Interim guidance. Notice 2011-28 provides further relief for small employers (i.e., those filing fewer than 250 Forms W-2) by making Code Sec. 6051(a)(14) reporting optional for health coverage provided through at least 2012, or until further guidance is issued by IRS. In other words, small employers won't have to report the cost of health care coverage on any forms required to be furnished to employees before January 2014, at the earliest.
Notice 2011-28 also provides additional guidance, in question and answer (Q&A) format, to employers who are subject to the information reporting requirement for the 2012 Forms W-2, and to employers that choose to voluntarily comply with it for either 2011 or 2012. The Q&As are generally categorized as follows: general requirements; methods for reporting the cost of coverage on Form W-2; definitions of terms relating to the cost of coverage required to be reported; the types of coverage for which the cost is required to included on Form W-2; calculation methods used to determine the cost of coverage; and issues that an employer may have to address in determining the cost of coverage. These subjects are briefly addressed below:
... In general. IRS emphasizes that Code Sec. 6051(a)(14)’s new reporting requirement is purely information and has no effect on whether any particular coverage is excludible under Code Sec. 106 or otherwise. Rather, the purpose of the reporting is to “provide useful and comparable consumer information to employees on the cost of their health care coverage.” (Q&A-2)
... Employers subject to the reporting requirement. Except as otherwise provided, all employers that provide applicable employer-sponsored coverage during a calendar year are subject to the reporting requirement, beginning with the 2012 Forms W-2. This includes governmental entities and religious organizations, but not Federally recognized Indian tribal governments. However, employers that file 250 or fewer Forms W-2 for the preceding year are exempted from the reporting requirement for 2012 Forms W-2 (and possibly later, depending on when IRS issues further guidance). (Q&A-3)
... Method of reporting on the Form W-2. The aggregate reportable cost is reported in box 12 of Form W-2, using code “DD.” (Q&A-5) An employer is not required to issue a Form W-2 with the aggregate reportable cost to an individual for whom the employer is not otherwise required to file a Form W-2 (Q&A-9), nor is the employer required to report the total aggregate reportable costs attributable to its employees on Form W-3. (Q&A-10) IRS also provided guidance relating to employees who have coverage provided by the employer for a period during the calendar year after the employee terminated employment (Q&A-6); individuals with multiple employers during the year, or with multiple employers who are related and have a common paymaster (Q&A-7); and individuals who transfer to a new employer that qualifies as a successor employer under Code Sec. 3121(a)(1) (Q&A-8).
... Aggregate cost of applicable employer-sponsored coverage. The “aggregate cost” of applicable employer-sponsored coverage is the total cost of coverage under all “applicable employer-sponsored coverage” provided to an employee (Q&A-11), which is defined as coverage under any “group health plan” made available to the employee that is excludable under Code Sec. 106. (Q&A-12) A “group health plan” refers to a plan of, or contributed to by, an employer or employee organization to provide health care to current and former employees, others currently or formerly associated with the employer in a business relationship, or their families. (Q&A-13) The “aggregate reportable cost” includes both the portions paid by the employer and the employee, regardless of whether the employee's contributions were made on a pre-tax or after-tax basis (Q&A-14), and it also includes the cost of coverage includible in the employee's gross income. (Q&A-15)
... Cost of coverage required to be included in the aggregate reportable cost. Except as otherwise provided, the cost of coverage under all applicable employer-sponsored coverage is included in the aggregate reportable cost, except contributions to an Archer MSA or Health Savings Account, and any salary reduction election to a flexible spending arrangement. (Q&A-16) The aggregate reportable cost does not include: the amount that an employer contributes to a multiemployer plan (Q&A-17); the cost of coverage under a Health Reimbursement Arrangement (Q&A-18); the cost of coverage under a dental or vision plan that isn't integrated into a group health plan (Q&A-20); the cost of coverage provided under a self-insured group health plan that isn't subject to any federal contribution coverage requirements (Q&A-21); or the cost of coverage provided by the federal government, the government of any State or political subdivision thereof, or any agency or instrumentality of any such government, under a plan maintained primarily for members of the military and their families (Q&A-22). If an employer offers a health flexible spending arrangement (FSA) through a Code Sec. 125 cafeteria plan, the amount of the health FSA required to be included is reduced (not below zero) by the employee's salary reduction contribution. (Q&A-19)
... Methods of calculating the cost of coverage. An employer may calculate the reportable cost under a plan using: the COBRA applicable premium method (reportable cost for a period equals the COBRA applicable premium for that coverage during that period) (Q&A-25); the premium charged method (the premium charged by the insurer for an employee's coverage during the applicable period) (Q&A-26); or the modified COBRA premium method (an employer that subsidizes the cost of COBRA determines the reportable cost based on a good faith estimate of the COBRA applicable premium for that period) (Q&A-27). An employer doesn't have to use the same method for every plan, but must use the same method for every employee receiving coverage under a particular plan. (Q&A-24)
... Other issues relating to calculating the cost of coverage. IRS also provides guidance on: how an employer that charges a composite rate to an employee calculates its reportable cost (Q&A-28); how the reportable cost must account for increases or decreases to the cost during the year (Q&A-29); and how the reportable cost under a plan is calculated if an employee commences, changes or terminates coverage during the year (Q&A-30). IRS also clarified that the reportable cost under a plan must be determined on a calendar year basis.
References: For reporting of health insurance on Form W-2, see FTC 2d/FIN ¶S-3152; United States Tax Reporter ¶60,514; TaxDesk ¶812,002; TG ¶60301.
IRS Issues Detailed Guidance On New Law's 100% Bonus Depreciation Allowance
Rev Proc 2011-26, 2011-16 IRB
IRS has issued detailed guidance on the 2010 Tax Relief Act's 100% bonus depreciation rules for qualifying new property generally acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012. Overall, the rules are quite generous. For example, they permit 100% bonus depreciation for components where work on a larger self-constructed property began before Sept. 9, 2010, allow a taxpayer to elect to “step down” from 100% to 50% bonus depreciation, OK 100% bonus depreciation for qualified restaurant property or qualified retail improvement property that also meets the definition of qualified leasehold improvement property, and provide an escape hatch for some business car owners who would otherwise be subject to a draconian depreciation result.
Background. In general, under the 2010 Tax Relief Act, an asset qualifies for the 100% bonus depreciation allowance if:
... It is: property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by Code Sec. 197; qualified leasehold improvement property; or certain water utility property;
... It is acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012 (placed in service before Jan. 1, 2013 for certain long production property and aircraft); and
... Its original use commences with the taxpayer. (Code Sec. 168(k)(5))
Limited exception for components. If before Sept. 9, 2010, a taxpayer began the manufacture, construction, or production of a larger self-constructed property that is qualified property for use in its trade or business or for its production of income, but this larger self-constructed property meets the placed in service and original use requirements, the taxpayer may elect to treat any acquired or self-constructed component of that larger self-constructed property as being eligible for the 100% additional first year depreciation deduction if the component is qualified property and is acquired or self-constructed by the taxpayer after Sept. 8, 2010, and before Jan. 1, 2012 (before Jan. 1, 2013, for certain long production property and aircraft)).
The election must be made by the due date (including extensions) of the federal tax return for the taxpayer's tax year in which it placed in service the larger self-constructed property, and by attaching a statement to that return indicating that the taxpayer is making the election under Sec. 3.02(2)(b) of Rev Proc 2011-26, and whether the taxpayer is making the election for all or some of the components.
If a taxpayer timely filed its federal tax return for its tax year in which the larger self-constructed property is placed in service by the taxpayer on or before Apr. 18, 2011, there's an automatic extension of 6 months from the due date of that federal return (excluding extensions) to make the election.
Qualified restaurant property and qualified retail improvement property. Code Sec. 168(e)(7)(B) and Code Sec. 168(e)(8)(B) provide that qualified restaurant property and qualified retail improvement property are not treated as qualified property for purposes of the bonus depreciation rules in Code Sec. 168(k) and thus aren't eligible for the 100% bonus depreciation allowance. Following the lead of the Joint Committee of Taxation (JCT) on the issue, IRS says that an asset that is qualified restaurant property or qualified retail improvement property also may fall within the definition of qualified leasehold improvement property under Code Sec. 168(e)(6), which is eligible for bonus deprecation. If it does, such “dual character” property qualifies for 100% bonus depreciation (or, at the taxpayer's election, 50% bonus depreciation, see below).
Observation: For a detailed article on bonus depreciation for qualified restaurant property and qualified retail improvement property.
Step-down election to 50% bonus depreciation OK'd. An election to take a reduced bonus depreciation deduction was specifically authorized under prior law, when a taxpayer could elect 30%–instead of 50%–bonus first-year depreciation. However, current law does not specially authorize a step-down from 100% to 50% bonus first-year depreciation. Apparently, the only choice for a taxpayer that does not want 100% bonus depreciation was to elect out of bonus depreciation entirely.
Nonetheless, the JCT in its “General Explanation of Tax Legislation Enacted in the 111th Congress” (JCS-2-11, March 2011, colloquially referred to as “the Blue Book”) says that it was Congress's intent that “a taxpayer may elect 50 percent (rather than 100 percent) bonus depreciation with respect to all property in any class of property placed in service during a taxable year.” Now, IRS has decided to follow the JCT's lead on this issue as well, and permit a step-down election from 100% to 50% bonus depreciation.
Observation: This is a reversal of IRS's position in the original Instructions to Form 4562 (Depreciation and Amortization) for 2010, in which IRS said the step-down election from 100% to 50% bonus depreciation could not be made.
Secs. 4 and 5 of Rev Proc 2011-26 carry elaborate procedures for taxpayers that claimed 100% bonus depreciation or that elected out of bonus depreciation but now want to elect to claim a stepped-down 50% bonus depreciation allowance.
Business autos. Under the 2010 Tax Relief Act, the otherwise applicable first-year depreciation deduction for new business autos (as well as light trucks and vans) bought and placed in service after Sept. 8, 2010, and before Jan. 1, 2012, and that otherwise are eligible for 100% bonus first year depreciation, is increased by $8,000. The confluence of these rules, and the pre-existing depreciation rules for business autos, produces a bizarre result. As we'll explain in detail in a future article, most business-car owners would wind up with a first-year depreciation deduction amount capped at $11,060 (for an auto) or $11,260 (for a light truck or van), but would have to defer writing off the balance of the vehicle until after the normal recovery period (literally 5 years, but effectively 6 because of the half-year convention). Fortunately, IRS provides an “out” to mitigate what it calls an “anomalous result.” It takes the form of an “as-if” calculation that determines the unrecovered basis of the vehicle as if 50%—instead of 100%—bonus depreciation had been claimed.
References: For 100% (instead of 50%) bonus depreciation for certain qualified property, see FTC 2d/FIN ¶L-9311.2; United States Tax Reporter ¶1684.0251.
IRS has issued detailed guidance on the 2010 Tax Relief Act's 100% bonus depreciation rules for qualifying new property generally acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012. Overall, the rules are quite generous. For example, they permit 100% bonus depreciation for components where work on a larger self-constructed property began before Sept. 9, 2010, allow a taxpayer to elect to “step down” from 100% to 50% bonus depreciation, OK 100% bonus depreciation for qualified restaurant property or qualified retail improvement property that also meets the definition of qualified leasehold improvement property, and provide an escape hatch for some business car owners who would otherwise be subject to a draconian depreciation result.
Background. In general, under the 2010 Tax Relief Act, an asset qualifies for the 100% bonus depreciation allowance if:
... It is: property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by Code Sec. 197; qualified leasehold improvement property; or certain water utility property;
... It is acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012 (placed in service before Jan. 1, 2013 for certain long production property and aircraft); and
... Its original use commences with the taxpayer. (Code Sec. 168(k)(5))
Limited exception for components. If before Sept. 9, 2010, a taxpayer began the manufacture, construction, or production of a larger self-constructed property that is qualified property for use in its trade or business or for its production of income, but this larger self-constructed property meets the placed in service and original use requirements, the taxpayer may elect to treat any acquired or self-constructed component of that larger self-constructed property as being eligible for the 100% additional first year depreciation deduction if the component is qualified property and is acquired or self-constructed by the taxpayer after Sept. 8, 2010, and before Jan. 1, 2012 (before Jan. 1, 2013, for certain long production property and aircraft)).
The election must be made by the due date (including extensions) of the federal tax return for the taxpayer's tax year in which it placed in service the larger self-constructed property, and by attaching a statement to that return indicating that the taxpayer is making the election under Sec. 3.02(2)(b) of Rev Proc 2011-26, and whether the taxpayer is making the election for all or some of the components.
If a taxpayer timely filed its federal tax return for its tax year in which the larger self-constructed property is placed in service by the taxpayer on or before Apr. 18, 2011, there's an automatic extension of 6 months from the due date of that federal return (excluding extensions) to make the election.
Qualified restaurant property and qualified retail improvement property. Code Sec. 168(e)(7)(B) and Code Sec. 168(e)(8)(B) provide that qualified restaurant property and qualified retail improvement property are not treated as qualified property for purposes of the bonus depreciation rules in Code Sec. 168(k) and thus aren't eligible for the 100% bonus depreciation allowance. Following the lead of the Joint Committee of Taxation (JCT) on the issue, IRS says that an asset that is qualified restaurant property or qualified retail improvement property also may fall within the definition of qualified leasehold improvement property under Code Sec. 168(e)(6), which is eligible for bonus deprecation. If it does, such “dual character” property qualifies for 100% bonus depreciation (or, at the taxpayer's election, 50% bonus depreciation, see below).
Observation: For a detailed article on bonus depreciation for qualified restaurant property and qualified retail improvement property.
Step-down election to 50% bonus depreciation OK'd. An election to take a reduced bonus depreciation deduction was specifically authorized under prior law, when a taxpayer could elect 30%–instead of 50%–bonus first-year depreciation. However, current law does not specially authorize a step-down from 100% to 50% bonus first-year depreciation. Apparently, the only choice for a taxpayer that does not want 100% bonus depreciation was to elect out of bonus depreciation entirely.
Nonetheless, the JCT in its “General Explanation of Tax Legislation Enacted in the 111th Congress” (JCS-2-11, March 2011, colloquially referred to as “the Blue Book”) says that it was Congress's intent that “a taxpayer may elect 50 percent (rather than 100 percent) bonus depreciation with respect to all property in any class of property placed in service during a taxable year.” Now, IRS has decided to follow the JCT's lead on this issue as well, and permit a step-down election from 100% to 50% bonus depreciation.
Observation: This is a reversal of IRS's position in the original Instructions to Form 4562 (Depreciation and Amortization) for 2010, in which IRS said the step-down election from 100% to 50% bonus depreciation could not be made.
Secs. 4 and 5 of Rev Proc 2011-26 carry elaborate procedures for taxpayers that claimed 100% bonus depreciation or that elected out of bonus depreciation but now want to elect to claim a stepped-down 50% bonus depreciation allowance.
Business autos. Under the 2010 Tax Relief Act, the otherwise applicable first-year depreciation deduction for new business autos (as well as light trucks and vans) bought and placed in service after Sept. 8, 2010, and before Jan. 1, 2012, and that otherwise are eligible for 100% bonus first year depreciation, is increased by $8,000. The confluence of these rules, and the pre-existing depreciation rules for business autos, produces a bizarre result. As we'll explain in detail in a future article, most business-car owners would wind up with a first-year depreciation deduction amount capped at $11,060 (for an auto) or $11,260 (for a light truck or van), but would have to defer writing off the balance of the vehicle until after the normal recovery period (literally 5 years, but effectively 6 because of the half-year convention). Fortunately, IRS provides an “out” to mitigate what it calls an “anomalous result.” It takes the form of an “as-if” calculation that determines the unrecovered basis of the vehicle as if 50%—instead of 100%—bonus depreciation had been claimed.
References: For 100% (instead of 50%) bonus depreciation for certain qualified property, see FTC 2d/FIN ¶L-9311.2; United States Tax Reporter ¶1684.0251.
Tax-Time Errors Filers Should Avoid
Mistakes on tax returns mean they take longer to process, which in turn, may cause your refund to arrive later. The IRS cautions against these nine common errors so your refund is timely.
1. Incorrect or missing Social Security Numbers When entering SSNs for anyone listed on your tax return, be sure to enter them exactly as they appear on the Social Security cards.
2. Incorrect or misspelling of dependent’s last name When entering a dependent’s last name on your tax return, ensure they are entered exactly as they appear on their Social Security card.
3. Filing status errors Make sure you choose the correct filing status for your situation. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction, and Filing Information to determine the filing status that best fits your needs.
4. Math errors When preparing paper returns, review all math for accuracy. Or file electronically; the software does the math for you!
5. Computation errors Take your time. Many taxpayers make mistakes when figuring their taxable income, withholding and estimated tax payments, Earned Income Tax Credit, Standard Deduction for age 65 or over or blind, the taxable amount of Social Security benefits, and the Child and Dependent Care Credit.
6. Incorrect bank account numbers for Direct Deposit If you are due a refund and requested direct deposit review the routing and account numbers for your financial institution.
7. Forgetting to sign and date the return An unsigned tax return is like an unsigned check – it is invalid. And, remember on joint returns both taxpayers must sign the return.
8. Incorrect Adjusted Gross Income information Taxpayers filing electronically must sign the return electronically using a Personal Identification Number. To verify their identity, taxpayers will be prompted to enter their AGI from their originally filed 2009 federal income tax return or their prior year PIN if they used one to file electronically last year. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math error correction made by IRS.
9. Claiming the Making Work Pay Tax Credit Taxpayers who file Form 1040 or 1040A will use Schedule M to figure the Making Work Pay Tax Credit. Completing Schedule M will help taxpayers determine whether they have already received the full credit in their paycheck or are due more money as a result of the credit. Taxpayers who file Form 1040-EZ should use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Credit.
1. Incorrect or missing Social Security Numbers When entering SSNs for anyone listed on your tax return, be sure to enter them exactly as they appear on the Social Security cards.
2. Incorrect or misspelling of dependent’s last name When entering a dependent’s last name on your tax return, ensure they are entered exactly as they appear on their Social Security card.
3. Filing status errors Make sure you choose the correct filing status for your situation. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction, and Filing Information to determine the filing status that best fits your needs.
4. Math errors When preparing paper returns, review all math for accuracy. Or file electronically; the software does the math for you!
5. Computation errors Take your time. Many taxpayers make mistakes when figuring their taxable income, withholding and estimated tax payments, Earned Income Tax Credit, Standard Deduction for age 65 or over or blind, the taxable amount of Social Security benefits, and the Child and Dependent Care Credit.
6. Incorrect bank account numbers for Direct Deposit If you are due a refund and requested direct deposit review the routing and account numbers for your financial institution.
7. Forgetting to sign and date the return An unsigned tax return is like an unsigned check – it is invalid. And, remember on joint returns both taxpayers must sign the return.
8. Incorrect Adjusted Gross Income information Taxpayers filing electronically must sign the return electronically using a Personal Identification Number. To verify their identity, taxpayers will be prompted to enter their AGI from their originally filed 2009 federal income tax return or their prior year PIN if they used one to file electronically last year. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math error correction made by IRS.
9. Claiming the Making Work Pay Tax Credit Taxpayers who file Form 1040 or 1040A will use Schedule M to figure the Making Work Pay Tax Credit. Completing Schedule M will help taxpayers determine whether they have already received the full credit in their paycheck or are due more money as a result of the credit. Taxpayers who file Form 1040-EZ should use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Credit.
Federal approach could be model to cut number of government units
By DOUG FINKE
THE STATE JOURNAL-REGISTER
A state senator is looking to the federal government for a model on how to reduce the glut of local governments in Illinois.
Sen. Terry Link, D-Waukegan, wants to create a commission that will recommend governments to be consolidated or eliminated.
State lawmakers then would take a single up or down vote on the entire list. THe process is similar to the approach used by the federal government to close military bases.
“I think it is a fairer way of doing it,” Link said. “It will allow us to consolidate. It will lessen the number (of governments) we have now.”
Illinois is famous (or infamous) for having the most units of government of any state in the country. And by a wide margin.
Census data complied in 2007 showed Illinois with 6,994 units of government, from cities and counties to drainage and mosquito abatement districts. Pennsylvania was in second place with 4,871, more than 2,100 fewer than Illinois.
“When you look at your tax bill, you’re paying for all of these different units of local government,” Link said. “That’s where your property taxes are going to.”
Link wants to form an eight-member commission with two members appointed by each of the four legislative leaders.
“Hopefully, the leaders would pick people who have definite independence of the General Assembly,” Link said. “They should look at what’s most beneficial to taxpayers, not at what’s political.”
Five-year target
The commission would come up with a list of local governments to be consolidated or abolished. Link said the goal is to target 250 units of government a year over a five-year period.
Each year, the list would be presented to the General Assembly, which could vote to reject the list -- but only in its entirety. Lawmakers could not cherry-pick the list to save a particular local government.
Just how much would be saved by eliminating units of government is an open question.
“There is relatively little research, and what research there is mixed if reducing government reduces the cost of government,” said Jim Nowlan of the Institute of Government and Public Affairs at the University of Illinois.
In North Carolina, for instance, there have been cases where merging governments actually increased costs because lower-paid employees from one governmental body received pay raises to bring them in line with salaries paid by another. It is similar to what some school districts in Illinois experienced when they merged and had to resolve salary disparities between the two.
Nowlan also cited a 2007 Congressional Quarterly publication that showed Illinois was just slightly above the national average in terms of the number of local government employees per 10,000 population, despite Illinois’ outsized number of local governments. Combine state and local public employees, and Illinois ranked 43rd in the country.
Savings in question
“The question is whether a reduction in governments would reduce expenditures significantly,” he said.
University of Illinois Springfield political scientist Chris Mooney said the proliferation of small government units makes it difficult for anyone to monitor their activities.
“Very few people know what these people are doing,” Mooney said. “There is a lack of accountability. There is an opportunity for nepotism and hanky-panky. They’re certainly not all corrupt, but when you get so many of them, people don’t notice what’s going on.”
That’s even true of government units that elect their officers.
“People don’t pay attention to politics to begin with. As you move down the ticket, people know less and less,” he said.
Both Mooney and Nowlan said the job of eliminating units of government will be tough because all of those governments have constituencies that want to preserve the status quo.
“People in them feel passionately about them,” Nowlan said.
“It’s going to be tough, given the way the General Assembly works,” Mooney said. “Nobody wants to be the one whose ox is gored.”
The Township Officials of Illinois represents the more than 1,400 townships in Illinois.
“We are obviously opposed to that bill,” said Bryan Smith, executive director of the association. “It places the fate of a government in the hands of an eight-person commission. I take it as an attack on local government.”
Smith said voters can already elect to dissolve special districts if they choose.
The legislation is Senate Bill 1926.
***
Units of local government in Illinois
Counties – 102
Municipalities – 1,299
Towns or townships – 1,432
Schools – 912
Special districts – 3,249 (such as fire protection, library, drainage, cemetery, park, sewer and other miscellaneous districts)
Copyright 2011 The State Journal-Register. Some rights reserved.
THE STATE JOURNAL-REGISTER
A state senator is looking to the federal government for a model on how to reduce the glut of local governments in Illinois.
Sen. Terry Link, D-Waukegan, wants to create a commission that will recommend governments to be consolidated or eliminated.
State lawmakers then would take a single up or down vote on the entire list. THe process is similar to the approach used by the federal government to close military bases.
“I think it is a fairer way of doing it,” Link said. “It will allow us to consolidate. It will lessen the number (of governments) we have now.”
Illinois is famous (or infamous) for having the most units of government of any state in the country. And by a wide margin.
Census data complied in 2007 showed Illinois with 6,994 units of government, from cities and counties to drainage and mosquito abatement districts. Pennsylvania was in second place with 4,871, more than 2,100 fewer than Illinois.
“When you look at your tax bill, you’re paying for all of these different units of local government,” Link said. “That’s where your property taxes are going to.”
Link wants to form an eight-member commission with two members appointed by each of the four legislative leaders.
“Hopefully, the leaders would pick people who have definite independence of the General Assembly,” Link said. “They should look at what’s most beneficial to taxpayers, not at what’s political.”
Five-year target
The commission would come up with a list of local governments to be consolidated or abolished. Link said the goal is to target 250 units of government a year over a five-year period.
Each year, the list would be presented to the General Assembly, which could vote to reject the list -- but only in its entirety. Lawmakers could not cherry-pick the list to save a particular local government.
Just how much would be saved by eliminating units of government is an open question.
“There is relatively little research, and what research there is mixed if reducing government reduces the cost of government,” said Jim Nowlan of the Institute of Government and Public Affairs at the University of Illinois.
In North Carolina, for instance, there have been cases where merging governments actually increased costs because lower-paid employees from one governmental body received pay raises to bring them in line with salaries paid by another. It is similar to what some school districts in Illinois experienced when they merged and had to resolve salary disparities between the two.
Nowlan also cited a 2007 Congressional Quarterly publication that showed Illinois was just slightly above the national average in terms of the number of local government employees per 10,000 population, despite Illinois’ outsized number of local governments. Combine state and local public employees, and Illinois ranked 43rd in the country.
Savings in question
“The question is whether a reduction in governments would reduce expenditures significantly,” he said.
University of Illinois Springfield political scientist Chris Mooney said the proliferation of small government units makes it difficult for anyone to monitor their activities.
“Very few people know what these people are doing,” Mooney said. “There is a lack of accountability. There is an opportunity for nepotism and hanky-panky. They’re certainly not all corrupt, but when you get so many of them, people don’t notice what’s going on.”
That’s even true of government units that elect their officers.
“People don’t pay attention to politics to begin with. As you move down the ticket, people know less and less,” he said.
Both Mooney and Nowlan said the job of eliminating units of government will be tough because all of those governments have constituencies that want to preserve the status quo.
“People in them feel passionately about them,” Nowlan said.
“It’s going to be tough, given the way the General Assembly works,” Mooney said. “Nobody wants to be the one whose ox is gored.”
The Township Officials of Illinois represents the more than 1,400 townships in Illinois.
“We are obviously opposed to that bill,” said Bryan Smith, executive director of the association. “It places the fate of a government in the hands of an eight-person commission. I take it as an attack on local government.”
Smith said voters can already elect to dissolve special districts if they choose.
The legislation is Senate Bill 1926.
***
Units of local government in Illinois
Counties – 102
Municipalities – 1,299
Towns or townships – 1,432
Schools – 912
Special districts – 3,249 (such as fire protection, library, drainage, cemetery, park, sewer and other miscellaneous districts)
Copyright 2011 The State Journal-Register. Some rights reserved.
Should We Cut Corporate Taxes By Raising Rates On Investors?
Posted by Howard Gleckman
While there seems to be growing agreement in Washington that the U.S. needs to cut its tax rate on corporations, there is (surprise) no consensus at all on how to pay for this. One way: Raise taxes on capital gains and dividends.
This idea was one element of the broad tax reforms proposed last year by the chairs of President Obama’s deficit reduction commission, Alan Simpson and Erskine Bowles, and by the Bipartisan Policy Center’s deficit panel, chaired by Alice Rivlin and Pete Domenici. Both panels relied in part on analysis in a paper by my Tax Policy Center colleagues Eric Toder, Ben Harris, and Rosanne Altshuler. The plan has so far received little attention. It deserves more.
The plan would tax dividends and long-term capital gains at ordinary income rates, with a maximum rate on gains of 28 percent–compared to 15 percent today–and use the revenue to cut corporate tax rates. Those of you with long memories may remember these investment rates were the law back in 1997.
Eric, Ben, and Rosanne figure the revenue this idea would generate would allow Congress to cut the corporate rate from 35 percent to about 26 percent, assuming corporations and investors do not change behavior (by, say, reducing dividend payments). Since they almost certainly will adjust, a redesign would probably buy less of a rate cut. At a roundtable last Friday sponsored by Tax Analysts, Congressional Research Service economist Jane Gravelle suggested it might get rates down to just 30 or 31 percent. Still, that ain’t nothing.
Here’s a bit of background to help explain what this is all about: Economists believe that all income should be taxed once but only once. By that standard, the current taxation of corporations is a mess. In theory, corporate income is double-taxed—once at the firm level and again when income is distributed to shareholders through dividends or capital gains. In reality, some is taxed repeatedly while some is not taxed at all.
To avoid this, many economists have argued for a fully integrated system where corporate income is paid either entirely at the business level or fully by shareholders. In fact, the vast majority of U.S. firms already do this by organizing themselves as pass-through entities such as S corporations and partnerships. In this model, owners pay tax on their individual returns but their business is not taxed at all.
Matters are much more complicated for other corporations, however. Some profits are double-taxed. But others are never taxed at the business level, largely thanks to the ability of multinationals to shift income to low-tax countries and deductible expenses to the U.S. Worse, in that environment, high corporate rates discourage investment in the U.S.
Similarly, foreign investors and tax-exempt shareholders (such as pensions) pay no tax on a big chunk of corporate profits. Another slug of capital gains goes untaxed because investors die and their unrealized gains pass tax-free to their heirs.
The challenge in this environment is to figure out how to reduce the corporate rate so it is competitive with the rest of the world, make sure that profits are somehow taxed, and not increase the deficit by tens of billions of dollars annually. The Congressional Budget Office figures that over the next decade corporations will pay about $400 billion-a-year in income taxes.
That brings us to the option of raising taxes on investors. Shifting some taxes on corporate profits from firms to shareholders has some obvious advantages. The biggest may be that it would reduce those disincentives for companies to invest at home. A tax on shareholders is based on where they live, rather than where their profits are earned. Thus, a lower corporate tax and a higher shareholder tax may, on balance, help keep investment in the U.S.
The TPC paper also figures it would be more progressive than the current regime. Since some share of corporate taxes is paid by workers (just how much is a matter of theological debate among economists), lowering the corporate rate would raise their after-tax earnings. At the same time, TPC figures 70 percent of the higher individual investment taxes would be paid by the top one percent of earners.
There are lots of issues to sort out with such a shift. But it is certainly worth considering.
While there seems to be growing agreement in Washington that the U.S. needs to cut its tax rate on corporations, there is (surprise) no consensus at all on how to pay for this. One way: Raise taxes on capital gains and dividends.
This idea was one element of the broad tax reforms proposed last year by the chairs of President Obama’s deficit reduction commission, Alan Simpson and Erskine Bowles, and by the Bipartisan Policy Center’s deficit panel, chaired by Alice Rivlin and Pete Domenici. Both panels relied in part on analysis in a paper by my Tax Policy Center colleagues Eric Toder, Ben Harris, and Rosanne Altshuler. The plan has so far received little attention. It deserves more.
The plan would tax dividends and long-term capital gains at ordinary income rates, with a maximum rate on gains of 28 percent–compared to 15 percent today–and use the revenue to cut corporate tax rates. Those of you with long memories may remember these investment rates were the law back in 1997.
Eric, Ben, and Rosanne figure the revenue this idea would generate would allow Congress to cut the corporate rate from 35 percent to about 26 percent, assuming corporations and investors do not change behavior (by, say, reducing dividend payments). Since they almost certainly will adjust, a redesign would probably buy less of a rate cut. At a roundtable last Friday sponsored by Tax Analysts, Congressional Research Service economist Jane Gravelle suggested it might get rates down to just 30 or 31 percent. Still, that ain’t nothing.
Here’s a bit of background to help explain what this is all about: Economists believe that all income should be taxed once but only once. By that standard, the current taxation of corporations is a mess. In theory, corporate income is double-taxed—once at the firm level and again when income is distributed to shareholders through dividends or capital gains. In reality, some is taxed repeatedly while some is not taxed at all.
To avoid this, many economists have argued for a fully integrated system where corporate income is paid either entirely at the business level or fully by shareholders. In fact, the vast majority of U.S. firms already do this by organizing themselves as pass-through entities such as S corporations and partnerships. In this model, owners pay tax on their individual returns but their business is not taxed at all.
Matters are much more complicated for other corporations, however. Some profits are double-taxed. But others are never taxed at the business level, largely thanks to the ability of multinationals to shift income to low-tax countries and deductible expenses to the U.S. Worse, in that environment, high corporate rates discourage investment in the U.S.
Similarly, foreign investors and tax-exempt shareholders (such as pensions) pay no tax on a big chunk of corporate profits. Another slug of capital gains goes untaxed because investors die and their unrealized gains pass tax-free to their heirs.
The challenge in this environment is to figure out how to reduce the corporate rate so it is competitive with the rest of the world, make sure that profits are somehow taxed, and not increase the deficit by tens of billions of dollars annually. The Congressional Budget Office figures that over the next decade corporations will pay about $400 billion-a-year in income taxes.
That brings us to the option of raising taxes on investors. Shifting some taxes on corporate profits from firms to shareholders has some obvious advantages. The biggest may be that it would reduce those disincentives for companies to invest at home. A tax on shareholders is based on where they live, rather than where their profits are earned. Thus, a lower corporate tax and a higher shareholder tax may, on balance, help keep investment in the U.S.
The TPC paper also figures it would be more progressive than the current regime. Since some share of corporate taxes is paid by workers (just how much is a matter of theological debate among economists), lowering the corporate rate would raise their after-tax earnings. At the same time, TPC figures 70 percent of the higher individual investment taxes would be paid by the top one percent of earners.
There are lots of issues to sort out with such a shift. But it is certainly worth considering.
IRS Issues Final Regs and Guidance on Mandatory E-Filing Requirements
The IRS issued final regulations (TD 9518) and several pieces of guidance relating to the requirement that return preparers e-file tax returns, starting this year. The final regulations adopt, with minor amendments, proposed regulations (REG-100194-10) that were published last December, and they require specified tax return preparers to e-file if they reasonably expect to file 100 or more income tax returns in 2011.
The final regulations clarify the definition of “specified tax return preparer,” define the term “file,” allow taxpayers to opt out of having their returns e-filed if they follow prescribed procedures, provide for undue hardship waivers and administrative exemptions, and provide a two-year transition rule. The final regulations are effective upon their publication in the Federal Register.
The mandatory e-filing requirement applies to any income tax return for an individual, estate or trust. However, certain returns that the IRS cannot accept electronically are currently exempt from the requirement. These exempt forms include Form 990-T, Exempt Organization Business Income Tax Return; Form 1040-NR, U.S. Nonresident Alien Income Tax Return; Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts; and all amended individual income tax returns.
The IRS received 53 written comments on the proposed regulations and made amendments to the final regulations based on some of the comments.
Specified Tax Return Preparer and Two-Year Transition
For 2011, the regulations define a “specified tax return preparer” as a tax return preparer who reasonably expects to file 100 or more individual income tax returns during the year. If the return preparer is a member of a firm, then the 100-return limit applies in the aggregate to all the firm’s members. Starting in 2012, the 100-return limit will be reduced to 11 returns.
The final regulations specify that the determination of whether a return preparer reasonably expects to file enough returns to fall within the e-filing mandate is made each calendar year for that year. The determination is “based on all relevant, objective, and demonstrable facts and circumstances prior to the time the tax return preparer and the preparer’s firm first file an individual income tax return during the calendar year” (Treas. Reg. § 301.6011-7(d)(2)).
The regulations provide five examples of when a return preparer reasonably expects to meet the return-filing threshold.
File
Some commenters opposed the e-filing requirement because they sometimes mail paper returns to the IRS as a service to their clients. The commenters cited situations such as when clients are elderly or incapacitated or traveling and it is not practical or convenient for them to mail their returns themselves.
Responding to these comments, the IRS has provided a transition rule, for 2011 only, to allow return preparers to mail returns for clients under specific circumstances, which are spelled out in Notice 2011-27. The return preparer must obtain a hand-signed and dated statement from the taxpayer containing both the taxpayer’s choice to have the return filed on paper and the taxpayer’s “unambiguous request” that the return preparer mail the return for the taxpayer. The notice provides sample language for this statement.
The proposed regulations defined submission in paper form by a return preparer to include “any act or acts of assistance beyond providing filing or delivery instructions to the taxpayer.” Commenters asked for clarification of what acts of assistance would amount to filing by the return preparer. In response, the IRS has removed the phrase from the final regulations and clarified in the preamble that “providing filing or delivery instructions, an addressed envelope, postage estimates, stamps, or similar acts designed to assist the taxpayer in the taxpayer’s efforts to correctly mail” the return will not constitute filing by the return preparer, “as long as the taxpayer actually mails” the paper return to the IRS.
Taxpayer Opt Out
Under the proposed regulations, taxpayers would be able to choose to file their own returns on paper, but the return preparer must obtain from any taxpayer who wishes to do this a signed and dated written statement from the taxpayer stating that the taxpayer chooses to file the return in paper format and that the taxpayer, not the return preparer, will submit the paper return to the IRS. The final regulations adopt this rule.
The IRS received several comments suggesting alternatives to the signed taxpayer statement; however, the IRS did not adopt these suggestions. One suggestion it did incorporate into the final regulations was that, for married taxpayers who wish to paper file a joint return, one spouse’s signature on the taxpayer choice statement will be sufficient.
The IRS issued guidance on documenting the taxpayer’s choice to paper file in Revenue Procedure 2011-25. The revenue procedure includes sample language to use for the taxpayer statement. The statement should not be attached to the taxpayer’s return, but should be kept by the return preparer. An email message from the taxpayer is not a sufficient statement for these purposes, but a copy of the taxpayer’s hand-signed and dated statement can be sent as an email attachment.
Hardship Waivers
The final regulations adopt a provision allowing the IRS to waive the e-filing requirement where the requirement would create an undue hardship for the return preparer. The IRS provided guidance on hardship waivers in Revenue Procedure 2011-25. The hardship waiver rules apply immediately.
A hardship waiver request must be made on Form 8944, Preparer e-file Hardship Waiver Request. The form must generally be submitted between Oct. 1 of the year preceding the year for which the waiver is requested and Feb. 15 of the applicable year.
The IRS noted in the revenue procedure that it will ordinarily grant hardship waivers only in rare circumstances. It also noted that when technological issues affect a range of return preparers, it will generally provide an administrative exemption (see below) and not a hardship waiver. The fact that a return preparer does not have a computer or appropriate software will not, standing alone, constitute grounds for a hardship waiver.
The IRS will review hardship waiver requests and send written notice of their approval or denial. Return preparers can send a written request for reconsideration if their hardship waiver request is denied.
Administrative Exemptions
The final regulations also allow the IRS to provide administrative exemptions to the e-filing requirement. In Notice 2011-26, the IRS has provided those exemptions. Specifically, administrative exemptions are created for:
* Specified tax return preparers who are members of certain religious groups that are conscientiously opposed to electronic technology;
* Certain foreign preparers without Social Security numbers (but such preparers must have applied for a preparer tax identification number);
* Specified tax return preparers who are currently ineligible to e-file because of an IRS e-file sanction;
* Returns that have been rejected by the IRS e-file system where the preparer attempted to but could not resolve the reject condition or code;
* Returns prepared using software that does not support e-filing of one or more forms or schedules that are part of the return;
* Returns not e-filed due to short-term, verifiable and documented technological problems; and
* Returns the IRS currently does not accept electronically (as noted above) or returns with attachments or required documentation that the IRS cannot accept electronically.
These administrative exemptions are automatic and are applicable retroactively to Jan. 1, 2011.
The final regulations clarify the definition of “specified tax return preparer,” define the term “file,” allow taxpayers to opt out of having their returns e-filed if they follow prescribed procedures, provide for undue hardship waivers and administrative exemptions, and provide a two-year transition rule. The final regulations are effective upon their publication in the Federal Register.
The mandatory e-filing requirement applies to any income tax return for an individual, estate or trust. However, certain returns that the IRS cannot accept electronically are currently exempt from the requirement. These exempt forms include Form 990-T, Exempt Organization Business Income Tax Return; Form 1040-NR, U.S. Nonresident Alien Income Tax Return; Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts; and all amended individual income tax returns.
The IRS received 53 written comments on the proposed regulations and made amendments to the final regulations based on some of the comments.
Specified Tax Return Preparer and Two-Year Transition
For 2011, the regulations define a “specified tax return preparer” as a tax return preparer who reasonably expects to file 100 or more individual income tax returns during the year. If the return preparer is a member of a firm, then the 100-return limit applies in the aggregate to all the firm’s members. Starting in 2012, the 100-return limit will be reduced to 11 returns.
The final regulations specify that the determination of whether a return preparer reasonably expects to file enough returns to fall within the e-filing mandate is made each calendar year for that year. The determination is “based on all relevant, objective, and demonstrable facts and circumstances prior to the time the tax return preparer and the preparer’s firm first file an individual income tax return during the calendar year” (Treas. Reg. § 301.6011-7(d)(2)).
The regulations provide five examples of when a return preparer reasonably expects to meet the return-filing threshold.
File
Some commenters opposed the e-filing requirement because they sometimes mail paper returns to the IRS as a service to their clients. The commenters cited situations such as when clients are elderly or incapacitated or traveling and it is not practical or convenient for them to mail their returns themselves.
Responding to these comments, the IRS has provided a transition rule, for 2011 only, to allow return preparers to mail returns for clients under specific circumstances, which are spelled out in Notice 2011-27. The return preparer must obtain a hand-signed and dated statement from the taxpayer containing both the taxpayer’s choice to have the return filed on paper and the taxpayer’s “unambiguous request” that the return preparer mail the return for the taxpayer. The notice provides sample language for this statement.
The proposed regulations defined submission in paper form by a return preparer to include “any act or acts of assistance beyond providing filing or delivery instructions to the taxpayer.” Commenters asked for clarification of what acts of assistance would amount to filing by the return preparer. In response, the IRS has removed the phrase from the final regulations and clarified in the preamble that “providing filing or delivery instructions, an addressed envelope, postage estimates, stamps, or similar acts designed to assist the taxpayer in the taxpayer’s efforts to correctly mail” the return will not constitute filing by the return preparer, “as long as the taxpayer actually mails” the paper return to the IRS.
Taxpayer Opt Out
Under the proposed regulations, taxpayers would be able to choose to file their own returns on paper, but the return preparer must obtain from any taxpayer who wishes to do this a signed and dated written statement from the taxpayer stating that the taxpayer chooses to file the return in paper format and that the taxpayer, not the return preparer, will submit the paper return to the IRS. The final regulations adopt this rule.
The IRS received several comments suggesting alternatives to the signed taxpayer statement; however, the IRS did not adopt these suggestions. One suggestion it did incorporate into the final regulations was that, for married taxpayers who wish to paper file a joint return, one spouse’s signature on the taxpayer choice statement will be sufficient.
The IRS issued guidance on documenting the taxpayer’s choice to paper file in Revenue Procedure 2011-25. The revenue procedure includes sample language to use for the taxpayer statement. The statement should not be attached to the taxpayer’s return, but should be kept by the return preparer. An email message from the taxpayer is not a sufficient statement for these purposes, but a copy of the taxpayer’s hand-signed and dated statement can be sent as an email attachment.
Hardship Waivers
The final regulations adopt a provision allowing the IRS to waive the e-filing requirement where the requirement would create an undue hardship for the return preparer. The IRS provided guidance on hardship waivers in Revenue Procedure 2011-25. The hardship waiver rules apply immediately.
A hardship waiver request must be made on Form 8944, Preparer e-file Hardship Waiver Request. The form must generally be submitted between Oct. 1 of the year preceding the year for which the waiver is requested and Feb. 15 of the applicable year.
The IRS noted in the revenue procedure that it will ordinarily grant hardship waivers only in rare circumstances. It also noted that when technological issues affect a range of return preparers, it will generally provide an administrative exemption (see below) and not a hardship waiver. The fact that a return preparer does not have a computer or appropriate software will not, standing alone, constitute grounds for a hardship waiver.
The IRS will review hardship waiver requests and send written notice of their approval or denial. Return preparers can send a written request for reconsideration if their hardship waiver request is denied.
Administrative Exemptions
The final regulations also allow the IRS to provide administrative exemptions to the e-filing requirement. In Notice 2011-26, the IRS has provided those exemptions. Specifically, administrative exemptions are created for:
* Specified tax return preparers who are members of certain religious groups that are conscientiously opposed to electronic technology;
* Certain foreign preparers without Social Security numbers (but such preparers must have applied for a preparer tax identification number);
* Specified tax return preparers who are currently ineligible to e-file because of an IRS e-file sanction;
* Returns that have been rejected by the IRS e-file system where the preparer attempted to but could not resolve the reject condition or code;
* Returns prepared using software that does not support e-filing of one or more forms or schedules that are part of the return;
* Returns not e-filed due to short-term, verifiable and documented technological problems; and
* Returns the IRS currently does not accept electronically (as noted above) or returns with attachments or required documentation that the IRS cannot accept electronically.
These administrative exemptions are automatic and are applicable retroactively to Jan. 1, 2011.
IRS Asks Court to Release Property Tax Records to Catch Gift Tax Nonfilers
By J.P. Finet and Diane Freda
The Internal Revenue Service wants the California Board of Equalization to turn over its computer database in an attempt to find taxpayers who have not paid gift tax on transfers of property to relatives between 2005 and 2010.
In what several practitioners called a fishing expedition, the Justice Department, on behalf of IRS, has a federal judge for leave to serve a “John Doe” summons on the California Board of Equalization requiring the board to turn over records of property transfers for little or no consideration (In Re the tax liabilities of John Does, E.D. Cal., No. 2:10-mc-00130-MCE-EFB, filed 12/27/11). These practitioners say it the first they have heard of this gift tax compliance initiative.
According to the ex parte petition filed with the U.S. District Court for the Eastern District of California Dec. 27, the summons relates to the investigation of U.S. taxpayers who transferred real property between 2005 and 2010. It said the Board of Equalization (BOE) maintains information about transfers under California Proposition 58 and Proposition 193, which exclude from reassessment property transfers between parents and children and grandparents and grandchildren.
“Based on information received from examinations across the country and information voluntarily disclosed by other states, the IRS has determined that taxpayers who transfer real property to a related party for little or no consideration frequently fail to file Form 709 and report this transfer, despite the fact that they are required to do so by the internal revenue laws,” wrote Josephine M. Bonaffini, Federal/State Coordinator of IRS Estate and Gift Tax Program in a declaration filed with the court. “Thus, the IRS has a reasonable basis to believe that a significant portion of the California taxpayers who have transferred property to their children or grandchildren (as reported to the BOE on forms for exclusion of reassessment) for little or no consideration have failed to report these transfers to the IRS.”
Use of John Doe Summonses
A John Doe summons does not identify the person with respect to whose liability it is issued and may be served only after a court proceeding in which the United States establishes certain factors. A John Doe summons the Justice Department filed against UBS AG is widely credited with having been a major factor in the Swiss bank's decision to enter into a deferred prosecution agreement with the government and turn over information on the accounts of U.S. taxpayers.
“The IRS has used John Doe type summonses before and its going to happen again unless someone picks up the torch and runs for the taxpayers because the California Board of Equalization supports the petition,” Gordon Spoor, a CPA with Spoor Associates in St. Petersburg, Fla., told BNA March 25. Spoor said while taxpayers will argue they have a reasonable expectation of privacy, that argument is not likely to be upheld by the court because when public records are filed, there can be no expectation of privacy.
‘Low Hanging Fruit’
Spoor said the IRS is focusing on intrafamily property transfers because they require the filing of a form for reassessment if property is transferred to a family member. Those records are readily available and the IRS is going for “the low hanging fruit,” he said.
Practitioners have known for a long time that IRS would like to use compliance techniques on the gift tax side that it routinely uses on the income tax side, particularly document matching, said Ron Aucutt, partner with McGuire Woods in McLean, Va. “This is an opportunity to replicate that, by looking through registered deed records, stock transfer records, whatever they can get,” he said.
However, practitioners were caught by surprise by the petition—not only by the IRS's attempt to round up recalcitrant gift tax payers, but by the fact that an IRS gift tax compliance program exists at all.
“They've obviously got a lot of information and they have managed to keep it quiet for quite some time,” said Evelyn Capassakis, partner in personal finance services with PricewaterhouseCoopers in New York. “They haven't sifted through all of this in a day, yet they have managed to keep it quiet.”
Both Spoor and Capassakis anticipated trouble for both the IRS and taxpayers from the effort. Because no statute of limitations applies to gift tax returns, Spoor said it is the donee who will be liable to pay gift tax if the donor fails to do it.
Capassakis questioned how IRS will find the manpower to sift through all the data it collects, adding that there have been few tax audits in this area. “In 27 years, I could count the gift tax audits I have had on one hand,” she said.
Gift Tax Compliance Initiative Launched
Bonaffini said that for more than a year, she has been assisting IRS teams nationwide with their examinations of taxpayers who have transferred real property for little or no consideration to related family members and failed to report them on a Form 709. Specifically, she said she worked with teams in Florida, Nebraska, New York, North Carolina, Ohio, Washington, and Wisconsin. She added that many states and counties have voluntarily disclosed their property transfer data.
Based on information provided by the IRS examination teams, Bonaffini estimated that between 60 and 90 percent of taxpayers that transfer real property for little or no consideration to family members fail to report it.
“After learning of the estimated 60 to 90 percent failure-to-file rates in various states, the IRS Estate and Gift Tax Program concluded that failure to file required Forms 709 was a widespread issue and launched a compliance initiative to investigate taxpayers who have transferred real property to a related party for little or no consideration,” explained Bonaffini. The records sought by the summons will reveal identities and disclose transactions by people who may be liable for federal taxes, and will enable the IRS to investigate whether they have complied with the internal revenue laws.
The complete text of this article can be found in the BNA Daily Tax Report, March 28, 2011.
© 2011, The Bureau of National Affairs, Inc.
The Internal Revenue Service wants the California Board of Equalization to turn over its computer database in an attempt to find taxpayers who have not paid gift tax on transfers of property to relatives between 2005 and 2010.
In what several practitioners called a fishing expedition, the Justice Department, on behalf of IRS, has a federal judge for leave to serve a “John Doe” summons on the California Board of Equalization requiring the board to turn over records of property transfers for little or no consideration (In Re the tax liabilities of John Does, E.D. Cal., No. 2:10-mc-00130-MCE-EFB, filed 12/27/11). These practitioners say it the first they have heard of this gift tax compliance initiative.
According to the ex parte petition filed with the U.S. District Court for the Eastern District of California Dec. 27, the summons relates to the investigation of U.S. taxpayers who transferred real property between 2005 and 2010. It said the Board of Equalization (BOE) maintains information about transfers under California Proposition 58 and Proposition 193, which exclude from reassessment property transfers between parents and children and grandparents and grandchildren.
“Based on information received from examinations across the country and information voluntarily disclosed by other states, the IRS has determined that taxpayers who transfer real property to a related party for little or no consideration frequently fail to file Form 709 and report this transfer, despite the fact that they are required to do so by the internal revenue laws,” wrote Josephine M. Bonaffini, Federal/State Coordinator of IRS Estate and Gift Tax Program in a declaration filed with the court. “Thus, the IRS has a reasonable basis to believe that a significant portion of the California taxpayers who have transferred property to their children or grandchildren (as reported to the BOE on forms for exclusion of reassessment) for little or no consideration have failed to report these transfers to the IRS.”
Use of John Doe Summonses
A John Doe summons does not identify the person with respect to whose liability it is issued and may be served only after a court proceeding in which the United States establishes certain factors. A John Doe summons the Justice Department filed against UBS AG is widely credited with having been a major factor in the Swiss bank's decision to enter into a deferred prosecution agreement with the government and turn over information on the accounts of U.S. taxpayers.
“The IRS has used John Doe type summonses before and its going to happen again unless someone picks up the torch and runs for the taxpayers because the California Board of Equalization supports the petition,” Gordon Spoor, a CPA with Spoor Associates in St. Petersburg, Fla., told BNA March 25. Spoor said while taxpayers will argue they have a reasonable expectation of privacy, that argument is not likely to be upheld by the court because when public records are filed, there can be no expectation of privacy.
‘Low Hanging Fruit’
Spoor said the IRS is focusing on intrafamily property transfers because they require the filing of a form for reassessment if property is transferred to a family member. Those records are readily available and the IRS is going for “the low hanging fruit,” he said.
Practitioners have known for a long time that IRS would like to use compliance techniques on the gift tax side that it routinely uses on the income tax side, particularly document matching, said Ron Aucutt, partner with McGuire Woods in McLean, Va. “This is an opportunity to replicate that, by looking through registered deed records, stock transfer records, whatever they can get,” he said.
However, practitioners were caught by surprise by the petition—not only by the IRS's attempt to round up recalcitrant gift tax payers, but by the fact that an IRS gift tax compliance program exists at all.
“They've obviously got a lot of information and they have managed to keep it quiet for quite some time,” said Evelyn Capassakis, partner in personal finance services with PricewaterhouseCoopers in New York. “They haven't sifted through all of this in a day, yet they have managed to keep it quiet.”
Both Spoor and Capassakis anticipated trouble for both the IRS and taxpayers from the effort. Because no statute of limitations applies to gift tax returns, Spoor said it is the donee who will be liable to pay gift tax if the donor fails to do it.
Capassakis questioned how IRS will find the manpower to sift through all the data it collects, adding that there have been few tax audits in this area. “In 27 years, I could count the gift tax audits I have had on one hand,” she said.
Gift Tax Compliance Initiative Launched
Bonaffini said that for more than a year, she has been assisting IRS teams nationwide with their examinations of taxpayers who have transferred real property for little or no consideration to related family members and failed to report them on a Form 709. Specifically, she said she worked with teams in Florida, Nebraska, New York, North Carolina, Ohio, Washington, and Wisconsin. She added that many states and counties have voluntarily disclosed their property transfer data.
Based on information provided by the IRS examination teams, Bonaffini estimated that between 60 and 90 percent of taxpayers that transfer real property for little or no consideration to family members fail to report it.
“After learning of the estimated 60 to 90 percent failure-to-file rates in various states, the IRS Estate and Gift Tax Program concluded that failure to file required Forms 709 was a widespread issue and launched a compliance initiative to investigate taxpayers who have transferred real property to a related party for little or no consideration,” explained Bonaffini. The records sought by the summons will reveal identities and disclose transactions by people who may be liable for federal taxes, and will enable the IRS to investigate whether they have complied with the internal revenue laws.
The complete text of this article can be found in the BNA Daily Tax Report, March 28, 2011.
© 2011, The Bureau of National Affairs, Inc.
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