The IRS expects to issue guidance on the Code Sec. 199A passthrough deduction in July, Acting IRS Commissioner David Kautter has said. Kautter outlined the timeline of various guidance proposals at the American Bar Association (ABA) Section of Taxation May Meeting in Washington, D.C.

The IRS expects to issue guidance on the Code Sec. 199A passthrough deduction in July, Acting IRS Commissioner David Kautter has said. Kautter outlined the timeline of various guidance proposals at the American Bar Association (ABA) Section of Taxation May Meeting in Washington, D.C.

Proposed Guidance
More specifically, the proposed guidance on the passthrough deduction is expected to be released by the end of July, an IRS spokesperson told Wolters Kluwer on May 15. "The goal of the guidance is to get things out that are complete," the IRS spokesperson said, reiterating Kautter. "But, it will not cover every question that taxpayers have," the spokesperson added.

Passthrough Deduction
The new passthrough deduction was enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) last December. The new law provides a 20-percent deduction for income from passthrough entities. The deduction is limited by certain controversial factors including business activities, wages paid by the business, and property values.

Questions Expected
Generally, Kautter anticipates initial follow-up questions from taxpayers and practitioners after the proposed guidance is released, the IRS spokesperson told Wolters Kluwer. Kautter has said that it would be better to get the guidance out in "fairly good shape," to allow for public comment and input, rather than taking more time to draft the guidance internally, according to several reports. Kautter has reportedly said that not everyone may agree with that approach, but that a "better product" will likely be created because of it.

Congressional lawmakers on Capitol Hill continue to focus on tax reform. Republicans and Democrats alike have been discussing the effects of tax reform, albeit reaching different conclusions.

Congressional lawmakers on Capitol Hill continue to focus on tax reform. Republicans and Democrats alike have been discussing the effects of tax reform, albeit reaching different conclusions.

Tax Reform Hearings
The Ways and Means Committee held a hearing during the week of May 14, marking the first in a series of upcoming committee hearings on tax reform. The Ways and Means hearings are each expected to examine the effects of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

Small Businesses. Ways and Means Tax Policy Subcommittee Chairman Vern Buchanan, R-Fla., has announced the second tax reform hearing in the series is scheduled for May 23. The subcommittee hearing is expected to focus on the TCJA’s impact on small businesses.

Senate. The Senate Finance Committee (SFC) examined early impressions of the TCJA in a hearing last month. SFC Chairman Hatch, R-Utah has indicated to Wolters Kluwer that he is also currently examining House proposals to reform the IRS.

TCJA Criticism
Meanwhile, Ways and Means Democrats remain united in their opposition against the new tax law. Ranking member Richard Neal, D-Mass., released a Democratic Progress Report which details areas in which Democrats believe the TCJA has fallen short.

The Republican tax law has not put the middle class first or provided relief for small businesses, the progress report notes. Rather, it has provided large " tax cuts to big corporations and wealthy executives," the report added.

Additionally, Democrats have criticized the TCJA for significantly adding to the federal deficit. Neal called the new law "fiscally irresponsible,"during a Ways and Means hearing held during the week of May 14.

However, House Speaker Paul Ryan, R-Wis., called Democratic tax policy ideas and criticisms of the TCJA "bizarre," during a May 17 press briefing. Democrats are in "denial" about the "thriving economy," according to Ryan.

"If you saw yesterday’s Ways and Means hearing, Democrats are still using the same old doom-and-gloom talk that they were using six months ago," Ryan said. "It was bizarre before, and it is even more bizarre now, when Democrats are openly calling for tax increases, which will do nothing but harm our economy," he added.

To that end, several House Democrats have called for raising the corporate tax rate, including certain Ways and Means members during the full committee hearing. Under the TCJA, the corporate tax rate was lowered from 35 to 21 percent.

Senate
Likewise, Senate Democrats across the Capitol have proposed raising the corporate tax rate to 25 percent. Additionally, in a proposal released by Senate Democrats in March, the top individual tax rate would be reinstated to 39.6 percent. Under the TCJA, the top individual tax rate was lowered to 37 percent. These tax rate increases would pay for a $1 trillion infrastructure plan, according to the Democratic proposal.

Ways and Means Open Seat
In related news, Rep. Brad Wenstrup, R-Ohio, may be eyeing a seat in the House’s tax writing committee. The House Steering Committee has recommended Wenstrup to serve as a member of the Ways and Means Committee. Wenstrup is a doctor, war veteran, and small business owner. He would replace Rep. Patrick Meehan, R-Pa., who resigned last month.

The IRS’s "Achilles’ heel" is using outdated software originating from the 1960s, Acting IRS Commissioner David Kautter told Senate lawmakers. Kautter and Treasury Secretary Steven Mnuchin testified in a May 22 Senate Appropriations Financial Services and General Government Subcommittee hearing.

The IRS’s "Achilles’ heel" is using outdated software originating from the 1960s, Acting IRS Commissioner David Kautter told Senate lawmakers. Kautter and Treasury Secretary Steven Mnuchin testified in a May 22 Senate Appropriations Financial Services and General Government Subcommittee hearing.

System Shut Down
2.3 million cyber attacks are launched against the IRS each day, one million of which are sophisticated, Kautter told Senate appropriators. Kautter and Mnuchin testified before the Subcommittee on the Trump Administration’s fiscal year (FY) 2019 Treasury and IRS budget request.

Underscoring the numerous cyber threats against the IRS is its antiquated technology systems currently in use, Kautter said. "59 percent of IRS hardware and 32 percent of IRS software is obsolete," Kautter told Senate appropriators.

Tax Day Glitch. However, the outdated technology at the IRS was not the cause of the partial system shut down that occurred this year on Tax Day, April 17. For eleven hours, certain taxpayers were unable to electronically submit payments through the IRS’s Direct Pay feature. The particular hardware that failed on Tax Day, however, is only a year-and-a-half old, Kautter said.

Five-Year Plan
The IRS and Treasury are currently crafting a new five-year plan to update the IRS’s information technology (IT) systems, both Kautter and Mnuchin testified. A preliminary draft of the plan is expected within 90 days, Mnuchin said.

"The IRS has not done a good job in the past with regard to its technology dollars," Kautter said. However, the leadership team at the IRS is new, energetic, and knowledgeable, and will thus render a different result, he added.

Tax Reform
Technology is the most time consuming and expensive aspect of tax reform implementation, according to Kautter. Additionally, Kautter expects that guidance on all major aspects of tax reform under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) will be out by fall. Recently, Kautter said that proposed guidance on the Code Sec. 199A pass-through deduction will be released in July.

Tax Gap
"In 2016, IRS estimated that the average annual gross tax gap—the difference between taxes owed and taxes paid on time—was $458 billion for tax years 2008-2010," Subcommittee Chairman James Lankford, R-Okla. said during his opening statement. However, the tax gap is most attributable to the "cash" economy, Kautter told lawmakers.

"An individual taxpayer making more than $1 million a year is seven times more likely to be audited than a taxpayer making under $200,000 a year," Kautter said. "The problems with the tax gap tend to be in the cash economy."

Budget
The Trump Administration’s FY 2019 budget request proposes a total of $12.3 billion for Treasury’s operations and bureaus. The budget request proposes $11.135 billion in IRS funding. This figure for the IRS includes "savings and reductions" of $24.5 million compared to the FY 2018 enacted levels, according to Kautter.

The FY 2019 budget request allocates IRS funding for the following:

• taxpayer services: $2.24 billion;
• operations support: $4.16 billion;
• enforcement: $4.63 billion; and
• business systems modernization: $110 million.

The Treasury Department and the IRS, along with the Department of Labor and the Department of Health and Human Services, issued a notice of clarification to more thoroughly explain their decision not to adopt recommendations made by the American College of Emergency Physicians (ACEP) and certain other commenters regarding T.D. 9744. The challenged regulations govern the coverage of emergency services by group health plans and health insurance issuers under the ACA’s copayment and coinsurance limitations.

The Treasury Department and the IRS, along with the Department of Labor and the Department of Health and Human Services, issued a notice of clarification to more thoroughly explain their decision not to adopt recommendations made by the American College of Emergency Physicians (ACEP) and certain other commenters regarding T.D. 9744. The challenged regulations govern the coverage of emergency services by group health plans and health insurance issuers under the ACA’s copayment and coinsurance limitations.

The ACEP had sued the federal government over the final regulations, which were issued in 2015 under the Patient Protection and Affordable Care Act (ACA) ( P.L. 111-148). Among other things, ACEP argued that the federal government did not adequately respond to their public comments regarding the regulations. On August 31, 2017, the court sent the matter back to the Departments of Health and Human Services, Labor, and Treasury to respond to the public comments from ACEP.

Greatest of Three Regulations
Under T.D. 9744, a plan or issuer satisfies the copayment and coinsurance limitations in the statute if it provides benefits for out-of-network emergency services in an amount equal to the greatest of three possible amounts:

• the amount negotiated with in-network providers for the emergency service furnished;
• the amount for the emergency service calculated using the same method the plan generally uses to determine payments for out-of-network services (such as the usual, customary, and reasonable charges), but substituting the in-network cost-sharing provisions for the out-of-network cost sharing provisions; or
• the amount that would be paid under Medicare for the emergency service.

Each of these amounts is calculated excluding any in-network copayment or coinsurance imposed with respect to the participant, beneficiary, or enrollee. This is sometimes referred to as the "Greatest of Three" or the "GOT" regulation because it sets a floor on the amount that nongrandfathered group health plans, and health insurance issuers offering nongrandfathered group or individual health insurance coverage, are required to pay for out-of-network emergency services under this provision at the greatest of the three listed amounts.

Clarification of Regulations
In their clarification, the departments state that the regulations provide a reasonable and transparent methodology to determine appropriate payments by nongrandfathered group health plans and health insurance issuers offering nongrandfathered group or individual health insurance coverage for out-of-network emergency services. In addition, the departments maintain that ACEP and other commenters did not provide adequate information to support their assertion that the methods used for determining the minimum payment for out-of-network emergency services under the GOT regulation are not sufficiently transparent or reasonable.

The IRS has issued a new five-year strategic plan to guide its programs and operations and to help meet the changing needs of taxpayers and members of the tax community. "Providing service to taxpayers is a vital part of the IRS mission and the new Strategic Plan lays out a vision of ways to help improve our tax system," remarked IRS Acting Commissioner David Kautter.

The IRS has issued a new five-year strategic plan to guide its programs and operations and to help meet the changing needs of taxpayers and members of the tax community. "Providing service to taxpayers is a vital part of the IRS mission and the new Strategic Plan lays out a vision of ways to help improve our tax system," remarked IRS Acting Commissioner David Kautter.

The Fiscal Year 2018-2022 IRS Strategic Plan focuses on six goals aimed at improving customer service:

• empowering and enabling all taxpayers to meet their tax obligations;
• protecting the integrity of the tax system by encouraging compliance through administering and enforcing the tax code;
• proactively collaborating with external partners to improve tax administration;
• cultivating a well-equipped, diverse, flexible and engaged workforce;
• advancing data access, usability and analytics to inform decision-making and improve operational outcomes; and
• driving increased agility, efficiency, effectiveness and security in IRS operations.

The Service further urged taxpayers to be aware of their fundamental rights under the Taxpayer Bill of Rights when dealing with the IRS.

The IRS Large Business and International (LB&I) Division has identified and selected six additional compliance campaigns. The IRS previously announced 13 campaigns on January 31, 2017, followed by an additional 11 on November 3, 2017, and five more on March 13, 2018. These campaigns help LB&I move in the direction of issue-based examinations. In addition, a compliance campaign process helps the organization decide which compliance issues present risks and the best way to respond to such risks.

The IRS Large Business and International (LB&I) Division has identified and selected six additional compliance campaigns. The IRS previously announced 13 campaigns on January 31, 2017, followed by an additional 11 on November 3, 2017, and five more on March 13, 2018. These campaigns help LB&I move in the direction of issue-based examinations. In addition, a compliance campaign process helps the organization decide which compliance issues present risks and the best way to respond to such risks.

The additional campaigns were identified through LB&I data analysis, and suggestions from IRS employees. LB&I’s goal is to improve return selection, identify issues representing a risk of noncompliance, and make the greatest use of limited resources.

The six campaigns selected for the rollout are:

• Interest Capitalization for Self-Constructed Assets;
• F3520/3520-A Non-Compliance and Campus Assessed Penalties;
• Forms 1042/1042-S Compliance;
• Nonresident Alien Tax Treaty Exemptions;
• Nonresident Alien Schedule A and Other Deductions; and
• NRA Tax Credits.

The campaigns themselves fall within the Withholding & International Individual Compliance practice area.

The IRS intends to provide guidance on the new information reporting obligations for certain life insurance contract transactions under Code Sec. 6050Y. The proposed regulations will provide guidance on the modifications to the transfer for valuable consideration rules for life insurance contracts under Code Sec. 101(a). In addition, the IRS has delayed the reporting requirements under Code Sec. 6050Y until the final regulations are issued.

The IRS intends to provide guidance on the new information reporting obligations for certain life insurance contract transactions under Code Sec. 6050Y. The proposed regulations will provide guidance on the modifications to the transfer for valuable consideration rules for life insurance contracts under Code Sec. 101(a). In addition, the IRS has delayed the reporting requirements under Code Sec. 6050Y until the final regulations are issued.

Transfers for Value Rules
For transfers after December 31, 2017, the exceptions to the transfer for value rules do not apply to the transfer of a life insurance contract, or any interest in such a contract, that is a reportable policy sale. Thus, some portion of the death benefit ultimately payable under the contract may be includable in income. A "reportable policy sale" means the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer’s interest in the life insurance contract. A "reportable death benefit" is an amount paid at the death of the insured under a life insurance contract that was transferred in a reportable policy sale.

Reporting Requirements Delayed
The new reporting requirements of Code Sec. 6050Y apply to reportable death benefits paid and reportable policy sales made after December 31, 2017. However, the transition guidance delays any reporting under Code Sec. 6050Y until final regulations are issued.

Under Code Sec. 6050Y, information returns must be filed in the following situations:

• By anyone who acquires a life insurance contract, or any interest in a life insurance contract, in a reportable policy sale;
• By an issuer of a life insurance contract upon notice of a transaction required to be reported above, or upon any notice of a transfer of a life insurance contract, or any interest in a life insurance contract, to a foreign person; and
• By any payor of reportable death benefits.

Proposed Regulations
The proposed regulations will describe the manner by which and time at which the reporting requirements of Code Sec. 6050Y must be satisfied. They will also clarify which parties are subject to the reporting requirements and other definitional issues. For example, Treasury and the IRS intend to define the term "reportable policy sale" in the proposed regulations to include a viatical settlement. In addition, the proposed regulations will clarify the extent to which Code Sec. 6050Y applies to sales or acquisitions effected by transferors and transferees outside the United States, and to sellers and issuers that are foreign persons for purposes of these reporting rules.

The IRS is requesting public comment on the intended proposed regulations implementing these reporting requirements.

The 2016 filing season has closed with renewed emphasis on cybersecurity, tax-related identity theft and customer service. Despite nearly constant attack by cybercriminals, the IRS reported that taxpayer information remains secure. The agency also continued to intercept thousands of bogus returns and prevent the issuance of fraudulent refunds.

The 2016 filing season has closed with renewed emphasis on cybersecurity, tax-related identity theft and customer service. Despite nearly constant attack by cybercriminals, the IRS reported that taxpayer information remains secure. The agency also continued to intercept thousands of bogus returns and prevent the issuance of fraudulent refunds.

Cybersecurity

Concerns about cybersecurity and the confidentiality of taxpayer information were paramount during the filing season. According to the IRS, its basic systems are attacked “millions of times” every day by cybercriminals looking for weaknesses. In April, IRS Commissioner John Koskinen told Congress that the agency’s basic systems are secure. However, cybercriminals did breach its Get Transcript app in 2015 and other applications are under constant probing and attack by cybercriminals.

Koskinen assured Congress that the agency is beefing up its cybersecurity staffing. The IRS has hired 55 new cybersecurity experts. However, he acknowledged that the agency’s cybersecurity head has left and the position is open. This has drawn criticism from lawmakers who have questioned why such an important job is open. Koskinen said that the lengthy government hiring process is a deterrent to hiring cybersecurity professionals and urged Congress to reinstate the agency’s fast-track hiring process.

Identity theft

Closely related to cybersecurity is tax-related identity theft. The breach of the Get Transcript App in 2015 resulted in $50 million in fraudulent refunds paid to cybercriminals, according to a government watchdog.

Because the filing season has just ended, final statistics will not be released until later this year. However, interim statistics give a snapshot of the vastness of the problem of tax-related identity theft. As of March 5, 2016, the IRS had successfully prevented the issuance of some $180 million in fraudulent refunds.

To help prevent tax-related identity theft, the IRS has enhanced its return processing filters. Many of these enhancements, the IRS has explained, are invisible to taxpayers. Other enhancements have been made working with return preparers and tax software providers.

Customer service

The IRS’s level of customer service hit historic lows during the 2015 filings season. Almost two-thirds of all calls to the IRS went unanswered and the agency disconnected millions of callers (so-called “courtesy disconnects.”) There were also long lines for in-person assistance at IRS service centers nationwide. The IRS blamed the poor customer service on budget cuts and its inability to hire more employees to answer taxpayer questions.

In December 2015, Congress gave the IRS an additional $290 million and instructed the agency to use the money to improve customer service, along with boosting cybersecurity and combating identity theft. Koskinen told Congress in April that the agency spent more than $100 million of the $290 million on customer service. As a result, the agency’s level of customer service reached as high as 65 percent during the filing season. However, that level will fall to around 50 percent for all of 2016, Koskinen said. The additional employees hired during the filing season were merely temporary employees and their employment ended with the close of the filing season, Koskinen explained.

Return processing

The IRS expects to receive some 150.6 million returns this filing season. That number includes an estimated 13.5 million returns on extension. Taxpayers on extension have until October 17, 2016 to file.

If you have any questions about the 2016 filing season, please contact our office.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended:

Section 179 expensing. The PATH Act permanently extended the Code Section 179 dollar of investment limitations at the higher $500,000 and $2 million, levels, which are adjusted for inflation for tax years beginning after 2015 (it is $500,000 and $2,010,000 for 2016). In addition, starting only in 2016, the $250,000 limitation on the amount of section 179 property that can be attributable to qualified real property has been eliminated. Further, for tax years beginning after 2015, the Code Section 179 expense deduction is now allowed for air conditioning and heating units.

Bonus depreciation. In addition to the big news that the PATH Act extended Code Section 168(k) bonus depreciation to apply to most qualifying property placed in service before January 1, 2020, it made a number of modifications, including:

• replacement of the bonus allowance for qualified leasehold improvement property with a bonus allowance for additions and improvements to the interior of any nonresidential real property, effective for property placed in service after 2015; and
• allowance to farmers of a 50 percent deduction in place of bonus depreciation on certain trees, vines, and plants in the year of planting or grafting rather than the placed-in-service year, effective for planting and grafting after 2015.

Section 181 expensing. Special Section 181 expensing for qualified film and television productions is extended for two years to apply to qualified film and television productions commencing before January 1, 2017. However, the expensing rule is also expanded to apply to qualified live theatrical productions commencing after December 31, 2015.

WOTC. The Work Opportunity Tax Credit (WOTC) has been extended five years through December 31, 2019. In addition, the credit has been expanded and made available to employers who hire individuals who are qualified long-term unemployment recipients who begin work for the employer after December 31, 2015.

Research credit. The PATH Act permanently extended the research credit that applies to amounts paid or incurred after December 31, 2014. However, a new allowance of the research credit against alternative minimum tax liability applies to credits determined for tax years beginning after December 31, 2015. In addition, a new payroll tax credit associated with the research credit applies only to tax years beginning after December 31, 2015 (Act Sec. 121(d) (3) of the PATH Act).

Military differential pay. The PATH Act extended the employer tax credit for differential wage payments made to qualified employees on active military duty has been made permanent and applies to payments made after December 31, 2014. Effective only for tax years beginning after December 31, 2015, however, the credit may be claimed by all employers regardless of the average number of individuals employed during the tax year. The credit is also no longer limited to eligible small business employers with less than 50 employees.

Teachers' classroom expense deduction. The PATH Act permanently extended the above-the-line deduction for elementary and secondary school teachers' classroom expenses. Additionally, for tax years after 2015, the Act includes "professional development expenses" within the scope of the deduction. These expenses include courses related to the curriculum in which the educator provides instruction.

Nonbusiness energy property credit. The PATH Act extended the nonrefundable nonbusiness energy property credit allowed to individuals under Code Sec. 25C for two years, making it available for qualified energy improvements and property placed in service before January 1, 2017. For property placed in service after December 31, 2015, the standards for energy efficient building envelope components are modified to meet new conservation criteria. 

If you have any questions about these new “extenders,” please contact our office.

The IRS always urges taxpayers to pay their current tax liabilities when due, to avoid interest and penalties. Taxpayers who can’t pay the full amount are urged to pay as much as they can, for the same reason. But some taxpayers cannot pay their full tax liability by the normal April 15 deadline (April 18^th in 2016 because of the intersection of a weekend and a District of Columbia holiday).

The IRS always urges taxpayers to pay their current tax liabilities when due, to avoid interest and penalties. Taxpayers who can’t pay the full amount are urged to pay as much as they can, for the same reason. But some taxpayers cannot pay their full tax liability by the normal April 15 deadline (April 18^th in 2016 because of the intersection of a weekend and a District of Columbia holiday). 

One alternative is to enter into an installment payment agreement with the IRS, where taxpayers agree in writing to make monthly payments to the IRS and to reduce their tax liability to zero over a reasonable period of time. The IRS may also agree to an installment payment arrangement for back taxes. Penalties and interest may continue to accrue, although the IRS may reduce the penalties. While the IRS is authorized to enter into a partial payment installment agreement for a portion of the taxpayer’s liability, the agency has been reluctant to do this.

Form 9465 

Taxpayers who cannot pay the tax liability reported on their current income tax return should submit Form 9465, Installment Agreement Request, to the IRS, to request a monthly installment plan. A taxpayer who owes more than $50,000 should provide Form 433-F, Collection Information Statement, along with the request. Taxpayers can enter into different types of agreements, including:

• A traditional agreement, where they agree to make their monthly payment by check, money order, or credit card;
• A direct debit installment agreement, to make automatic payments from a bank account; or
• A payroll deduction agreement, with payments made by the employer from a paycheck.

The IRS charges a user fee for entering into an agreement: $120 for a traditional agreement; or $52 for a direct debit agreement. Qualifying low-income taxpayers pay a fee of $43, regardless of the type of agreement. If the agreement is restructured (because of a change in the taxpayer’s financial condition, for example), or if the IRS terminates the agreement and then agrees to reinstate it, the IRS will charge a fee of $50.

Different agreements

The IRS’s procedures include different kinds of agreements, depending on the taxpayer’s circumstances:

• Taxpayers can use Form 9465 to apply for a streamlined agreement. The taxpayer must owe $50,000 or less and must pay all their taxes within 72 months or by the expiration of the collection statute of limitations (generally 10 years).
• Instead of using Form 9465, taxpayers can apply for an online payment agreement, provided the taxpayer owes $50,000 or less in taxes, interest and penalties, or provided the taxpayer owns a business and owes $25,000 or less in total. A taxpayer cannot apply online for this agreement if the taxpayer owes more than $50,000.
• Taxpayers who owe $10,000 or less (without interest or penalties) can enter into a guaranteed installment agreement if the taxpayer agrees to pay all taxes within three years. The taxpayer must have filed all returns and paid all taxes due for the past five years, and cannot have entered into an installment agreement in the same period.
• A taxpayer who can make full payment within 120 days should not use Form 9465 but should instead call the IRS phone line to make arrangements. There is no user fee.

Yes, the IRS can impose penalties if a tax return is not timely filed or if a tax liability is not timely paid. As with all IRS penalties, the rules are complex. However, a taxpayer may avoid a penalty if he or she shows reasonable cause.

Yes, the IRS can impose penalties if a tax return is not timely filed or if a tax liability is not timely paid. As with all IRS penalties, the rules are complex. However, a taxpayer may avoid a penalty if he or she shows reasonable cause.

Failure to file

The penalty for failure to file a timely return is five percent of the net amount of tax due for each month or partial month of the delinquency, up to a maximum of 25 percent. The penalty runs from the due date of the return until the date the IRS actually receives the late return. If the failure to file an income tax return extends for more than 60 days, the penalty may not be less than the lesser of $135 (subject to annual inflation adjustments) or 100 percent of the tax due on the return. The penalty applies to the net amount due, which is the tax shown on the return and any additional tax found to be due as reduced by any credits for withholding and estimated tax payments.

Failure to pay

The failure-to-pay tax penalty is generally one-half of one percent of the amount of the unpaid tax for each month of the delinquency, up to a maximum of 25 percent for 50 months. For failure to pay tax shown on the return, the penalty is imposed on the amount shown on the return, less amounts that have been withheld, estimated tax payments, partial payments and other applicable credits. For failure to pay a deficiency within the number of days allotted after the date of a notice and demand, the penalty is imposed on the tax stated in the notice, reduced by the amount of any partial payments.

Overlap

Complexity enters when a taxpayer is subject to both the failure-to-file and the failure-to-pay penalty. In this case, the failure-to-file penalty is generally reduced by the amount of the failure-to-pay penalty. Every taxpayer’s situation is unique, so please contact our office for more details.

Reasonable cause

The failure-to-pay penalty does not apply if the taxpayer shows that the failure-to-pay was due to reasonable cause and not to willful neglect. Generally, the taxpayer must pay the tax due before the IRS will abate a failure-to-pay penalty for reasonable cause.

Certain entities

The Tax Code authorizes the IRS to impose specific penalties on certain entities that fail to file returns. These include a partnership that is required to file a partnership return but does not timely do so, or files a return that does not contain the required information; and an S corporation that is required to file its information return but does not timely do so, or files a return that does not contain the required information, and certain persons with certain interests or stock in a foreign partnership or corporation, among other entities.

Penalties are one of the most complex areas in the Tax Code. If you have any questions about penalties, do not hesitate to contact our office.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

Tax-related identity theft

Tax-related identity theft most often occurs when a criminal uses a stolen Social Security number to file a tax return claiming a fraudulent refund. Often, criminals will claim bogus tax credits or deductions to generate large refunds. Fraud is particularly prevalent for the earned income tax credit, residential energy credits and others. In many cases, the victims of tax-related identity theft only discover the crime when they file their genuine return with the IRS. By this time, all the taxpayer can do is to take steps to prevent a recurrence.

Being proactive

However, there are steps taxpayers can take to reduce the likelihood of being a victim of tax-related identity theft. Personal information must be kept confidential. This includes not only an individual's Social Security number (SSN) but other identification materials, such as bank and other financial account numbers, credit and debit card numbers, and medical and insurance information. Paper documents, including old tax returns if they were filed on paper returns, should be kept in a secure location. Documents that are no longer needed should be shredded.

Online information is especially vulnerable and should be protected by using firewalls, anti-spam/virus software, updating security patches and changing passwords frequently. Identity thieves are very skilled at leveraging whatever information they can find online to create a false tax return.

Impersonators

Criminals do not only steal a taxpayer's identity from documents. Telephone tax scams soared during the 2015 filing season. Indeed, a government watchdog reported that this year was a record high for telephone tax scams. These criminals impersonate IRS officials and threaten legal action unless a taxpayer immediately pays a purported tax debt. These criminals sound convincing when they call and use fake names and bogus IRS identification badge numbers. One sure sign of a telephone tax scam is a demand for payment by prepaid debit card. The IRS never demands payment using a prepaid debit card, nor does the IRS ask for credit or debit card numbers over the phone.

The IRS, the Treasury Inspector General for Tax Administration (TIGTA) and the Federal Tax Commission (FTC) are investigating telephone tax fraud. Individuals who have received these types of calls should alert the IRS, TIGTA or the FTC, even if they have not been victimized.

Tax-related identity theft is a time consuming process for victims so the best defense is a good offense. Please contact our office if you have any questions about tax-related identity theft.

There are three main types of IRS audits: correspondence audits, office audits, and field audits (listed in order of increasing invasiveness). Correspondence audits are initiated (and generally conducted) by postal mail. Office audits require a taxpayer and/or its representative to appear in an IRS office; and a field audit involves IRS examiners paying a visit to the taxpayer's place of business.

There are three main types of IRS audits: correspondence audits, office audits, and field audits (listed in order of increasing invasiveness). Correspondence audits are initiated (and generally conducted) by postal mail. Office audits require a taxpayer and/or its representative to appear in an IRS office; and a field audit involves IRS examiners paying a visit to the taxpayer's place of business.

Correspondence audits

Correspondence audits, as the name suggests, are conducted entirely through the U.S. mail. (The IRS never uses e-mail to correspond with taxpayers.) Correspondence examinations require less involvement from IRS examiners and are therefore used more frequently by the budget-strapped IRS. Because correspondence examinations make up such a large percentage of the total examinations the IRS conducts, they are considered the "work horse" of the IRS audit tools.

The IRS routinely uses correspondence examinations for issues that it generally deems more efficient and less burdensome to handle by mail, for example questionable claims for earned income tax credits (EITCs) or inconsistent line items.

Office audits

Generally, office examinations involve small businesses or individual income tax returns that predominantly include sole proprietorships. They involve issues that are too complex for a correspondence audit, which involves only the exchange of mail and (sometimes) a few telephone calls. Issues subject to an office audit, however, are usually not complex enough to warrant a full-scale field audit examination. Common issues include the substantiation of a business purpose, travel and entertainment expenses, Schedule C items, or certain itemized deductions.

In addition, if a taxpayer previously selected for a correspondence audit requests an interview to discuss the IRS's proposed adjustments, the case may be moved to the taxpayer's district office. Conversely, an examiner may sometimes determine that a tax return selected for an office audit examination would be better handled through a correspondence audit.

Office examinations generally take place at the IRS office located nearest to where taxpayer maintains its financial books and records, which is generally its residence or place of business. However, on a case-by-case basis the IRS will consider written requests from taxpayers or their representatives to change the office examination location. A request by a taxpayer to transfer the place of an office examination will generally be granted if the current residence of the taxpayer or the location of the taxpayer's books, records, and source documents is closer to a different IRS office than the one originally designated for the examination. Additionally, Treasury Reg. 301.7605-1(e)(1) directs the IRS to consider several factors including whether the selected office audit location would cause undue inconvenience to the taxpayer.

Field audits

The IRS initiates a field exam audit usually by sending either a letter that lays out the issues to be examined and lists a specific IRS agent as the point of contact. Taxpayers must contact the revenue agent within 10 days of receiving the initial contact letter in order to schedule an interview. Generally an Information Document Request (IDR) also accompanies the initial contact letter and contains the IRS examiner's description of the audit-related documents it wants to review.

Conducting a field examination of a tax return requires the agent to have far greater knowledge of tax law and accounting principles than do correspondence or office audits, and therefore, field examiners are generally much more experienced than other examiners. Field audits almost always take place where the taxpayer's books, records, and other relevant data are maintained, which generally means the taxpayer's residence or place of business. However, if a business is so small that a field examination would essentially require the taxpayer to close the business or would unduly disrupt the operation of the business, the IRS examiner can conduct the field examination at the closest IRS office or at the office of the taxpayer's representative.

Employers and other organizations must obtain an employer identification number (EIN) to identify themselves for tax administration purposes, such as starting a new business, withholding taxes on wages, or creating a trust. Entities apply for an EIN by filing IRS Form SS-4. Page two of the form advises whether an applicant needs an EIN.

Employers and other organizations must obtain an employer identification number (EIN) to identify themselves for tax administration purposes, such as starting a new business, withholding taxes on wages, or creating a trust. Entities apply for an EIN by filing IRS Form SS-4. Page two of the form advises whether an applicant needs an EIN.

Other entities that need an EIN include corporations, partnerships, estates, trusts, state or local governments, and churches and other nonprofit organizations. Unincorporated entities (sole proprietorships) that establish a retirement plan or that file certain tax forms will also need an EIN for filing the relevant forms.

Application process

The IRS does not charge for obtaining an EIN and has sought to simplify the application process. Taxpayers may apply by mail, by fax, or online. International applicants may also apply by phone. In all cases, if the IRS determines that the applicant needs an EIN, the IRS will issue the EIN and transmit it to the taxpayer in the same manner as the application was made.

Applications by mail generally take four weeks, the IRS indicates, once the SS-4 is properly and completely filled out. Entities located in the U.S. or a U.S. territory can apply online. For online applications, the IRS validates the information and issues the EIN immediately. The IRS notes that the principal officer or other relevant party must have a valid taxpayer identification number, such as a Social Security Number, to use the online application process. The IRS will respond to a completed fax application within four business days, if the applicant provides a fax number.

Filing without EIN

The IRS states that it will only issue one EIN per day per responsible party, regardless of the means of applying. If the taxpayer needs to file a return but lacks an EIN because of this limitation, the IRS advises that the taxpayer should attach a completed Form SS-4 to the completed and signed tax return. The IRS will assign an EIN and then process the return.