Senate tax writers on Capitol Hill continue to discuss bipartisan retirement savings bills as the House gears up for a vote on a related tax measure.

Senate tax writers on Capitol Hill continue to discuss bipartisan retirement savings bills as the House gears up for a vote on a related tax measure.

The Senate Finance Committee (SFC) held a May 14 hearing during which lawmakers on both sides of the aisle highlighted the importance of moving forward with retirement savings-related legislative efforts. While a number of related tax proposals have been introduced recently, SFC lawmakers paid particular focus to the bipartisan Retirement Enhancement Savings Bill, more commonly referred to as “RESA.”

“[T]his committee worked on a bipartisan basis to put together the [RESA],” SFC ranking member Ron Wyden, D-Ore., said during opening statements. “Our bill is all about making it easier for employers -- particularly small businesses -- to offer retirement plans to their employees,” Wyden added. “Giving those small businesses an opportunity to band together and offer a common retirement plan is a simpler and more cost-effective way of helping more people save.”

House Vote Expected on Secure Bill

Notably, the Senate’s RESA bill has many similarities to the House’s Setting Every Community Up for Retirement Enhancement (SECURE) Bill of 2019 (HR 1994). The bipartisan SECURE Bill is expected to reach the House floor for a full chamber vote in the coming days.

“We’re on track to go to the House floor this month,” Kara Getz, chief tax counsel for House Ways and Means Committee Chairman Richard Neal, DMass., has said. Getz, while speaking on May 10 at the American Bar Association (ABA) May Tax Meeting in Washington, D.C., said that the House bill is derived from a true “partnership” between Democrats and Republicans.

To that end, SFC Chairman Chuck Grassley, R-Iowa, alluded during the May 14 hearing that the Senate and House measures could soon be reconciled and enacted. “I’m hoping that the House will send its version of RESA over to us at some point this month,” Grassley said. “And, I’ll continue to work closely with Senator Wyden and other Committee members to reconcile the differences and get this important bill to the President.”

Additionally, Drew Crouch, senior tax counsel for the SFC minority, while speaking on May 10 at the ABA May Meeting, stated that there is a “high probability” the retirement bill(s) will be enacted this year. Crouch further emphasized this position by adding that that there is a “high chance retirement legislation will make it across the finish line,” in this Congress.

Retirement Savings 2.0

Meanwhile, House and Senate lawmakers are already working toward Retirement Savings “2.0,” Getz stated at the ABA May Meeting. House tax writers are “actively working on 2.0,” Getz said, adding that, “we would really like to markup a second retirement bill.”

Likewise, Grassley alluded to the Retirement Savings 2.0 initiative on May 14, noting in his
opening statement that the SFC hearing “marks the start of our work on the next round of retirement savings reforms.”

To that end, SFC members Rob Portman, R Ohio, and Ben Cardin, D-Md., on March 14 introduced
a 132-page bipartisan retirement savings tax bill. The Retirement Savings & Security Bill would
make several sweeping reforms to retirement savings.

President Donald Trump and Democratic congressional leaders have agreed to develop a $2 trillion infrastructure plan, according to Senate Minority Leader Chuck Schumer, D-N.Y.

President Donald Trump and Democratic congressional leaders have agreed to develop a $2 trillion infrastructure plan, according to Senate Minority Leader Chuck Schumer, D-N.Y.

$2 Trillion Infrastructure Plan

"There was goodwill in this meeting…which is a very good thing," Schumer told reporters at the White House on April 30 after meeting with Trump. "We agreed on a number – $2 trillion for infrastructure,"Schumer said. Further, House Speaker Nancy Pelosi, D-Calif., and Schumer both praised Trump after the meeting for his bipartisan cooperation.

The president and Democratic leaders were to meet again to discuss how to pay for the infrastructure plan, Schumer said. At that time, Trump is expected to convey his ideas on funding, Schumer added. "This was a very, very good start…and we hope it will go to a constructive conclusion."

“Pay-Fors”

Additionally, Schumer told reporters at the White House that the infrastructure plan’s "pay-fors"remained undetermined. Notably, Schumer suggested from the Senate floor on April 29 rolling back part of Republicans’ 2017 tax reform law to fund infrastructure costs.

Generally, infrastructure is considered a bipartisan priority among lawmakers. However, reaching an agreement on how to pay for the reportedly $2 trillion infrastructure plan that is still in development is expected on Capitol Hill to be an arduous task. Namely, Democrats are expected to propose scaling back certain tax cuts under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) to foot the infrastructure bill, which is not likely to receive GOP support.

"That’s a non-starter" Senate Majority Leader Mitch McConnell, R-Ky., told reporters at the U.S. Capitol on April 30. "This tax bill [TCJA] is what has generated this robust economy; the last thing we want to do is step on all of this growth…by repealing in effect what has generated all of this prosperity and low unemployment," McConnell said.

White House: Meeting Excellent, Productive

Meanwhile, the White House praised the April 30 infrastructure meeting between Trump and top congressional Democrats, calling it "excellent and productive," as noted in a statement released by White House Press Secretary Sarah Huckabee Sanders shortly after the meeting. Notably, however, the statement did not mention the $2 trillion figure allegedly agreed upon by Trump and Democratic congressional leadership.

"We will have another meeting in three weeks to discuss specific proposals and financing methods,"Sanders added. "The president looks forward to working together in a bipartisan way and getting things done for the American people."

Highly anticipated proposed regulations have been issued on the withholding required with respect to the disposition of certain partnership interests. The proposed regulations affect certain foreign persons that recognize gain or loss on the disposition of an interest in a partnership that is engaged in a trade or business in the United States, and persons that acquire those interests. Also affected are partnerships that directly or indirectly have foreign partners.

Highly anticipated proposed regulations have been issued on the withholding required with respect to the disposition of certain partnership interests. The proposed regulations affect certain foreign persons that recognize gain or loss on the disposition of an interest in a partnership that is engaged in a trade or business in the United States, and persons that acquire those interests. Also affected are partnerships that directly or indirectly have foreign partners.

Gain or loss from the disposition of a partnership interest is treated as income effectively connected to a U.S. trade or business, to the extent that there would have been effectively connected income to the foreign partner, if the partnership assets were sold under Code sec. 864(c)(8). The withholding rules of Code Sec. 1446(f) require 10 percent withholding on the amount realized on the disposition, absent certification that the transferor is not a nonresident alien or foreign corporation.

The proposed regulations are a companion to Proposed Reg. 1.864(c)(8)-1 issued in December 2018, on gain or loss by foreign persons on the disposition of a partnership interest.

Reporting, Withholding and Paying Tax

The proposed regulations provide rules for withholding, reporting and paying tax upon the disposition of a partnership interest in a partnership described in Code Sec. 864(c)(8) and Proposed Reg. 1.864(c)(8)-1. The proposed regulations adopt much of the temporary guidance issued in Notice 2018-29, I.R.B. 2018-16, 495, which looked to the rules for withholding on dispositions of U.S. real property interests by foreign persons in Code Sec. 1445.

The proposed regulations also:

• clarify the reporting rules for transfers of partnership interests under Code Sec. 6050(k),
• provide rules for implementing withholding by brokers on transfers of certain interests in publicly traded partnerships,
• make changes to withholding rules for distributions by publicly traded partnerships,
• make changes to reporting rules and procedures for adjusting withholding; and
• provide coordination rules to prevent overwithholding.

A transferee is required to report and pay any tax withheld by the 20th day after the date of the transfer. Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

The proposed regulations also provide rules that address a partnership’s requirement to withhold if the transferee fails to withhold.

General Rule and Exceptions

A transferee of a partnership interest must withhold a tax equal to 10 percent of the amount realized on any transfer of a partnership interest (other than certain publicly traded partnership interests), if the gain is treated as effectively connected income.

There are six exceptions to withholding under the proposed regulations:

• certification by transferor of non-foreign status,
• certification by transferor that no gain is realized on transfer by transferor,
• certification by partnership that effectively connected gain from the disposition would be less than 10 percent,
• certification by transferor that for prior three tax years its effectively connected taxable income for each year was less than 10 percent of its total distributive share of net partnership income for the year;
• certification by transferor that a nonrecognition provision applies, and
• certification by transferor that a treaty provision applies.

Publicly Traded Partnership Interests

The proposed regulations provide rules for withholding and reporting on the transfer of an interest in a publicly traded partnership (a PTP interest). The withholding obligation is generally limited to brokers that receive proceeds from the sale and act on behalf of the transferor. Once the proposed regulations are final, the suspension on withholding on a PTP interest in Notice 2018-08, I.R.B. 2018-7, 352, will end.

Notice Requirements

A foreign partner that transfers its partnership interest will need information from the partnership to compute its tax liability based on the deemed sale. Rules are provided that will facilitate the transfer of information between a foreign partner and partnership for purposes of Code Sec. 864(c)(8).

Proposed regulations provide rules on the attribution of ownership of stock or other interests for determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under the foreign base company sales income rules.

Proposed regulations provide rules on the attribution of ownership of stock or other interests for determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under the foreign base company sales income rules.

The proposed regulations also provide rules to determine whether a CFC receives rents in the active conduct of a trade or business, for determining the exception from foreign personal holding company income.

Ownership Attribution

The proposed regulations provide specific rules for applying principles similar to those in the Code Sec. 958(b) constructive ownership rules when determining related person status under the foreign base company sales rules. Determining related person status is relevant for many purposes, including whether certain types of income can be characterized as subpart F foreign base company sales or service income.

A person is a related person with respect to a CFC if the person is:

• an individual who controls the CFC;
• an entity that controls or is controlled by the CFC; or
• an entity that is controlled by the same person that controls the CFC.

Under current Reg. §1.954-1(f), the Code Sec. 318(a)(3) downward attribution rules, which attribute ownership downward from the owner of an entity to an entity, apply by reference to the Code Sec. 958stock ownership rules. These rules are applied regardless of the size of the ownership interest in a partnership, estate or trust, but are applied to corporations based on a 50-percent or more ownership interest.

Based on concern that the downward attribution rules could produce inappropriate results, the proposed regulations provide that the downward attribution rule of Code Sec. 318(a)(3) and Reg. §1.958-2(d) will not apply for purposes of determining related person status under the foreign base company sales income rules.

This change does not preclude a corporation, partnership, trust, or estate from being treated as controlled by the same person or persons that control the CFC under other rules that remain applicable for the related person rules.

Additionally, an anti-abuse rule is provided with respect to the option attribution rule in Code Sec. 318(a)(4). The option attribution rule will not be applied to treat a person with an option as owning the stock or equity interest for purposes of the related person rule if the principal purpose of using the option was to cause a person to be treated as a related person.

The proposed regulations also incorporate a similar rule issued in Notice 2007-9, 2007-1 CB 401. The rule applies if the principal purpose for the use of an option is to qualify dividends, interest, rents or royalties paid by a foreign corporation for the Code Sec. 954(c)(6) CFC look-through exception from foreign personal holding company income. The rule is proposed to apply for tax years of CFCs beginning after December 31, 2006, and ending before the date that final regulation are published in the Federal Register, and for tax year of U.S. shareholders in which or with which such tax years end.

Foreign Personal Holding Company Rules

The proposed regulations modify the foreign personal holding company rules on amounts paid or incurred by a CFC in connection with the CFC’s rental income and the active rents exception. Rents are excluded from foreign personal holding company income if they are:

• received from a person other than a related person; and
• from the active conduct of a trade or business.

If rents are from leasing property as a result of marketing activities, there must be a substantial marketing organization in order to meet the active trade or business test. Under a safe harbor, an organization is substantial if active leasing expenses equal or exceed 25 percent of adjusted leasing profit. If the CFC receives rents from property it does not own, the substantiality of the organization is determined net of those rent payments.

The propose regulations extend the rule to apply to royalties, in addition to rents. As a result, the substantiality of the organization is determined under the safe harbor, net of the rents or royalties paid or incurred by the lessor CFC, for the right to use the property (or a component part of the property) that generated the rental income.

Applicability Date

The proposed regulations are generally proposed to apply to tax years of CFCs ending on or after the date the final regulations are published in the Federal Register, and for tax year of U.S. shareholders in which or with which such tax years end.

Final regulations have been issued on transactions of U.S. taxpayers that have qualified business units (QBUs) with functional currency other than the U.S. dollar.

Final regulations have been issued on transactions of U.S. taxpayers that have qualified business units (QBUs) with functional currency other than the U.S. dollar. Specifically, the final regulations:

• cover combinations and separations of QBUs subject to Code Sec. 987 (Reg. 1.987-2 and Reg. 1. 987-4),
• cover recognition and deferral of foreign currency gain or loss with respect to a QBU subject to Code Sec. 987 in connection with certain QBU terminations and other transactions involving partnerships (Reg. 1. 987-12), and 
• withdraw Temporary regulations that determine a partner’s share of assets and liabilities of a Code Sec. 987 aggregate partnership (Temporary Reg. 1.987-7T). In general, the regulations prevent the selective recognition of Code Sec. 987 gain or loss.

Applicability Dates

The IRS declined to extend the applicability of these provisions. The final regulations retain the applicability dates of the temporary regulations, as extended by IRS guidance. The final regulations under Reg. 1.987-2 and Reg. 1. 987-4 generally apply to tax years beginning on or after the day that is three years after the first day of the first tax year following December 7, 2016. The final regulations under Reg. 1. 987-12 generally apply to any deferral event or outbound loss event that occurs on or after January 6, 2017.

Medicaid waiver payments were earned income, even though IRS Notice 2014-7 treated them as “difficulty of care” foster care payments that were excluded from gross income. The Tax Court held that excluding the payments from earned income would improperly deny the taxpayers’ earned income credit and the additional child tax credit.

Medicaid waiver payments were earned income, even though IRS Notice 2014-7 treated them as “difficulty of care” foster care payments that were excluded from gross income. The Tax Court held that excluding the payments from earned income would improperly deny the taxpayers’ earned income credit and the additional child tax credit.

IRS Excludes Medicaid Waiver Payments From Gross Income

The taxpayers received payments under a state Medicaid waiver program for proving care to their adult disabled children in the family home. IRC §131 excludes foster care payments from gross income, but it applies only when the foster individuals are placed in the caregiver’s home by the state. Despite the statutory language, however, Notice 2014-7 treats Medicaid waiver payments as excludable “difficulty of care” foster payments. Thus, the taxpayers excluded the payments from their gross income.

Gross Income Vs. Earned Income

However, the taxpayers included the payments in their earned income, which allowed them to claim the earned income credit and the additional child tax credit. The IRS denied the credits, arguing that only gross income can be earned income. The Tax Court sided with the taxpayers.

No Deference For Notice 2014-7

The court concluded that Notice 2014-7 was entitled to little if any deference for two reasons:

1. The taxpayers’ payments did not satisfy the plain statutory definition of excludable foster care payments.
2. The notice reversed the IRS’s long-held position that payments like these were not foster care payments

Although the Medicaid waiver payments were not covered by §131, they absolutely fell within the statutory definition of “earned income.” The IRS could not rely on Notice 2014-7 to deny credits that Congress clearly intended to provide for earned income.

IRS, Not Congress, Provided Double Benefit

Finally, the court recognized that the taxpayers were receiving an unintended double benefit, because they were getting tax credits that were based on tax-free income. However, this was only because the IRS:

1. unilaterally decided to exclude Medicaid waiver
   payments from gross income, and
2. failed to argue that if the Tax Court included the payments in earned income, they should also be included in gross income.

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.