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Monthly Newsletter for ncpeFellowship Members Vol. 9 No. 4 April 2018

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Remarks from Beanna

Beanna Ranks Tax Return Preparers As Number One on the Hard Workers List

Referencing the article below, IRS certainly should "go after" bad return preparers of all credentials (see Office of Professional Responsibility listing in "Tax Pros in Trouble") but IRS doesn't get it.

Those of us who toil in the field of tax preparation know we have to be on our game, knowing tax law and how to properly apply it to our client's situation. We have to grapple with clients who heard somewhere, at the cleaners, bar or 7-11, how they don't have to pay taxes. We have to do our "due diligence" to make certain the returns that are filed are complete and accurate and often without the appreciation from the client, the IRS, the press or anyone for our efforts that often go above and beyond.

It is April 1 - but this is no April's Fool Joke - pat yourself on the back! You are the glue that holds this crazy, changing and troubling tax law of the United States together. You have often heard me say we are the land of the free because of the brave, so true, but this also extends to the dedicated and determined individuals in the business of tax who love what they do which is to assist America's Taxpayers to complete their obligation of filing.

On a personal note, this week I heard of the passing of my Executive Assistant, Sharon Lane, who was my EA (Executive Assistant) when I worked for IRS. Sharon was a career IRS employee who was my right arm leading me through the waters at the IRS. She was puzzled by me as she had always worked for IRS executives, born and raised before and I was, well let's say "different". I came back from a meeting with the Commissioner and Sharon apologized and said that the information I wanted would not be available for a week. I said, "well I guess I am just SOL." About 2 hours later, Sharon came in my office with a big book and said, "I've looked through the acronyms book and I can't find what SOL means." As I said, I was different. The sky tonight is brighter because of Sharon!

Stay well and let's finish this one well.Beanna

Beanna@ncpefellowship.com or 877-403-1470

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NCPE Seminar Series Reference Books

Availablencpefellowship.com

2017 Fall Seminar Series Book:Searchable, With References

1040 Individual Income Tax Update Seminar857-Page

2017 Summer Seminar Series Book:Searchable, With References

Corporations (C & S) andPartnerships (LLCs) Seminar

765-Page

2016 Fall Seminar Series Book:Searchable, With References

1040 Individual Income Tax Update Seminar5th Revision, 854-Page

2016 Summer Seminar SeriesSearchable And Reference Book

Corporations (C & S) andPartnerships (LLCs) Seminar

802 Pages

2015 Fall Seminar SeriesSearchable And Reference Book

923 Pages

2015 Summer Seminar SeriesSearchable And Reference Book

840 pages

2014 Fall Seminar SeriesSearchable And Reference Book

1,004 Pages

2014 Summer Seminar SeriesSearchable And Reference Book

840 Pages

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Remarks From Beanna (1)

Tax News (5)IRS Ranks Tax Return Preparer Fraud As Number Four On The IRS “Dirty Dozen” For 2018 (5)2017 Tax Reform: AICPA Sends Suggested TCJA Technical Corrections to Congress (6)IRS released Revenue Procedure 2018-18 (as part of Bulletin 2018-10), on March 5, 2018 (7)The Relationship Between Reasonable Compensation and Business Valuation (8)MLP's and the Dangers When IRAs Invest in Them (9)Tax Change Delivers A Blow To Professional Sports (9)Marital Dissolution Planning After the Tax Cuts and Jobs Act (10)Taxing Collectibles: What You Need to Know (12)2017 Tax Reform: New Carried Interest Rule Can't Be Avoided By Having S Corporation Hold the Interest (13)Penalties Increase For Failure to File FBAR For Foreign Financial Account (13)

Question of the Month (14)Does Cancellation of Debt for an S Corporation Pass to the Shareholders? (14)

Tax Practice Management (14)7 Last Minute Tips to End Tax Season Strong (14)Houston Woman Plans to File Lawsuit Against Tax Preparer (15)IRS Policy on Disclosures About Its Investigations of Practitioner Misconduct (16)

Military Taxes (16)Annual Pay Adjustment (16)

Estate and Gift Taxes (17)The Effects of Estate and Inheritance Taxes on Entrepreneurship (17)

News from Capitol Hill (17)The IRS Gets Help From Congress As It Tries to Implement the New GOP Tax Law (17)IRS Restructuring Draft Coming (18)Industry Clamors For Fixes to GOP Tax Law (18)

People in the Tax News (19)Dorothy Leaman (19)President Trump To Name Michael Desmond IRS Chief Counsel (20)Pharmacist Gets Prison Term for Filing False Tax Return (20)Liberty Tax Receives Notice of Second Delinquent Form 10-Q Filing from Nasdaq and Receives Extension of Time to Cure Delinquencies (20)Couple Charged With Conspiring to Evade Personal and Employment taxes (21)Paul Manafort Pleads Not Guilty to Tax and Fraud Charges in Federal Court in Virginia (21)Alabama Resident and Ringleader of Multi-Million Dollar Stolen Identity Tax Refund Fraud Schemes Sentenced to 30 Years in Prison (21)

IRS News (23)IRS: Refunds Worth $1.1 Billion Waiting to be Claimed by Those Who Have Not Filed 2014 Federal Income Tax Returns (23)Phishing Schemes Make IRS ‘Dirty Dozen’ List of Tax Scams for 2018; Individuals, Businesses, Tax Pros Urged to Remain Vigilant (24)Update on Jurisdictions Included on the IRS List of Jurisdictions That Do Not Issue Foreign TINs (25)File Current Versions of Exemption Applications (26)IRS Procedures Where Disaster Victim Has an Overpayment and an Unrelated Underpayment (26)IRS Modifies User Fee For Determination Letter Request on Form 5310 (27)Interest Rates Increase for the Second Quarter of 2018 (27)

Table Of Contents (page)

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Battery Added to Solar Energy System Qualified for Residential Energy Credit (28)IRS Rules on Retirement Plan That Offsets Benefits of Low-Paid Employees (29)Winter Storm Extension: Many Businesses Have Extra Time to Request a 6-month Extension (32)Additional Time to Make Refund Claims for Wrongful Incarceration Exclusion: File Back-year Claims by Dec. 17, 2018, at Special Address (32)IRS to End Offshore Voluntary Disclosure Program; Taxpayers With Undisclosed Foreign Assets Urged to Come Forward Now (32)Here’s How to Get Prior-Year Tax Information (33)IRS Provides Additional Details on Section 965, Transition Tax; Deadlines Approach for Some 2017 filers (34)

Tax Pros in Trouble (34)South Valley Tax Preparer Accused of ID Theft, Fraud (34)Pensacola Man Indicted On 18 Counts of Preparing False Tax Returns (34)Chicago Tax Preparer Faces Fraud Charges (34)Salem County, New Jersey, Woman Admits Filing False Corporate Tax Returns (35)Announcement of Disciplinary Sanctions from the Office of Professional Responsibility (35)20 Latest Tax Preparers Barred From Filing Returns In Maryland (35)Returns from Gaithersburg Tax Preparer Blocked (37)Feds: Preparer Filed 110 Fraudulent Tax Returns (37)

Ragin Cagin (37)The Tax Cuts and Jobs Act (37)

Taxpayer Advocacy (39)IRS Still Evaluating Virtual Appeals, Case Leader Pilots (39)IRS Adds New Issues to LB&I's Campaign Audit Strategy (39)Employer Can Offset Taxes Paid By Misclassified Employees Against FICA Liability (40)The Right to Challenge the IRS’s Position and Be Heard Taxpayer Bill of Rights #4 (41)Recent Decision in FOIA Case Provides OPR with the Opportunity to Highlight an Important Process Change (41)Representing Clients Before the IRS: Power of Attorney (42)

State News of Note (44)Nevada To Regulate Tax Preparers, Require Bonds (44)Twenty States Challenge Constitutionality of ACA Without Individual Mandate Penalty (45)2017 Tax Reform: Recent Developments Regarding Workarounds, Challenges to SALT Deduction Limitation (45)Corporate Close-Up: Court Rules that New Jersey Cannot Assess Limited Partnership for Corporate Limited Partner’s Share of Corporate Business Tax (47)

Foreign Taxes (48)Government Accountability Office - Foreign Workplace Retirement Plans (48)IRS Releases Draft Questions To Aid Preparation For Upcoming FATCA Certifications (48)Tax Preparation Services Given to Employees Working Abroad Not a Tax-free Fringe Benefit (49)Concern Raised Over Withholding Computation for Nonresident Aliens (50)2017 Tax Reform: Guidance on Return Filing and Tax Payment for Transition Tax (Deemed Repatriation) (50)

Wayne's World (51)Court Case of Note - Company President Was Responsible Person Despite Lender's Security Interest (51)

Letters to the Editor (53)

Tax Joke's and Quotes (54)

Sponsor of the Month (55)R C Reports (55)

Table Of Contents (page)

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Tax News

IRS Ranks Tax Return Preparer Fraud As Number Four On The IRS “Dirty Dozen” For 2018

Continuing its daily “countdown” of the annual “Dirty Dozen” tax schemes, the Internal Revenue Service announced that return preparer fraud is the fourth entry on that esteemed list for 2018. With more than half of the nation’s taxpayers relying on someone else to prepare their tax return, the Internal Revenue Service reminded consumers today to be on the lookout for unscrupulous tax preparers looking to make a fast buck from honest people seeking tax assistance. The IRS recognizes that the majority of tax professionals provide honest, high-quality service. But there are some dishonest preparers who operate each filing season to perpetrate refund fraud, identity theft, and other scams that hurt honest taxpayers.

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of announcement from the IRS follows.

Tax return preparers are a vital part of the U.S. tax system. About 56 percent of taxpayers use tax professionals to prepare their returns.

Selecting the right tax professional is critically important because taxpayers are ultimately responsible for what they submit on their tax return.

The IRS is also working to protect taxpayers from shady return preparers. The pursuit of illegal scams can lead to significant penalties and interest as well as possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.

Choose Return Preparers Carefully

It is important to choose carefully when hiring an individual or firm to prepare a tax return. Well-intentioned taxpayers can be misled by preparers who don’t understand taxes or who mislead people into taking credits or deductions they aren’t entitled to claim. Scam preparers may take this step in order to increase their fee. Every year, these types of tax preparers encounter everything from stiff penalties to jail time for defrauding their clients.

Here are a few tips for taxpayers to consider to help avoid a fraudster when choosing a tax preparer:

– Avoid fly-by-night preparers. Make sure the preparer will be

available if needed, even after the return is filed. In the event questions come up about a tax return, taxpayers may need to contact the preparer.

– Ask if the preparer has an IRS Preparer Tax IdentificationNumber (PTIN). Paid tax return preparers are required toregister with the IRS, have a PTIN and include it on tax returns.

– Inquire whether the tax return preparer has a professionalcredential (enrolled agent, certified public accountant orattorney), belongs to a professional organization or attendscontinuing education classes. Tax law can be complex. Acompetent tax professional needs to be up-to-date in thesematters. The IRS website has more information regarding thenational tax professional organizations.

– Check the preparer’s qualifications. Use the IRS Directoryof Federal Tax Return Preparers with Credentials and SelectQualifications. This tool can help locate a tax return preparerwith the preferred qualifications.

– The Directory is a searchable and sortable listing of taxpreparers registered with the IRS. It includes the name, city,state and zip code of:

– Attorneys– CPAs– Enrolled Agents– Enrolled Retirement Plan Agents– Enrolled Actuaries– Annual Filing Season Program participants– Check the preparer’s history.

Ask the Better Business Bureau about the preparer. Check for disciplinary actions and the license status for credentialed preparers. For CPAs, check with the State Board of Accountancy. For attorneys, check with the State Bar Association. For Enrolled Agents, go to IRS.gov and search for “verify enrolled agent status” or check the Directory.

– Ask about service fees. Avoid preparers who base fees ona percentage of their client’s refund or boast bigger refundsthan their competition. Don’t give tax documents, SocialSecurity numbers or other information to a preparer when onlyinquiring about their services and fees. Unfortunately, somepreparers have improperly filed returns without the taxpayer’spermission once the records were obtained.

– Make sure the preparer offers IRS e-file and ask to e-filethe tax return. Paid preparers who do taxes for more than10 clients generally must file electronically. The IRS hasprocessed more than 1.5 billion e-filed tax returns. It’s thesafest and most accurate way to file a return.

– Provide records and receipts. Good preparers will ask to seetax records and receipts. They’ll ask questions to determinethe client’s total income, deductions, tax credits and otheritems. Do not rely on a preparer who is willing to e-file a returnusing a pay stub instead of a Form W-2. This is against IRSe-file rules.

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– Understand representation rules. Attorneys, CPAs andenrolled agents can represent any client before the IRS inany situation. Annual Filing Season Program participants mayrepresent taxpayers in limited situations if they prepared andsigned the return. However, non-credentialed preparers whodo not participate in the Annual Filing Season Program mayonly represent clients before the IRS on returns they preparedand signed on or before Dec. 31, 2015.

– Never sign a blank return. Don’t use a tax preparer that asksclients to sign an incomplete or blank tax form.

– Review the tax return before signing. Before a taxpayer signsa return, they should review it and ask questions if something isnot clear. Taxpayers should ensure they are comfortable withthe accuracy of the return and that the refund goes directly tothem – not into the preparer’s bank account. Reviewing therouting and bank account number on the completed return isalways a good idea.

– Report abusive tax preparers to the IRS. Taxpayers canreport abusive tax return preparers and suspected tax fraud tothe IRS. Use Form 14157, Complaint: Tax Return Preparer. Ifa return preparer is suspected of filing or changing the returnwithout the client’s consent, also file Form 14157-A, ReturnPreparer Fraud or Misconduct Affidavit. Forms are availableon IRS.gov.

To find other tips about choosing a preparer, understanding the differences in credentials and qualifications, researching the IRS preparer directory and learning how to submit a complaint regarding a tax return preparer, visit www.irs.gov/chooseataxpro.

Remember: Taxpayers are legally responsible for what is on their tax return even if someone else prepares it.

2017 Tax Reform: AICPA Sends Suggested TCJA Technical Corrections to Congress

Feb. 22, 2018, the American Institute of Certified Public Accountants (AICPA) sent a letter containing suggestions for technical corrections to the Tax Cuts and Jobs Act (TCJA) to the chairmen and ranking members of the Senate Finance Committee and the House Ways and Means Committee. In this article, we discuss the specific suggestions made by the AICPA.

Net operating losses—TCJA Sec. 13302. The TCJA repeals the general 2-year NOL carryback and the special carryback provisions, but provides a 2-year carryback for certain losses incurred in a farming trade or business. The Act also provides that NOLs may be carried forward indefinitely. (Code Sec. 172(b)(1)(A))

TCJA §13302(e)(2) provides that this change is effective for NOLs arising in tax years ending after Dec. 31, 2017. However, the conference committee provided an effective date for tax years “beginning after Dec. 31, 2017.”

The AICPA suggests a technical correction so that the provision applies for tax years beginning after Dec. 31, 2017. The AICPA says that its suggested language would be fairer to fiscal year taxpayers.

Qualified improvement property—TCJA Sec. 13204. Qualified improvement property (QIP) is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service, except for any improvement for which the expenditure is attributable to (1) enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building. ( Code Sec. 168(e)(6))

Under the TCJA, the statutory language for Code Sec. 168(e)(3)(E) does not include QIP, leaving it as nonresidential real property (39 years modified accelerated cost recovery system (MACRS)) and not subject to bonus depreciation or some other class of property (e.g., a property with 15 years MACRS). However, according to the conference committee, QIP was intended to be 15-year property, qualifying for bonus depreciation.

The AICPA recommends that Congress provide a technical correction to the property class life for QIP to be 15 years and the inclusion of QIP as eligible property for 100% bonus depreciation.

60%-of-AGI limit on charitable contribution deduction—TCJA Sec. 11023. The TCJA increased the charitable-contribution-base-percentage limit for deductions of cash contributions by individuals to 50% charities from 50% to 60% (the “60% limit”). (Code Sec. 170(b)(1)(G)(i)) Cash contributions that are taken into account under the 60% limit aren't taken into account for purposes of applying the 50% limit. (Code Sec. 170(b)(1)(G)(iii)(I)) But the 30% and 50% limits are applied for a tax year by reducing the aggregate contribution limit allowed for that year by the aggregate cash contributions allowed under the 60% limit for the year. (Code Sec. 170(b)(1)(G)(iii)(II))

The AICPA letter provides that the current statutory language in the TCJA reduces the allowed charitable deduction to 50%, rather than 60%, if even $1 of assets other than cash are donated. The letter provides specific language that the AICPA says would confirm Congress's intent to allow for the increased 60% of AGI limitation, assuming the additional amount is in cash (for example, 30% appreciated securities and 30% cash).

Alternative minimum tax (AMT) exemption and phaseout for estates and trusts—TCJA Sec. 11001. With respect to individual taxpayers, the TCJA increases the statutory AMT exemption amounts and increases the statutory AMT income threshold amounts for purposes of phasing out the exemption amounts. (Code Sec. 55(d)(4)(A)) The TCJA does not increase these amounts with respect to estates and trusts.

The AICPA suggests increasing these amounts for estates and trusts as well.

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Revocations of S corporation elections—Act Sec. 13543. The 1-year period after which a corporation's S election terminatesis generally the post-termination transition period (PTTP).The TCJA provides that if an eligible terminated S corporationmakes a cash distribution after the PTTP, the accumulatedadjustments account is allocated to the distribution, andthe distribution is chargeable to accumulated earnings andprofits in the same ratio as the amount that the accumulatedadjustments account bears to the amount of such accumulatedearnings and profits. (Code Sec. 1371(f))

The AICPA letter says that a technical correction is needed to allow taxpayers to elect out of the Code Sec. 1371(f) provision.

Deemed repatriation rules—Act Sec. 14103. Code Sec. 965 was enacted into law by the TCJA; it requires certain foreign corporations to increase their subpart F income, for their last tax year that begins before Jan. 1, 2018, by the amount of their deferred foreign income. It taxes this increased income at either an 8% rate or a 15.5% rate, and it accomplishes those rates via a complicated calculation that involves a deduction. (Code Sec. 965(c))

The AICPA recommends corrections to assure that the amount included under Code Sec. 965(c) is not subject to AMT and the deduction used to arrive at the 8% and 15.5% rates does not fall within the definition of miscellaneous itemized deductions under Code Sec. 67.

The tax liability incurred as a result of Code Sec. 965 can be paid in installments. Under the TCJA, the amount that can be paid in installments is based on the difference between the taxpayer's “regular tax liability” computed with the Code Sec. 965 addition to income and the “regular tax liability” computed without that addition to income. (Code Sec. 965(h)(6))

The AICPA letter wants the term “tax imposed by this chapter” substituted for “regular tax liability,” so that AMT is taken into consideration in computing the amount that can be paid in installments.

IRS released Revenue Procedure 2018-18 (as part of Bulletin 2018-10), on March 5, 2018

Due to changes made in the Tax Cuts and Jobs Act, certain adjustments needed to be made to inflation amounts. This includes a reduction in the maximum family HSA contribution for those with family coverage under an HDHP from $6,900 to a new limit of $6,850 for calendar year 2018. The single contribution limit remains unchanged at $3,450 per year.

How this Affects You

This reduction affects employees participating in the TASC HSA Plan who elected to contribute more than $6,850 for family coverage in 2018.

What to do Next

Inform your employees of this change and share the following

instructions (we have also sent an email communication to our TASC HSA participants).

• For employees who did not elect more than $6,850 toTASC HSA for 2018, no action is required.

• If any of your employees elected an HSA familycontribution exceeding $6,850, they will need to make anelection change to decrease it to the new limit of $6,850.Instructions are as follows:

• Employees can download and complete the TASCHSA Election Change Form via the following link:

https://www.tasconline.com/uploads/KB/EFG/HS-5511-041116%20EV1-EFG%20HSA%20Contribution%20Change%20Form.pdf

• Each affected employee must complete the formand submit it to their HR/Payroll department tomake the change through payroll.

• The HR/Payroll department would then need tosend each completed form to TASC at the addressmentioned in the instructions on the form.

• If the employee has already contributed more than$6,850 this year from payroll, they will need to request aspecial distribution for the excess contribution (by April2019 to avoid excise tax):

• Employees can download and complete the TASCHSA Distribution Request Form via the followinglink:

https://www.tasconline.com/uploads/KB/EFG/HS-5503-041116%20EV1-EFG%20HSA%20Distribution%20Request%20Form.pdf

• Employee should select “Excess ContributionRemoval” and enter in the dollar amount and date.

• Employee submits the completed form to TASC andwe will process the distribution to the employee.

• If the employee has already spent more than $6,850from their TASC HSA, they will need to contact their taxprofessional to discuss possible post-tax refunds.

TASC has changed the maximum limits set in our HSA system to ensure that employees do not go over the maximum contribution limit.

View the IRS Bulletin at https://www.irs.gov/pub/irs-irbs/irb18-10.pdf

All benefit plan limits can be viewed at https://www.tasconline.com/benefits-limits/

Editor's Note: Again, TASC and our representative, Todd

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in compensation when reasonable compensation would have been $40,000. In this case the business valuation is understated by $300,000. Not only has the business been paying an extra $9,180 in payroll taxes, whomever inherits the business misses out on a step up in value to the current fair market value, thereby paying more in capital gain or reduced depreciation deductions when the business is subsequently sold or operated. This will be the fact in the majority of situations as most people do not have a taxable estate and most people pay more than they should for compensation due to their own egos.

The bottom line comes down to this, it is better to do the work up front to determine reasonable compensation while you can be proactive, then to have the consequences taken out of your control.

Preparer Penalties & Reasonable Compensation

Because the majority of S Corp owners do not understand Reasonable Compensation, the burden of educating them falls on their Tax Advisor. The IRS requires tax preparers to be proactive in asking for the right information necessary to prepare tax returns, even if it means the preparer will need to spend more time with the client during the preparation process. Asking the appropriate questions will keep the preparer out of the penalty box.

Editors' Note: The IRM, Internal Revenue Manual, requires each audit to conduct a review of payroll issues. After the audit on the taxpayer is complete, a paid preparer penalty will be determined.

Automotive Service Mechanics

Imagine driving down the road in your 1965 Volkswagen bus when you hear a loud bang. You push the pedal to the metal and nothing… There’s always a cloud of smoke wherever this bus goes but this time, it’s coming from the engine. Looks like the old hippie van finally peaced out. Luckily for all of us, the local auto mechanic can resurrect our VW from its ungrateful death and get us back on the road.

This month we hit the brakes and take a look at what Automotive Service Mechanics make around the country:

Kuehn, is on top of this for us. Remember to visit them on the Sponsor's Page.

Total Administrative Services Corporation (TASC)2302 International Lane

Madison, WI 53704-3140 www.tasconline.com

The Relationship Between Reasonable Compensation and Business Valuation

By Jack Salewski, CPA, CGMA & Paul S. Hamann

A common question in public practice is, “how much is my business worth?” This question comes up for a variety of reasons. It could be a business merger, sale of the business, divorce, death or even idle curiosity.

There are a lot of different factors that go into a business valuation. It is an over simplification, but most businesses are valued as a multiplier of earnings before interest, taxes, depreciation, and amortization (EBITDA).

When more wages are taken out than what is reasonable, the value of the business will be understated. This will cause the company and the shareholders to pay more in payroll taxes than they should. If less wages are paid out than what is reasonable, then the company value will be overstated.

If the purpose of the valuation is for a sale, the financial statements could be recast or normalized for the sale. Unfortunately, if the purpose is for a merger, the recasting will send a message to the other party that it is acceptable to do things wrong or at best bend reality as the shareholders see fit.

If the valuation is due to death, there could be an estate tax generated by having the company overvalued. For example, if the compensation taken was $40,000 when reasonable compensation should have been $100,000, then $60,000 less was paid in compensation than should have been paid. Assuming the cap rate on sale was 20% (or a factor of five), the value of the company would be overstated by $300,000 ($60,000 x 5). If the descendant had a taxable estate, there would be additional estate tax of $105,000.

Let’s look at the opposite situation. $100,000 was taken

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Alabama ~ Average – $18.12/hrLos Alamos, NM ~ Average – $26.55/hr*Des Moines, IA ~ Average – $19.56/hrAnn Arbor, MI ~ Average – $28.09/hrNew Shoreham, RI ~ Average – $17.15/hr*

Each month we highlight an occupation from the more than 6,000 occupations included within the RCReports proprietary database of wages~*Wage only available from RCReports.

Thank you to RC Reports for information for our clients and for us as tax professionals. Visit RC Reports on the Sponsors Tab - our members using their services give RC Reports "two thumbs up". Beanna.

MLP's and the Dangers When IRAs Invest in Them

Editor's Note: In the March Taxing Times, the article on MLPs was left with a comment about the dangers of investing in an MLP in your IRA and referenced the fine investigative work done by member Ellery May. I felt his comments important to share.

Your article on MLP’s makes them look attractive as high yielding publicly traded securities but there is a punitive tax process being implemented. The year the security is sold triggers depreciation recapture. Noted in your article. But the cumulative years of tucked away losses are not accumulated unless the soon to be $300 a year tax preparation fee is paid. The result is that operating income recaptured is offset with only the $1,000 credit and $3,000 loss deduction. A long term investment has a bad surprise coming.

But there is more. The rules for tax exempt entities require an annual 990-T for information only if no UBTI is apparent.

The annual fee against all IRA accounts UBTI or not is big revenue bump for the CPA’s.

I am frustrated that after all I did to avoid the IRS that I missed the political side of the issue and ignored Jim Crammer. UBTI was described to me by the Trustee as disallowed operations for MLP’s. Less than 10% of the operating income: wrong. It is 100% of the annual operating income plus depreciation recapture in the year of sale.

It turns out that an IRA is a tax exempt entity and that an investment in a publicly traded MLP is the UBTI. As opposed to privately held.

A privately formed MLP in which I can control the operations would be a disallowed investment. Pub 590 states that pretty much. The code, PWC, and the Trustee quotes state only MLP: not publicly traded MLP.

In 1987 Congress specific sanctioned publicly traded MLP’s as UBTI. In 1993 Congress repealed that provision. Without the specific sanction the UBTI arguments regarding publicly traded MLP’s is arbitrary flawed conjecture: too many definitions have to be altered to get there.

I hope that Newsletter will advise the members on how to calculate the UBTI tax so that they can evaluate for their clients tax impact before choosing an MLP for an IRA. After the UBTI comes the 1040 Individual tax on their tax exempt distributions. (I could live with that. Any chance TEGE had made IRA’s tax exempt?)

Until Congress acts I recommend staying away from these things. If not then a six month investment without crossing a yearend. That might keep the IRA under the thresh-holds.

What investors do not want is a surprise by holding them past the thresh-hold point.

I expect to pay some tax again this year. I did not expect Fidelity to cancel my relationship over this issue. I panicked without understanding the tax calculations. If this is law then E&Y should have to conform. If not then PWC is doing harm.

The last time I tried to help was when I realized that we were going to have a mortgage crisis: 2004 or 2005. The Senators acted by toughening up bankruptcy laws for the middle class. There are a lot of taking clause violations out there right now. This is not the only one. If the wealthy are as over-leveraged as I fear, history follows the rules of gravity.

Tax Change Delivers A Blow To Professional Sports

Houston Astros starting pitcher Justin Verlander was traded from the Detroit Tigers in a move that that experts estimate netted the Astros about $10 million, though no money changed hands between the two teams.

A single four-letter word — added to a provision of the tax code — has professional sports leagues scrambling, as teams face what could be millions of dollars in new taxes.

"Real."

The revision changed a section of the tax code that applies to "like-kind exchanges." Under the old law, farmers, manufacturers and other businesses could swap certain "property" assets — such as trucks and machinery — without immediately paying taxes on the difference in value.

The 2017 tax overhaul inserted the word "real" before "property." With that, the provision now applies only to real estate swaps.

That means teams could be looking at tax bills in the millions for trading player contracts. Major League Baseball is already lobbying Washington to carve out an exception.

What the provision is, and how it changed

The provision mostly applies to farmers and fleet owners, people who own machinery. What it allows you to do is, if you trade property ... you don't pay taxes on the value you gain in that trade, until you sell the truck. ...

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This provision has been narrowed now, so that it only applies to real estate. And that excludes trucks and farm animals ... and baseball players.

This is a $31 billion savings over 10 years, according to the Joint Committee on Taxation.

On why lawmakers narrowed the tax break

There were a lot of provisions like this in the tax bill. Lawmakers call these changes "base-broadening," but what that really means is: they're raising some taxes to capture new federal revenue, in order to pay for the tax rates they cut. Lawmakers needed more money to pay for those rates, and the way they found that money was to close loopholes like the one that was in this provision.

On how this affects sports trading

Right now, based on a ruling from the '60s, when teams trade players, [the players] are treated like a "like-kind exchange." ... A player contract is like a truck.

But now, because they're not real estate, these players have to be traded in a way that there might be taxable values.

What that means is, teams have to figure out how much a player is worth to them in dollar figures, and how much the player they might be giving away is worth. And if they're getting more back than they gave, they've got to pay taxes on that — capital gains taxes.

So the question is: How do you value [each player]? Is he 'how many extra wins he brings to your team'? Is he 'how many extra wins he brings for how much money he costs'? Or is he some special formula of 'how much he would bring to you value-wise' that is different from one team to the other, because your team might have three second basemen and my team has none?

On the size of the tax hit

The Houston Astros won the World Series last year. And on the way to winning the World Series, they traded for a pitcher named Justin Verlander from the Detroit Tigers. Some experts I talked to estimate that the value the Astros got back in that trade was probably about $10 million above what they had given up. So in that case, $10 million value, 15 percent capital gains tax — that's $1.5 million that the Astros would have give to the government. And the Astros have made several other trades like that over the last few years. That adds up.

On sports leagues lobbying Congress

Major League Baseball says they're already at work on it. I would not be surprised if the other leagues are close behind...

It's a real possibility that [Congress could just pass] the 'Make Sports Trades Great Again' Act of 2018 on a voice vote, because nobody wants to be the one who stopped their local

team from making the trade it needed to win a championship.

Marital Dissolution Planning After the Tax Cuts and Jobs Act

Tax Tips columnist Sidney Kess writes: The Tax Cuts and Jobs Act of 2017 (TCJA) made important changes in the tax rules for alimony. These changes have a ripple effect throughout the tax law, impacting a number of other provisions. Here are the basic rules for alimony and their impact on other tax provisions in light of TCJA.

Sidney Kess

The IRS reports that nearly 600,000 taxpayers claimed an alimony deduction on their 2015 returns (the most recent year for statistics). The Tax Cuts and Jobs Act of 2017 (TCJA) (P.L. 115-97) made important changes in the tax rules for alimony.These changes have a ripple effect throughout the tax law,impacting a number of other provisions. Here are the basicrules for alimony and their impact on other tax provisions inlight of TCJA.

Alimony

Currently, payments that meet the definition of “alimony” under Code §71 are deductible by the payer and includible in gross income by the recipient. There are no dollar limits on these amounts. These rules continue to apply to payments under divorce or separation agreements executed before Jan. 1, 2019.

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However, alimony will not be deductible, or includible in the recipient’s gross income, for any divorce or separation instrument executed after Dec. 31, 2018, as well as those executed earlier but modified after 2018 expressly providing that the repeal of qualified alimony and separate maintenance rules apply. In effect, those with post-2018 divorces will see alimony treated the same as child support (i.e., nondeductible by the payer and nontaxable to the recipient).

Clearly, this tax law change will impact negotiations for alimony payments for new marital dissolutions. Those considering modifications of existing arrangements have leeway in their course of action. They can continue to apply the old rules unless they agree to have the new rules apply by expressly referencing the TCJA deduction repeal. Reasons to consider opting for TCJA treatment include changes in the income levels of the payer and/or recipient. For example, the payer may be in a lower bracket and won’t benefit greatly from a deduction, or the recipient may be in a higher bracket and prefer tax-free income.

Any modifications should take the “recapture rule” into account. This rule requires the payer to recapture (i.e., report as income) some amounts previously deducted. The rule is triggered when alimony paid in the third year of the first three-year period is more than $15,000 less than in the second year or if the alimony paid in the second and third years decreases significantly from the amount paid in the first year. This rule has not been changed by the TCJA.

It should also be noted that post-2018 decrees and agreements do not have to conform to the definition of alimony. Whereas deductible alimony payments under pre-2019 decrees and agreements must be in cash, payments to a spouse or former spouse under post-2018 decrees and agreements need not be in cash. It would seem, for example, that a transfer from a qualified retirement plan pursuant to a qualified domestic relations order (QDRO) may be used to make a lump-sum alimony payment by the payer. In the same vein, perhaps stock or realty could be used to satisfy a lump-sum alimony payment. And it would not matter whether payments end on the death of the recipient.

Child Support

The tax treatment of child support has not been changed by the TCJA. Payments are not deductible by the payer or taxable to the recipient (Code §71(c)).

Dependency exemptions. The dependency exemption applies for 2017 returns. The custodial parent can waive the dependency exemption to allow the noncustodial parent—often the person providing the child support—to claim the exemption. This waiver is made on Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.

The TCJA suspends the dependency exemptions for 2018 through 2025. Despite this suspension, the concept of a dependent remains viable through these years for various tax

provisions (e.g., child tax credit) and should not be overlooked.

Existing divorce agreements likely have factored in the tax benefit for dependency exemptions, as well as the tax rates that the payer is subject to. In other words, one parent may have agreed to pay a certain amount with the understanding that he/she could claim an exemption for the child. For example, in 2017, the $4,050 exemption amount saves a parent in the top tax bracket more than $1,600 in taxes. If the parties renegotiate agreements after 2018 to make changes in child support, it is important to note the impact of the language on alimony (i.e., whether the parties opt for pre-2019 treatment for alimony).

Child tax credit. For purposes of the child tax credit (Code §24), which was greatly expanded, a taxpayer can claim acredit for a:

• Qualifying child. The child (the taxpayer’s child, sibling, ordescendant) must be under age 17 by the end of the yearand not provide more than half of his/her support. Usually thechild must live with the taxpayer for more than half the yearbut there is an exception in the case of divorce. The credit isup to $2,000; up to $1,400 can be refundable.

• Qualifying dependent. This can be a qualifying relative of anyage as long as he/she would qualify as a dependent under theold dependency rules (Code §152(b)) (e.g., a taxpayer’s childwho is over age 17). The nonrefundable credit is up to $500.

Education

Another change by the TCJA is the ability to use up to $10,000 annually from a 529 plan to pay for elementary and secondary school. Those with agreements requiring a parent to pay out of pocket for these costs may need to be revisited.

IRAs

IRAs continue to be an asset that can be addressed in a marital dissolution. The rules have not been changed by the TCJA. Courts may direct the account owner to transfer some or all of the funds to the spouse or former spouse. The transfer is not taxable to the account owner if it’s made pursuant to a court order and done by directly transferring a fixed dollar amount or percentage of the account to the spouse’s IRA or by setting up a new IRA to which these funds are transferred. If there’s a court order but the account owner transfers funds to his/her checking account and then writes a check to the spouse, the account owner is taxable (see Kirkpatrick, TC Memo 2018-20).

A recipient of taxable alimony can count it as income for purposes of making an IRA contribution. Thus, a nonworking individual receiving alimony in 2018 can base an IRA contribution on alimony payments. In 2019, those receiving alimony under a divorce or agreement finalized before 2019 can continue to treat the taxable alimony as compensation for purposes of IRA contributions.

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But there is a related story of this quest: the tax implications of owning a valuable collection.

Tax rules for collectibles are complex, but sound planning to minimize burdens can be critical to the preservation of a collection’s value over the long term. Below, tax experts break down some of the most important moves:

Keeping it in the family: If you intend to leave your collection to heirs, the Tax Cut and Jobs Act passed into law late last year opens the door to some massive tax savings.

The law doubles the estate-tax exemption to $11.2 million, or $22.4 million for a couple. While this part of the law is set to expire in 2025, exemptions can be used during your lifetime through gifting. “Consider locking in this higher exemption by giving away assets up to the new level over the next seven years,” says David Leibell, a senior wealth strategist at UBS.

Choose collectibles likely to appreciate the most in value. “That way, you can avoid a lot of future capital-gains tax,” Leibell says.

Keep in mind that the final tax bill eliminated an earlier promise by lawmakers to honor the higher exemption retroactively, even after it expires. “It isn’t 100% that if you use the exemption now they won’t claw it back,” says Bradford Cohen, partner at Jeffers Mangels Butler & Mitchell in Los Angeles. “Still, we’re advising people to take advantage of it now.”

If you decide to pass on your collection through your will, sort out how your heirs will cover estate taxes. Consider buying life insurance, housed in a trust, to pay future estate taxes, Leibell says, so heirs won’t have to sell off a portion of the collection to cover the tax bill.

Donate to charity: Tax deductions for charitable contributions can go a long way toward reducing your overall tax burden, but plan carefully to get the most bang for your gifts.

If you donate collectibles during your lifetime, the gift must be of related use to the charity to get a tax deduction for its full value, up to 30% of the donor’s adjusted gross income. “For example, artwork must be given to an organization that exhibits artwork,” Leibell says. “If you give it to the Red Cross, you’ll get a deduction for the cost basis.”

Different trusts can be used to pass on collectibles to charities over time, while keeping control over them and getting the benefit of upfront deductions and, potentially, an income stream for a trust’s term.

If you wait to make an outright donation to charity in your will, its full value can be used to reduce your taxable estate.

To get both a deduction and raise some cash, consider a so-called bargain sale to a charity in which you sell an asset for below fair market value, Leibell suggests. This may trigger some capital-gains tax, but you can take a deduction for the value of the donated portion of the asset.

However, for those who receive nontaxable alimony starting in 2019, the opportunity to make IRA contributions based on alimony payments no longer exists.

Conclusion

This year is going to be a busy one for matrimonial attorneys with clients who want to finalize agreements before 2019 as well as for those who may want to delay the process. There is much to consider for these individuals and their families … and taxes should be an important factor is reaching a marital dissolution.

Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink and senior consultant to Citrin Cooperman & Company

Editor's note: I had the great pleasure of meeting Sidney Kess at the IRS Nationwide Tax Forums in New York City when I was Director or National Public Liaison for the IRS. When we talk about experts in the field of tax - Sidney Kess, Jerry Riles and Wayne Hebert are at the top of my list.

Taxing Collectibles: What You Need to Know

Forty years ago, architects Lucia Howard and David Weingarten began picking up European artifacts from the centuries-old Grand Tour era, a time when wealthy youngsters toured cultural epicenters as part of their education. Unlike a resin Eiffel Tower you might pick up at Orly Airport nowadays, the souvenirs for these early tourists were fine replicas of existing or ancient landmarks, crafted out of brass, marble, glass, or even paper.

Howard, 66, and Weingarten, 65, now claim the largest Grand Tour collection in the world, with some 4,500 sculptures, architectural models, mosaics, paintings, and other artifacts. The collection, exquisitely displayed in their Lafayette, Calif., home, has an otherworldly quality.

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Buy and sell wisely: The new tax rule eliminated tax-free like-kind exchanges for artwork and other collectibles. This is a transaction in which a collectible could be traded for another of the same value, without incurring capital-gains taxes.

But now, without this ability, sales of many collectibles are likely to decline, and owners will be looking at creative options for being able to prune or add to their collections.

Cohen advises considering a pass-through entity to house a collection. Pass-throughs are partnerships, S corporations, and limited liability companies. Income from these entities is taxed under rates up to 37% as of this year, but the new tax rules allow for a 20% income-tax deduction.

The task for collectors? Figure out if you’re better off incurring capital-gains taxes at a top rate of 20% when you sell a collectible, or be subject to a 37% income-tax rate after claiming a 20% deduction, Cohen says.

Another move to size up: Create a personal museum on your property, and claim a tax deduction for the items donated. Be cautious, however. The Internal Revenue Service doesn’t like these, and will demand proof that the museum is accessible to the public, has proper insurance, and is otherwise catering to outside visitors.

Furthermore, try to maximize the value of your donations. A themed collection in its entirety is likely to be valued higher than if it were donated piecemeal, says David Lehn, a tax partner at Withers Bergman in Greenwich, Conn.

Howard and Weingarten plan to prune their collection this year by donating a comprehensive chunk of it to the National Building Museum in Washington, D.C. They plan to give souvenirs from the Grand Tour’s final years in the early 20th century.

As with any sale or donation, pay attention to the IRS rules on appraisals, or months of strategizing can be all for nothing. As Cohen says, “A small foot-fault can reduce any tax benefit to zero.”

2017 Tax Reform: New Carried Interest Rule Can't Be Avoided By Having S Corporation Hold the Interest

Notice 2018-18, 2018-12 IRB; IR 2018-37

In a Notice and accompanying News Release, IRS has announced that taxpayers cannot avoid the rule contained in the Tax Cuts and Jobs Act (the Act)—that a “carried interest” must be held for a minimum of three years in order to obtain long-term capital gain—by using an S corporation to hold the interest.

Background. Effective for tax years beginning after Dec. 31, 2017, the Act added a new Code section which imposes a 3-year holding period requirement in order for “applicable

partnership interests” received in connection with the performance of services to be taxed as long-term capital gain. (Code Sec. 1061) These interests are often referred to as “carried interests.”

Code Sec. 1061(c)(1) generally defines the term “applicable partnership interest” as meaning any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any applicable trade or business.

Code Sec. 1061(c)(4)(A) provides that the term “applicable partnership interest” does not include any interest in a partnership directly or indirectly held by a corporation. Code Sec. 1361(a)(1) provides in general that the term “S corporation” means, with respect to any tax year, a small business corporation for which an election under Code Sec. 1362(a) is in effect for such year.

IRS will issue regs that prevent S corporation workaround. IRS has now announced that it intends to issue regs providing guidance on the application of Code Sec. 1061 and that those regs will provide that the term “corporation” for purposes of Code Sec. 1061(c)(4)(A) does not include an S corporation. Thus, “taxpayers will not be able to circumvent the three-year rule by using S corporations.”

Penalties Increase For Failure to File FBAR For Foreign Financial Account

The Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department, has announced the inflation-adjusted increase in the penalty amounts for a failure to file a Report of Foreign Bank and Financial Accounts (FBAR) reporting an interest in a foreign financial account.

Background on FBAR.

Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, must file an FBAR (Report of Foreign Bank and Financial Accounts, i.e., FinCEN Form 114) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

A U.S. person means a U.S. citizen (including a child), a individual who is a resident alien under Code Sec. 7701(b) of the U.S the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the U.S., and an entity, including a corporation, partnership, trust or limited liability company organized or formed under U.S. laws or the law of any State, the District of Columbia, the U.S. Territories and Insular Possessions or Indian Tribes.

A "foreign financial account" is a financial account located outside the U.S. The U.S. includes the states, the District of Columbia, territories and possessions of the U.S., and certain

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Indian lands. An account maintained with a branch of a U.S. bank that is physically located outside of the U.S. is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the U.S. is not a foreign financial account.

A U.S. person has a financial interest in a foreign financial account for which: (1) the U.S. person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the U.S. person or for the benefit of another person; or (2) the owner of record or holder of legal title is one of certain listed entities, which include (a) an agent, a nominee, attorney, or a person acting in some other capacity on behalf of the U.S. person with respect to the account, or (b) any of certain entities controlled by the U.S. person.

The civil and criminal penalties for noncompliance with the FBAR filing requirements are significant. Civil penalties for a non-willful violation can range up to $10,000 per violation (31 U.S.C. 5321(a)(5)( B)(i)), as adjusted for inflation, and civil penalties for a willful violation can range up to the greater of $100,000 (31 U.S.C. 5321(a)(5)(C)), as adjusted for inflation, or 50% of the amount in the account at the time of the violation. As adjusted for inflation, these amounts are, for penalties assessed after 8/1/2016 but before 1/16/2017, $12,663 and $126,626, respectively. A "reasonable cause" exception exists for non-willful violations, but not for willful ones.

Inflation adjustment. For penalties assessed after 1/15/2017, the FBAR penalty for a non-willful failure to report penalty increases from $12,663 to $12,921, and the penalty for a willful failure to report increases from $126,626 to $129,210.

Question of the Month

Does Cancellation of Debt for an S Corporation Pass to the Shareholders?

An S corporation derives income when a creditor discharges the S corporation from a debt. The income derived from the cancellation of indebtedness of an S corporation is not distributed to the shareholders of an S corporation. However the income that each share holder derives generally from an S corporation is subject to taxation[i].

For the purpose of taxation, an S corporation and its share holders are considered two separate entities. The method adopted for taxing an S corporation and partnership is same. But the rules adopted for distribution of Cancellation of Debt Income (COD) in an S corporation is different from that of a partnership.

As mentioned earlier, the income of a shareholder does not increase with the cancellation of indebtedness. It is only the general income, tax credits, and deductions of the S corporation that are distributed at the shareholder level[ii]. As an exception to the general rule, the income that arises

from the discharge of debt that is made before October, 12, 2001 and March, 1, 2002 under the bankruptcy proceedings is distributed among the shareholders.

However, the liability of an S corporation in insolvency, bankruptcy and indebtedness is not distributed at the shareholder level of an S corporation[iii]. Similarly the income that is received from the discharge of debt due to insolvency and bankruptcy is distributed at the corporation level and it is not distributed at the shareholder level.

Occasionally, a loss incurred by an S corporation is also not distributed among the shareholders. Hence such losses are considered income to the shareholders and it is called Net Operating Losses (NOL). An NOL is reduced from the gross income of the S corporation. The income derived from the discharge of indebtedness is also excluded from the gross income of an S corporation.

[i] Bilthouse v. United States, 2007 U.S. Dist. LEXIS 75206(N.D. Ill. 2007)

[ii] Pugh v. Commissioner, 213 F.3d 1324 (11th Cir. 2000)

[iii] Brooks v. Comm’r, T.C. Memo 2005-204 (T.C. 2005)

Tax Practice Management

7 Last Minute Tips to End Tax Season Strong

Can you see the light at the end of the tunnel? Right about this time, we bet you’re up to your eyeballs in tax returns, so it may be tough to think about how to make sure the tax season ends on a high note. Here are a few tips we think will help you finish tax season strong—and plan to make next year’s busy season even better.

Tip 1. Take notes

You probably have a method you use to jot down important notes. Whether it’s a favorite notepad, a date book or a mobile app, be sure you keep your tax season notes all in one place for future reference. Document specific things that went right

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Tip 6. Plan for time off

Be sure to thank everyone for their hard work by giving much-needed time off after tax season is over. You can also hand out bonuses, take the team to dinner, and/or give out gift cards to show your appreciation. Don’t forget to take time for yourself, too: It’s important to regroup and reenergize. You’ve most likely ignored your family and friends during this hectic time of year, so make it up to them and make plans to spend some downtime with the loved ones who support you.

Tip 7. Review and plan for 2019

Before you let the team go to rest and rejuvenate, take a few hours to analyze what went right and what went wrong while tax season is still fresh in everyone’s minds. In addition to asking your employees, make sure you ask your clients. Was it difficult to get answers from the office? Did your team respond to questions in a timely manner? What could you do for them to make next year’s tax return season easier? The more feedback you get from your team and your clients, the better you’ll be able to plan for next year.

Houston Woman Plans to File Lawsuit Against Tax Preparer

A Houston woman plans to sue a tax preparer whom she claims falsified her tax return which now has her in hot water with the IRS.

Alejandra Diaz claims the preparer falsified her 2015 tax return which has the IRS telling Diaz she owes them $7,000. It was a huge impact just to know that you owe the IRS more than $7,000," Diaz said through an interpreter.

Diaz said the preparer improperly claimed the education credit without her consent. In addition, she said her refund was listed as $5,000 but the preparer gave her a check for $3,000 and pocketed the extra money.

"Charging $2,000 for a $5,000 refund is absurd," Diaz's attorney Lisa Virgen said. "It's not right. So we're gonna try to get my client justice."

Diaz and her attorney also said she was targeted because she's a non-English speaker and classified as low-income.

During this tax season, they want others to know there are places to get your taxes prepared for free to avoid anyone who would take advantage of you.

"They're targeting a community that's already vulnerable, it's low income, and they don't the laws," Virgen said. "They don't know the immigration laws, they don't know the tax laws."

Diaz and her attorney said they plan to file the lawsuit.

and wrong during the season. If you take notes that are specific to a certain client, make sure you enter that information into your CRM system so it will pop up automatically when you search for that client in 2019. The more you can remember about this year’s tax season, the better prepared you’ll be to handle next year.

Tip 2. Stay healthy

With every spare moment spent working, taking care of yourself has probably taken a backseat to taking care of clients. Unfortunately, if you don’t maintain your health, your frantic work hours could leave you prone to illness—and the same is true for your employees. Encourage good hygiene throughout the office by providing hand sanitizer and tissues. When an employee starts to feel symptoms, require them to either take the day off or work remotely so he or she does not infect the entire office. Finally, have lots of healthy snacks and beverages on hand to keep your team energized, and encourage quick exercise breaks to rejuvenate the team during their long hours.

Tip 3. Hire last minute help

If you didn’t plan on hiring extra help for the busy season, there’s still time to change your mind. Don’t drive yourself crazy trying to finish your clients’ tax returns on your own. Even if you can’t afford to hire qualified tax preparers, you can find people to take care of accounting, invoicing and administrative tasks. You can hire virtual temporary help online at websites such as Indeed.com and Flexjobs. Another option: Ask a family member to help out temporarily.

Tip 4. Be prepared for problems

Daily crises such as complaining customers or crashing computers are inevitable during this time of year. Try to build in a little time every day to handle these emergencies by not scheduling every minute of your day. If you have a bit of wiggle room, you’re better able to recover from a crisis. Of course, the best plan is to prevent problems in the first place. Back up all your data to the cloud, have a plan for working remotely if needed, and keep your IT support numbers handy for emergencies.

Tip 5. Delegate

Do you usually handle paying your business’s bills or ordering supplies? Your time can be better spent on other things, especially this time of year. Delegate these types of tasks to your employees. Another option for better time management: Have another team member handle all your clients’ follow-up questions. This will reduce the number of interruptions you get. (Just be sure to let clients know ahead of time that your associate will be helping them so they don’t feel like they’re getting second-class treatment.) Pay attention to how your employees handle the pressure and who can be trusted with more sensitive tasks. Delegate by outsourcing incorporation and business filings to a full-service partner so you can concentrate on more important matters.

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IRS Policy on Disclosures About Its Investigations of Practitioner Misconduct

In its publication “Alerts from the IRS Office of Professional Responsibility (OPR)” (the Publication), OPR has publicized its procedures that allow a practitioner to obtain information from the OPR about allegations of misconduct against the practitioner that the OPR is investigating, while allowing the OPR to comply with Code Sec. 6103's limitations on disclosure of returns and return information.

Background—Circular 230 and OPR. Treasury Department Circular 230 provides rules regulating the practice of taxpayer representatives before the Department, i.e., the Circular 230 rules. The OPR administers and enforces the Circular 230 rules.

Background—disclosure of returns and return information. Returns and return information are confidential and may not be disclosed except as authorized under the Code. (Code Sec. 6103(a)) “Return information” is defined broadly to include “any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to a determination of the existence, or possible existence” of a taxpayer's liability under the Code. (Code Sec. 6103(b)(2)(A))

With exceptions not relevant here, a return or return information may be disclosed in a federal or state judicial or administrative proceeding relating to tax administration if: a) the treatment of an item reflected on the return is directly related to the resolution of an issue in the proceeding; or b) the return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer, and it directly affects the resolution of an issue in the proceeding. (Code Sec. 6103(h)(4))

Background—case that highlighted problems in OPR's previous procedures. The following are the facts of a district court case that the Publication notes but does not cite.

The OPR received a report from another part of IRS about possible practitioner misconduct. After reviewing the matter, the OPR sent the practitioner a “soft letter” that generally described the allegations and informed the practitioner that the OPR had decided not to take action on the matter. The “soft letter” advising the practitioner of the matter also advised him that the OPR investigation was closed. The practitioner sought further information about the allegations from the OPR, but the OPR was required to deny the request because its disclosure authority under Code Sec. 6103 is limited to disclosures related to open investigations. The practitioner then submitted his FOIA request, and took the matter to a U.S. district court when IRS continued to deny specific information regarding the allegations. The district court agreed that IRS acted properly by not disclosing the information.

The Publication doesn't cite any source for the above “limited to disclosures related to open investigations” language, but it would appear that the source is the Code Sec. 6103(h)

(4) language described under “Background—disclosure...,”above.

IRS has changed its procedures. In the Publication, IRS is publicizing that the OPR has modified its process to give practitioners in cases like the district court case an opportunity to seek information before it closes the case, providing an affected practitioner a fuller opportunity to understand and respond if the practitioner chooses to do so.

When the OPR issued the “soft” closing letter to the practitioner in the district court case, the OPR did not foresee the subsequent events, in particular, a request for information that it could not act on because of the closed status of the case. In hindsight, the OPR found this result inconsistent with its commitment to provide practitioners a full and fair opportunity to respond to allegations, and in 2016 modified its processes to address the problem. OPR now sends a letter to the practitioner advising of the issues presented in the matter under investigation and gives the practitioner an opportunity to comment, and, then, when it's an appropriate disposition of the case, sends a second letter with the “soft” closing language. This two-letter process gives a practitioner who wants to know more about the allegation(s) an opportunity to make a request before the OPR closes the matter, thus fitting within the framework of the Code Sec. 6103 provision.

OPR says that the revised “soft letter” process follows long-standing communication processes used by the OPR in investigations that could result in action under Circular 230, such as a reprimand, censure, suspension or disbarment.

Military Taxes

Annual Pay Adjustment

Annual military pay raises are linked to the increase in private sector wages, as measured by the Employment Cost Index (ECI). In the 1990's, the annual military pay raise was capped at one-half percent below private-sector growth unless specifically granted a larger increase by Congress. The FY2000 National Defense Authorization Act directed that pay raises for 2000 through 2006 would automatically be one-half percent above the private-sector wage increases. Pay raises beginning in 2007 are equal to the increase in the ECI. Pay raises may exceed these automatic levels if authorized and funded by Congress.

The basic pay raises since 2007:

1 January 2007: 2.2%

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1 April 2007: 0.5%1 January 2008: 3.5%1 January 2009: 3.9%1 January 2010: 3.4%1 January 2011: 1.4%1 January 2012: 1.6%1 January 2013: 1.7%1 January 2014: 1.0%1 January 2015: 1.0%1 January 2016: 1.3%1 January 2017: 2.1%1 January 2018: 2.4%

Estate and Gift Taxes

The Effects of Estate and Inheritance Taxes on Entrepreneurship

The Washington, D.C.-based Tax Policy Center recently published a paper titled "The Effects of Estate and Inheritance Taxes on Entrepreneurship." The estate and gift tax remains controversial despite its relatively small role in the federal taxation system, the authors noted.

To reach their conclusions, they relied on two main sources of data which resulted in "some new evidence" on the effect of estate and inheritance taxes on entrepreneurship, they said. First, the Survey of Consumer Finances was used to evaluate "how receipt of an inheritance affects the likelihood that an heir will own and manage a business." Second, the Health and Retirement Study was used to examine "how the changing rules for wealth transfer taxation at the federal and state level affect the likelihood of continued self-employment."

The authors found that the effects of inheritance on business formation are statistically significant and this does not differ with earlier evidence. "Receipt of an inheritance raises the likelihood of having active business income," they said. "The amount of the inheritance is less important than the existence of the inheritance.

Nonetheless, a $1 million reduction in the size of an inheritance would reduce the likelihood of owning and managing a business about 1 percentage point," they added. The authors also found "evidence that the specter of estate or inheritance taxes affects the likelihood of remaining self-employed, but this effect seems to primarily operate through the decision to retire: an estate tax makes retirement somewhat more attractive. That effect, however, is not specific to entrepreneurs." They added several caveats to their conclusions.

News from Capitol HillThe IRS Gets Help From Congress As It Tries to Implement the New GOP Tax Law

House Ways and Means Committee Chairman Kevin Brady (R-Tex.), touting the GOP tax plan last fall. Did Congress give the IRS enough money to implement the plan? (J. Scott Applewhite/AP)

Professor Andy Grewal and his law students recently tried calling the Internal Revenue Service to understand a complicated tax credit expanded in the new Republican tax law.

“We waited as the automated voice told us again and again to check the IRS website, before I decided we couldn’t waste further class time and hung up,” said Grewal, of the University of Iowa. “Then we found a video about it on their website, but the link to it was dead. Really.”

Fearing millions of Americans will wind up in similar informational dead-ends as they try to figure out their tax returns, Congress last week passed a $1.3 trillion omnibus package that bulks up funding for the IRS, including a $320 million short-term allocation to help the agency implement the tax law.

The overall IRS budget is also bumped to $11.4 billion in the next fiscal year. That is still down from the $12.1 billion the IRS received in 2010, a year in which the tax collection agency was not tasked with enforcing the biggest overhaul of the federal tax code in several decades.

The short-term $320 million boost is about 82 percent of the $397 million that IRS acting commissioner David J. Kautter told Congress that the agency would need to address the tax law. Kautter requested that money to help the agency over two years, so Congress could still provide the full funding during another appropriations bill. The national taxpayer advocate, an independent official within the IRS, has said the agency needs $495 million over two years to implement the law.

Congress's decision goes against the White House, which had pushed for additional cuts to the IRS budget. The administration sought to fund the IRS at $11.1 billion, down from $11.2 billion the year before. That request was opposed by Republicans in Congress, who cited the danger of further cuts to the agency. Even before the law’s passage, the IRS expected to be able to answer only 60 percent of the 100 million telephone calls it receives every year.

The law marks a sharp reversal for Republicans, who over the past eight years successfully cut the budget of the tax enforcement agency by about $1 billion and reduced its staff size by 18,000 people. But it's not clear whether the funding is enough to prepare the federal government for next filing season, with experts and former IRS officials offering a range of opinions. The $320 million increase can be used

On-Demand WebinarsncpeFellowship.com

website

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House Republicans first unveiled their ideas for restructuring the agency in a 2016 tax overhaul blueprint, including a focus on better customer service, a unit to support business taxpayers, and the creation of a small claims court for taxpayers.

Industry Clamors For Fixes to GOP Tax Law

Industry groups are pushing for lawmakers to include changes to the new tax law in the government funding package that is expected to pass this month.

Republicans enacted the tax overhaul at breakneck speed last year, turning it into law in less than two months. Since then, drafting errors in the law have emerged, while other provisions have come under scrutiny for their potential unintended consequences.

Stakeholders want to see changes to the law passed as soon as possible and view the funding omnibus as a prime opportunity. Among those pushing for action are groups in the agriculture and retail sectors.

“We’re very much hoping that they can be included in the [omnibus],” said Rachelle Bernstein, vice president and tax counsel at the National Retail Federation.

The House is expected to take up an omnibus bill funding federal agencies through the end of the fiscal year as soon as this week. Congress needs to pass either an omnibus or a short-term spending bill by March 23 to avoid another federal government shutdown.

Since the spending bill is one of the few must-pass pieces of legislation that Congress is expected to take up this year, lobbyists and lawmakers are clamoring to get their priorities attached to the measure — including tweaks to the tax law.

A top issue with the tax law that stakeholders hope to see addressed involves a provision impacting the agriculture industry. This issue has become known as the “grain glitch.”

The law created a 20-percent deduction for the gross payments that farmers receive from cooperatives. Cooperatives are businesses owned by farmers that perform functions such as buying and marketing their members’ commodities.

The provision was added to the tax law in an effort to address the fact that under the old tax code, co-ops could claim the

for enforcement, operations support and taxpayer services in rolling out the new law.

“The numbers remain concerning given the work the IRS has to do,” said Mark W. Everson, who served as commissioner of the IRS from 2003 to 2007 and now works at the tax consulting firm Alliantgroup. The IRS did not respond to a request for comment.

Others celebrated lesser-noticed changes to the IRS in the budget package, including new federal funding for programs that will help poor and elderly Americans understand and navigate the tax law changes, said Marvin Friedlander, who oversaw exempt organizations at the IRS before retiring in 2010.

“They got a bunch of money to implement the new tax law and for business systems, enforcement and taxpayer education,” Friedlander said. “It’s really good. Poorer and older people don’t have the resources to hire an accountant.”

Congress has traditionally increased funding for the IRS following big changes to the U.S. tax code. The 1986 tax overhaul signed by President Ronald Reagan led the IRS to hire an additional 1,300 staff members and increase the number of phone calls it answered by 30 percent. The 2008 stimulus bill prompted a 125 percent increase in the number of incoming calls.

Republican lawmakers have for months recognized the need to step up the agency’s funding in the wake of the law. The IRS is wrestling with a host of questions about the law, including which companies qualify for certain deductions and, among other issues, the legality of states' efforts to circumvent the new cap on residents' property tax deductions.

The increase agreed on by lawmakers may only partially offset the slow attrition from the agency. In 2017, the IRS lost 6,801 permanent staffers. Previous projections from National Taxpayer Advocate Nina Olson, an independent oversight official, found that only 4 of 10 callers could reach a live operator during the 2018 filing season.

“You need humans to answer the phones, and the rates are abysmal during filing season,” said Mark Mazur, who served as assistant secretary for tax policy at the Treasury Department under Barack Obama. “This really should be on top of a much bigger budget increase.”

IRS Restructuring Draft Coming

Draft legislation that would restructure the IRS could be released soon after Congress returns from its Easter break, according to House Ways and Means Oversight Subcommittee Chair Lynn Jenkins (R-Kan.).

A committee vote on the legislation is expected by the mid-April tax-filing deadline. Jenkins has previously said she was looking to get feedback on the draft from Republican members of the Committee before any committee vote.

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domestic production deduction, which was repealed under the new law. But the provision had the unintended consequence of creating an incentive for farmers to sell their commodities to cooperatives rather than to private companies.

“This is a problem because the agriculture industry is better served when farmers have competition for where they sell their products,” said Pat Wolff, a tax-policy specialist for the American Farm Bureau Federation.

Stakeholders and lawmakers identified the provision as an issue fairly quickly, and talks about a fix have been taking place among private companies, cooperatives and House and Senate tax writers since January.

The National Council of Farmer Cooperatives (NCFC) and the National Grain and Feed Association (NGFA) issued a joint statement Tuesday afternoon announcing a proposal that they expect to be included in the omnibus. The proposal, whose legislative language was developed by the congressional tax-writing committees, would be retroactive to Jan. 1 and is designed to replicate the benefits co-ops received under the domestic production deduction while also removing tax incentives for farmers to do businesses with companies just because they are co-ops.

“The old [domestic production deduction] had a proven track record of letting farmers keep more of their hard-earned money. We expect these provisions to do the same,” said Chuck Conner, president and CEO of NCFC.

“We believe the solution merits enactment so that competitive choices remain available to agricultural producers and the marketplace — not the tax code — determines with whom they do business,” said NGFA President and CEO Randy Gordon.

Retailers, meanwhile, are hoping to see drafting errors in the tax law fixed.

Under the old tax code, improvements to retail stores and restaurant properties could be written off over 15 years. The authors of the new law intended for the full costs of those improvements to be written off immediately after they are made. But due to a drafting mistake, the law states that those property improvements instead have to be written off over 39 years.

Dave Koenig, vice president for tax at the Retail Industry Leaders Association, said the drafting mistake poses a “cash flow issue” for retailers.

He said the tax bill “clearly was meant to encourage investment,” but until the provision is fixed, it would have the opposite effect.

Retailers also want to see a change made to the effective date of a provision largely barring businesses from carrying back net operating losses to prior years.

Lawmakers wrote in their conference report on the law that the provision applies for taxable years beginning after Dec. 31, 2017, but the actual text of the statute mistakenly said it applies for taxable years ending after Dec. 31, 2017.

Many retailers have fiscal years that end Jan. 31, so for them, the prohibition on net operating loss carry-backs would apply for their fiscal years that just ended. This is essentially a retroactive change, said Bernstein.

She added that the drafting error could be harmful for retailers in bankruptcy, who may have planned using net operating loss carry-backs to help finance their inventory.

The tax law passed Congress through a process called reconciliation that allowed the measure to clear the Senate with a simple majority. But technical changes to the law can’t be passed through reconciliation and instead would have to get 60 votes in the Senate. Republicans only have 51 seats.

Because the changes would need some Democratic votes to pass, stakeholders think it would be best to include them in must-pass legislation such as the government spending bill.“They’re dealing with a lot of other big stuff, and we’re hoping this is noncontroversial enough that this can ride with it,” Bernstein said.

Democrats, however, are reluctant to help make technical changes to the tax law without also securing more substantive changes. They all voted against the law and denounced Republicans for moving it so quickly through Congress.

People in the Tax News

Dorothy Leaman

As previously announced to the membership, Dorothy Leaman, the first lady of tax in North Carolina has passed away.

To say "Dot" will be missed is a gross understatement. She touched the lives of many and the likes of her are rare.She served as President of the National Society of Tax Professionals where she worked diligently to provide quality services and education to its members. She served in disturbing times and resigned when she felt the organization was not fulfilling its promises to the membership.

She continued in her service to the North Carolina Society of Tax Professionals and was the instrumental force in the Carolina's Forum, an annual event for North and South Carolina tax professionals. Just this last event Dorothy was honored by the NCNSTP by President and ncpeFellowship member Nona Fisher for her tireless efforts on behalf of tax professionals.

She was instrumental in bringing ncpe education to NC in

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restitution and forfeit more than $820,000 in a related case. He had pleaded guilty last September to filing a false tax return

Smith operated a pharmacy in Jersey City that was owned by a family member. Officials say Smith had control of and access to the pharmacy's bank account and that during the 2011 tax year, he withdrew roughly $170,831 from the account for his own use.

Smith didn't report the money as income on his personal tax return that year. He also failed to file personal tax returns for the following two years.

Liberty Tax Receives Notice of Second Delinquent Form 10-Q Filing from Nasdaq and Receives Extension of Time to Cure Delinquencies

The parent company of Liberty Tax Service, announced today that it received a notice (the "Notice") from the Listing Qualifications Department of the Nasdaq Stock Market ("Nasdaq") on March 15, 2018 stating that the Company's failure to file its Form 10-Q for the quarter ended January 31, 2018 constituted an additional delinquency under Nasdaq Listing Rule 5250(c)(1), which requires timely filing of periodic reports with the Securities and Exchange Commission ("SEC"). The Company previously disclosed in a Form 8-K filed with the SEC on December 19, 2017 that the Company had received a notice from Nasdaq stating that the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1) due to the Company's failure to file its Form 10-Q for the quarter ended October 31, 2017.

As previously disclosed in the Company's Form 8-K filed with the SEC on December 11, 2017, KPMG LLP resigned as the Company's independent public accounting firm, effective December 8, 2017. The Company has experienced a delay in the completion of its financial statements and other related components of its Form 10-Qs for the quarters ended October 31, 2017 and January 31, 2018 due to the resignation of KPMG.

Nasdaq informed the Company in the Notice that the Company will have until June 11, 2018 to file the Form 10-Qs for the quarters ended October 31, 2017 and January 31, 2018 with the SEC to regain compliance with Nasdaq Listing Rule 5250(c)(1). The Company continues to work expeditiously to engage a new independent public accounting firm as auditor of the Company's financial statements and expects to file the delinquent reports as soon as practicable following the engagement of the auditor.

In a separate notification, Nasdaq informed the Company on March 15, 2018 that it has granted the Company an extension of time until May 31, 2018 to regain compliance with Nasdaq Listing Rule 5605(c)(2)(A), which requires that the Audit Committee of the Board of Directors consist of at least three members, each of whom must satisfy the independence and other requirements of Nasdaq Listing Rule 5605(c)(2)(A). In a Form 8-K filed with the SEC on January 8, 2018, the Company

the Asheville area and was a great promoter of ncpe to other practitioners.

Dorothy's husband, Bert, and her 7 children are joined by countless others whose lives were touched by Dorothy. Her generosity, her desire to build and grow and her love for the tax professional community are her legacy to us.

In a world of many women, to know Dorothy was to know a "lady".

President Trump To Name Michael Desmond IRS Chief Counsel

BNA is reporting that President Trump plans to appoint Michael J. Desmond IRS Chief Counsel and Treasury DepartmentAssistant General Counsel:

After serving as a law clerk for a Federal judge in Los Angeles, Mike began his career in tax controversy as a Trial Attorney with the Attorney General’s Honors Program at the Tax Division of the U.S. Department of Justice. After the Justice Department, Mike worked at a boutique tax firm in Washington, D.C., where he was elected partner in 2004. In this capacity he represented clients ranging from Fortune 100 companies to partnerships and individuals. Mike returned to government in 2005, serving as Tax Legislative Counsel in the U.S. Department of Treasury through 2008. As Tax Legislative Counsel, Mike was the Department’s senior legal advisor on domestic tax issues, testifying before Congress and working with senior IRS officials including the IRS Commissioner and Chief Counsel on a broad range of tax policy, legislative and regulatory matters. Following his tenure at the Treasury Department, Mike spent several more years as a partner in a global law firm [Bingham McCutchen] before starting his own practice in January 2012.

Pharmacist Gets Prison Term for Filing False Tax Return

A pharmacist who failed to report nearly $171,000 he withdrew from the business on his personal tax returns has been sentenced to a year in prison.

Federal officials say Mark Smith must also pay $372,000 in

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previously reported that it had received a notice from Nasdaq stating that because of the resignations of Mr. John Garel and Mr. Steven Ibbotson as directors of the Company, both of whom served on the Audit Committee, the Company was no longer in compliance with Nasdaq Listing Rule 5605(c)(2)(A).

In the event that the Company is unable to regain compliance with Nasdaq Listing Rules 5250(c)(1) and 5605(c)(2)(A) by June 11, 2018 and May 31, 2018, respectively, Nasdaq has advised the Company that its securities will be subject to delisting proceedings.

Couple Charged With Conspiring to Evade Personal and Employment taxes

An Upper Freehold Township couple was arrested on March 23 by federal agents on charges of conspiracy to defraud the United States by evading the payment of personal and employment taxes, U.S. Attorney Craig Carpenito announced.

Tito Viteri, 39, and Maria Yepez, 38, are charged by complaint with one count of conspiracy to defraud the IRS of taxes from 2008 through 2016. Viteri and Yepez made their initial appearances on March 23 before U.S. Magistrate Judge Lois H. Goodman in Trenton federal court and were released on $300,000 each unsecured bonds, according to the U.S. Attorney.

According to documents filed in the case and statements made in court, since 2002, Viteri was the owner and operator of numerous commercial trucking companies that performed delivery services, all of but one of which operated in New Jersey. Yepez was the nominal owner of three of the companies.

Viteri and Yepez allegedly conspired to evade paying personal and business-related taxes by engaging in the following acts: “pyramiding” companies and using nominees as the purported owners of several of the companies in order to shield business assets while incurring employment tax liabilities; failing to file timely and accurate quarterly federal tax returns by falsely categorizing employees as independent contractors, for whom employment taxes did not have to be paid; receiving unreported kickback income from an employee; and concealing personal income and assets by using nominees and depositing money into their child’s bank account.

In 2008, an IRS audit determined Viteri allegedly owed approximately $785,000 in unpaid taxes for one of his

companies, and he himself allegedly owed approximately $315,000 in unpaid personal taxes.

Although Viteri began making payments to the IRS in August 2011, he stopped making those payments in December 2013, claiming he was not “bringing enough money home.” Despite his claims, at about the same time (February 2013 to February 2016), Viteri and Yepez made approximately $111,000 in rental payments (approximately $3,000 per month) for a property in Chesterfield, Burlington County, where they lived.

Although Viteri and Yepez still had substantial outstanding tax liabilities, in 2016, Viteri and Yepez purchased a home in the Cream Ridge section of Upper Freehold Township for $929,653. To conceal the purchase of the home from the IRS, Viteri and Yepez purchased the home in the name of Viteri’s mother.

As of March 2018, Viteri owed approximately $1.3 million in personal income taxes, and Viteri and Yepez owed an additional approximate $1.3 million in unpaid business-related taxes.

The conspiracy charge carries a maximum potential penalty of five years in prison and a statutory maximum fine equal to the greatest of: $250,000; twice the gross amount of any pecuniary gain that any persons derived from the offense; or twice the gross amount of any pecuniary loss sustained by any victims.

Paul Manafort Pleads Not Guilty to Tax and Fraud Charges in Federal Court in Virginia

President Trump’s former campaign manager pleaded not guilty to tax and fraud charges in federal court in Virginia on Thursday as he appeared before a judge in the second criminal case brought against him by the special counsel investigating Russian interference in the 2016 election.

During the hearing in U.S. District Court in Alexandria, Judge T.S. Ellis III put Paul Manafort on home confinement, requiring him to wear a GPS monitoring device, and set a trial for July 10. Jurors will hear from 20 to 25 witnesses during a trial thatwill last eight to 10 days, prosecutors said.

Manafort also pleaded not guilty last week in a related case in Washington, D.C., where he is set to go to trial on Sept. 17. Manafort lives in Virginia and was indicted there in February.

Ellis called the Virginia case “complex” but noted that it “doesn’t have anything to do with the Russians or Russian interference in the election.”

Defense attorney Kevin Downing responded that he planned to file motions soon making that very point and arguing that special counsel Robert S. Mueller III has no authority to bring these charges.

Prosecutor Andrew Weissmann said in court that the special counsel’s office has already turned over all relevant documents

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“Show us your bracelet!” Christeson shouted before throwing a Russian flag at Manafort and calling him a “traitor.”

Manafort spokesman Jason Maloni did put out a statement shortly after the indictment was announced.

“Mr. Manafort is confident that he will be acquitted and violations of his constitutional rights will be remedied,” the statement said.

If convicted of bank fraud in Virginia, Manafort faces up to 270 years in prison, but prosecutors say federal sentencing guidelines call for much less time: four to five years. He faces up to 15 years on the charges of filing false tax returns and up to 20 years on the charges of failing to report foreign bank accounts. Guidelines call for about eight to 10 years.

Separately on Thursday, an April 4 hearing was scheduled before a federal judge in Washington in Manafort’s lawsuit challenging Mueller’s appointment as special counsel, which the government has moved to dismiss. That suit is before U.S. District Judge Amy Berman Jackson, who also is overseeing Manafort’s criminal case in the District.

Manafort is already on home confinement and under GPS monitoring in the District. But Downing told Ellis that his client is putting together a $10 million bond package that may allow him freedom until trial.

The current restrictions, Downing said, are “excessive” and “incredibly onerous.”

Ellis, a senior judge, was appointed by President Ronald Reagan in 1987.

Alabama Resident and Ringleader of Multi-Million Dollar Stolen Identity Tax Refund Fraud Schemes Sentenced to 30 Years in Prison

A Phenix City, Alabama, resident was sentenced today to 30 years in prison for his role in masterminding multiple stolen identity refund fraud (SIRF) schemes, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and U.S. Attorney Louis V. Franklin, Sr. of the Middle District of Alabama.

William Anthony Gosha III, a/k/a Boo Boo, was convicted, following a jury trial in November 2017, of one count of conspiracy, 22 counts of mail fraud, three counts of wire fraud, and 25 counts of aggravated identity theft.

According to the evidence presented at trial and sentencing, between November 2010 and December 2013, Gosha ran a large-scale identity theft ring with his co-conspirators, Tracy Mitchell, Keshia Lanier, and Tamika Floyd, who were all previously convicted and sentenced to prison. Together they filed over 8,800 tax returns with the Internal Revenue Service (IRS) that sought more than $22 million in fraudulent refunds of which the IRS paid out approximately $9 million.

to Manafort’s attorneys and was ready to go to trial soon.

“I don’t think it’s complicated,” Weissman said of the case.

Downing disagreed, pointing to the numerous offshore accounts and business interests involved.

“Having had the benefit of trying criminal tax cases for 15 years, I think it is complicated,” he said. He had hoped for the trial to be in November, he said, after Manafort faces a jury in the District.

Manafort’s former business partner, Rick Gates, has pleaded guilty in the District to conspiracy and lying to the FBI. At the request of prosecutors, charges have been dropped against Gates in Virginia, although they could be resurrected should he fail to live up to a plea agreement, which requires him to offer information on any matters Mueller deems relevant.

Both indictments accuse Manafort of hiding the work he did for and the money he made from a Russia-friendly political party in Ukraine and former Ukrainian president Viktor Yanukovych.In Washington, Manafort faces counts of conspiracy to launder more than $30 million, making false statements, failing to follow lobbying disclosure laws and working as an unregistered foreign agent.

In Virginia, he is accused of hiding foreign bank accounts, falsifying his income taxes and failing to report foreign bank accounts.

Manafort also faces bank fraud charges in Virginia not directly related to his work in Ukraine. After his business there dried up, according to prosecutors, Manafort fraudulently secured more than $20 million in loans in part by using his real estate as collateral.

Prosecutors had offered to combine the indictments in D.C., but Manafort refused to do so. Downing suggested Thursday that Manafort would like to face all the charges in Virginia.

“We’re trying,” Downing said, to move tax conspiracy charges from the District to Virginia.

Downing declined to comment after court, saying he had already “had my three minutes.”

The attorney has been rebuked by the judge overseeing the D.C. trial for speaking out on Manafort’s behalf despite a gagorder she issued.

Manafort also said nothing to a group of reporters outside the courthouse, holding his wife’s arm as they hurried to a waiting SUV.

Also waiting was Bill Christeson of Kensington, Md., who said he has followed Manafort to several court appearances and has been hoping to see the longtime lobbyist prosecuted for decades.

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In November 2010, Gosha stole IDs of inmates from the Alabama Department of Corrections and provided the IDs to Lanier who used the information to seek fraudulent tax refunds. Gosha and Lanier agreed to split the proceeds. Gosha also stole employee records from a company previously located in Columbus, Georgia. In 2012, Lanier needed an additional source of stolen IDs and approached Floyd, who worked at two Alabama state agencies in Opelika, Alabama: the Department of Public Health and the Department of Human Resources. In both positions, Floyd had access to the personal identifying information of individuals, including teenagers. Lanier requested that Floyd primarily provide her with identities that belonged to sixteen and seventeen year-olds. Floyd agreed and provided thousands of names to Lanier and others at Lanier’s direction.

After receiving the additional stolen IDs, Gosha recruited Mitchell and her family to help file the fraudulent tax returns. Mitchell worked at a hospital located at Fort Benning, Georgia, where she had access to the personal identification information of military personnel, including soldiers who were deployed to Afghanistan. She stole soldiers’ IDs and used their information to file fraudulent returns.

In order to electronically file the fraudulent returns, Gosha, Lanier, and their co-conspirators applied for several Electronic Filing Identification Numbers (EFIN) with the IRS in the names of sham tax preparation businesses. Gosha, Lanier, and their co-conspirators then used these EFINs to file the returns and obtain tax refund related bank products from various financial institutions, which provided them with blank check stock. Gosha and his co-conspirators initially printed out the fraudulently obtained refund checks using the blank check stock.

However, the financial institutions halted Gosha’s and his co-conspirators’ ability to print checks. As a result, they recruited U.S. Postal employees who provided Gosha and others with addresses on their routes to which the fraudulent refund checks could be directly mailed. In exchange for cash, these postal employees intercepted the refund checks and provided them to Gosha, Lanier, Mitchell and others. Gosha also directed tax refunds to prepaid debit cards and had those cards sent to addresses he controlled.

In addition, between January 2010 and December 2013, Gosha participated in a separate SIRF scheme with Pamela Smith and others, in which Gosha sold the IDs that he had stolen from the Alabama Department of Corrections to Smith and others. Smith and others used the IDs to file returns that sought approximately $4.8 million in fraudulent refunds of which the IRS paid out approximately $1.85 million. Smith also has been convicted and sentenced to prison for this conduct.

At Gosha’s sentencing, the government offered victim impact statements from several individuals whose identities were stolen, and from companies and governmental agencies where the identity theft breaches occurred. An Alabama Department of Public Health representative noted, the identity theft was

not only devastating financially, but it also had a chilling effect on the department’s ability to serve the residents of the State of Alabama. A mother of a young U.S. Army soldier who was an identity theft victim described the consequences of the fraud on her and her family, stating:

While my son was fighting for our country and all back home, I received a very disturbing phone call from [an] Agent from the IRS that my son, while at Ft. Benning training to defend our country, the land of the free, had his identity stolen and fraudulent tax returns were filed with his social security number. This news was devastating to think that my 19-year-old son, who was defending the very freedom this country stands for, was wronged by one of those people he was willing to die for. My whole family could not believe what was happening. We now had to worry about this terrible act by one of our own. As I tried my best to keep composed and handle all of the gruesome mounds of paperwork to get this straightened out with the IRS, my son was then denied his tax refund as result of this scheme. This created a financial hardship on him. We were too afraid to tell him while he was deployed because we did not want to worry him and we wanted him to focus only on getting home alive and not have to worry about such an atrocious act by someone who did not even know him.

In addition to the term of imprisonment, U.S. Chief District Court Judge Keith Watkins ordered Gosha to serve three years of supervised release and to pay restitution in the amount of $9,052,049.

Prior to Gosha’s sentencing, thirty of his co-conspirators have been sentenced, including Keisha Lanier who received 15 years and Tracy Mitchell who received over 13 years.

Principal Deputy Assistant Attorney General Zuckerman and U.S. Attorney Franklin commended special agents of Internal Revenue Service-Criminal Investigation and U.S. Postal Service Office of Inspector General who investigated this case and Trial Attorneys Michael C. Boteler and Gregory P. Bailey of the Tax Division and Assistant U.S. Attorney Jonathan Ross of the Middle District of Alabama, who prosecuted the case.

IRS News

IRS: Refunds Worth $1.1 Billion Waiting to be Claimed by Those Who Have Not Filed 2014 Federal Income Tax Returns

Unclaimed federal income tax refunds totaling about $1.1 billion may be waiting for an estimated 1 million taxpayers who did not file a 2014 federal income tax return, according to the Internal Revenue Service.

To collect the money, these taxpayers must file their 2014 tax return with the IRS no later than this year's tax deadline,

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Revenue Service today listed email “phishing” schemes as a top filing season concern and part of the annual listing of the “Dirty Dozen” tax scams for 2018.

The IRS warned taxpayers, businesses and tax professionals to be alert to fake emails or websites looking to steal personal information. These attempts can expand during tax season and remain a major identity theft threat.

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals.

To help protect taxpayers, the IRS is highlighting each of these scams on 12 consecutive days to help raise awareness. The IRS also urges taxpayers to help protect themselves against identity theft by reviewing safety tips prepared the Security Summit, a collaborative effort between the IRS, states and the private-sector tax community.

“We urge taxpayers to watch out for these tricky and dangerous schemes,” said Acting IRS Commissioner David Kautter. “Phishing and other scams on the ‘Dirty Dozen’ list can trap unsuspecting taxpayers. Being cautious and taking basic security steps can help protect people and their sensitive tax and financial data.”

2018 Sees New Phishing Schemes

The IRS continues to see a steady onslaught of new and evolving phishing schemes as scam artists work to victimize taxpayers during filing season.

In a recent twist to a phishing scam, the IRS has seen thousands of taxpayers victimized by an unusual scheme that involves their own bank accounts. After stealing client data from tax professionals and filing fraudulent tax returns, the criminals use taxpayers' real bank accounts to direct deposit refunds. Thieves are then using various tactics to reclaim the refund from the taxpayers, including falsely claiming to be from a collection agency or representing the IRS. Phone calls, emails and web sites are used to make the scheme more elaborate. Versions of the scam may continue to evolve. The IRS encourages taxpayers to review some basic tips if they see an unexpected deposit in their bank account.

In addition, the IRS has seen email schemes in recent weeks targeting tax professionals, payroll professionals, human resources personnel, schools as well as individual taxpayers.

In these email schemes, criminals pose as a person or organization the taxpayer trusts or recognizes. They may hack an email account and send mass emails under another person’s name. Or they may pose as a bank, credit card company, tax software provider or government agency. Criminals go to great lengths to create websites that appear legitimate but contain phony log-in pages. These criminals hope victims will “take the bait” and provide money, passwords, Social Security

Tuesday, April 17.

"We’re trying to connect a million people with their share of $1.1 billion in unclaimed refunds for 2014,” said Acting IRS Commissioner David Kautter. “Time is running out for people who haven’t filed tax returns to claim their refunds. Students, part-time workers and many others may have overlooked filing for 2014. And there’s no penalty for filing a late return if you’re due a refund.”

The IRS estimates the midpoint for the potential refunds for 2014 to be $847; half of the refunds are more than $847 and half are less.

In cases where a federal income tax return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a tax refund. If they do not file a tax return within three years, the money becomes the property of the U.S. Treasury. For 2014 tax returns, the window closes April 17, 2018. The law requires taxpayers to properly address, mail and ensure the tax return is postmarked by that date.

The IRS reminds taxpayers seeking a 2014 tax refund that their checks may be held if they have not filed tax returns for 2015 and 2016. In addition, the refund will be applied to any amounts still owed to the IRS or a state tax agency and may be used to offset unpaid child support or past due federal debts, such as student loans.

By failing to file a tax return, people stand to lose more than just their refund of taxes withheld or paid during 2014. Many low- and moderate-income workers may be eligible for the Earned Income Tax Credit (EITC). For 2014, the credit was worth as much as $6,143. The EITC helps individuals and families whose incomes are below certain thresholds. The thresholds for 2014 were:

• $46,997 ($52,427 if married filing jointly) for those withthree or more qualifying children;

• $43,756 ($49,186 if married filing jointly) for peoplewith two qualifying children;

• $38,511 ($43,941 if married filing jointly) for those withone qualifying child, and;

• $14,590 ($20,020 if married filing jointly) for peoplewithout qualifying children.

Current and prior year tax forms (such as the tax year 2014 Form 1040, 1040A and 1040EZ) and instructions are available on the IRS.gov Forms and Publications page or by calling toll-free 800-TAX-FORM (800-829-3676).

Phishing Schemes Make IRS ‘Dirty Dozen’ List of Tax Scams for 2018; Individuals, Businesses, Tax Pros Urged to Remain Vigilant

Following continuing threats to taxpayers, the Internal

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numbers and other information that can lead to identity theft.

Fake emails and websites also can infect a taxpayer’s computer with malware without the user knowing it. The malware gives the criminal access to the device, enabling them to access all sensitive files or even track keyboard strokes, exposing login information.

For those participating in these schemes, such activity can lead to significant penalties and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.

Tax Pro Alert

Numerous data breaches in the past year mean the entire tax preparation community must be on high alert during filing season to any unusual activity. Criminals increasingly target tax professionals, deploying various types of phishing emails in an attempt to access client data. Thieves may use this data to impersonate taxpayers and file fraudulent tax returns for refunds.

As part of the Security Summit initiative, the IRS has joined with representatives of the software industry, tax preparation firms, payroll and tax financial product processors and state tax administrators to combat identity theft refund fraud to protect the nation's taxpayers.

The Security Summit partners encourage tax practitioners to be wary of communicating solely by email with potential or even existing clients, especially if unusual requests are made. Data breach thefts have given thieves millions of identity data points including names, addresses, Social Security numbers and email addresses. If in doubt, tax practitioners should call to confirm a client’s identity.

What to Do with Phishing Attempts

If a taxpayer receives an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), they should report it by sending it to phishing@irs.gov. Learn more by going to the Report Phishing and Online Scams page on IRS.gov.

Tax professionals who receive unsolicited and suspicious emails that appear to be from the IRS or related to the e-Services program also should report it by sending it tophishing@irs.gov.

It is important to keep in mind the IRS generally does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

Update on Jurisdictions Included on the IRS List of Jurisdictions That Do Not Issue Foreign TINs

Notice 2018-20

I. Purpose

This notice announces that the Internal Revenue Service (IRS) will expand the list of jurisdictions that do not issue taxpayer identification numbers to their residents, described in section IV.B.3.ii of Notice 2017-46, 2017-41 I.R.B. 275, to include jurisdictions that make a request to the U.S. competent authority to be included on such list. The Department of the Treasury (Treasury Department) and the IRS intend to amend §1.1441-1T(e)(2)(ii)(B) to incorporate the guidance describedin this notice.

II. Background

On January 6, 2017, the Treasury Department and the IRS published temporary regulations under chapter 3 of the Internal Revenue Code (T.D. 9808, 82 F.R. 2046) (temporary regulations). Section 1.1441-1T(e)(2)(ii)(B) of the temporary regulations provides that, beginning January 1, 2017, a beneficial owner withholding certificate provided to document an account maintained at a U.S. branch or office of a withholding agent that is a financial institution is required to contain the taxpayer identification number issued by the account holder’s jurisdiction of tax residence (Foreign TIN) in order for the withholding agent to treat the withholding certificate as valid. Section 1.1441-1T(e)(2)(ii)(B) further provides that for withholding certificates associated with payments made on or after January 1, 2018, an account holder that does not provide a Foreign TIN must provide a reasonable explanation for its absence in order for the withholding certificate not to be considered invalid.

On September 25, 2017, the Treasury Department and the IRS released Notice 2017-46, which provides guidance modifying the requirements of §1.1441-1T(e)(2)(ii)(B) for withholding agents to obtain and report Foreign TINs of their account holders. Among other things, Notice 2017-46 extends the date on which the requirement to obtain Foreign TINs takes effect to January 1, 2018; provides transitional rules for withholding agents obtaining a Foreign TIN for an account holder documented with an otherwise valid Form W-8 that was signed before January 1, 2018; and provides exceptions to obtaining Foreign TINs for certain categories of account holders. In particular, Notice 2017-46 provides that under regulations to be published at a later date, withholding agents will not be required to obtain a Foreign TIN (or a reasonable explanation for why an account holder has not been issued a Foreign TIN) for an account held by a resident of a jurisdiction that has been identified by the IRS on a list of jurisdictions that do not issue Foreign TINs to their residents (No TIN list). Notice 2017-46 identifies three such jurisdictions, and provides that a list of all such jurisdictions will be made available at www.irs.gov/FATCA and will be updated as necessary. In December 2017, the No TIN list was posted by the IRS and is available at https://www.irs.gov/businesses/corporations/list-

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of-jurisdictions-that-do-not-issue-foreign-tins.

III. Expansion Of No Tin List To Include Jurisdictions ThatRequest To Be On The List

Since the release of Notice 2017-46, some jurisdictions with laws that restrict the collection or disclosure of the Foreign TINs of their residents have requested that their residents not be required to provide Foreign TINs to withholding agents for purposes of §1.1441-1T(e)(2)(ii)(B). In response to these requests, the Treasury Department and the IRS have decided to expand the No TIN list to include jurisdictions that request to be on the list, even if the jurisdictions issue Foreign TINs to individuals or entities resident in such jurisdictions. To request to be added to the No TIN list, a jurisdiction’s competent authority should contact the U.S. competent authority. As of the date of this notice, the following jurisdiction will be included on the No TIN list:

Australia

The Treasury Department and the IRS intend to amend §1.1441-1T(e)(2)(ii)(B) to provide that withholding agents arenot required to collect or report Foreign TINs of residents inthe jurisdictions on the No TIN list, including the jurisdictionidentified above.

IV. Taxpayer Reliance

Before the issuance of the amendment to the temporary regulations described in section III of this notice, taxpayers may rely on the provisions of this notice regarding the content of the amendment and the inclusion of Australia (and any jurisdictions subsequently included) on the No TIN list.

V. Effect On Other Documents

This notice supplements Notice 2017-46.

VI. Drafting Information

The principal author of this notice is Charles Rioux of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Charles Rioux at (202) 317-4992 (not a toll-free call).

File Current Versions of Exemption Applications

The IRS reminds people seeking tax-exempt status to use the current version of forms to avoid processing delays. The current version of Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, is dated December 2017, and Form 1024, Application for Recognition of Exemption Under Section 501(a), is dated January 2018.

If you use a prior version of one of these forms, the IRS will return your application and ask you to resubmit using the current version of the form.

User fees

Revenue Procedure 2018-5 announces the following user fees:

Please submit Form 8718, User Fee for Exempt Organization Determination Letter Request, with group exemption letter requests and exemption applications, other than those filed on Forms 1023 and 1023-EZ.

The IRS announces user fees annually in updates to Rev. Proc. 2018-5 and posts them to IRS.gov.

Form 1023 revisions

The IRS revised Form 1023 and its instructions. Highlights include:

• Added a new public charity status for agriculturalresearch organizations (Section 170(B)(1)(a)(ix))

• Eliminated a question about the advance ruling process

• Eliminated an outdated question about organizationsapplying for 501(c)(3) recognition more than 27 monthsafter formation

• Increased financial data reporting requirements fororganizations older than one year

IRS Procedures Where Disaster Victim Has an Overpayment and an Unrelated Underpayment

Chief Counsel Advice 201808015

In an email Chief Counsel Advice (CCA), IRS has explained what rules do, and what rules don't, apply to a victim of a Presidentially declared disaster, who has both an overpayment of one tax and an underpayment for a different tax and/or a different tax year.

Background. IRS has the authority to credit any overpayment against any liability and refund the remainder, if any. (Code Sec. 6402(a))

Internal Revenue Manual (IRM) 20.2.4.6.2(4) provides that a refund should not be delayed to accommodate the possibility of a future offset. The IRS may, however, credit an overpayment against a liability when a determination of liability has been made and a notice of deficiency has been issued, even though

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user fee that was provided earlier this year with respect to applications on Form 5310, Application for Determination for Terminating Plan. The fee is reduced from $3,000 to $2,300, effective Jan. 2, 2018, and applicants who paid the higher amount will receive a refund of the difference.

Background. Rev Proc 2018-4, issued in January of this year, explains how IRS provides advice to taxpayers on issues under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division, Employee Plans Rulings and Agreements Office (Employee Plans Rulings and Agreements), including procedures for requesting determination letters from IRS. It also includes the user fees that are required to be paid when requesting various types of advice.

Appendix A of Rev Proc 2018-4 sets forth the specific fee applicable with respect to each category or subcategory of submission under the revenue procedure. Section.06 of Appendix A sets forth the fees applicable to determination letters. The user fee applicable to a determination letter request submitted on Form 5310 provided in section.06(1)(c) of Appendix A was increased from $2,300 for 2017 to $3,000 for 2018.

User fee modified. Rev Proc 2018-19 changes the user fee for applications on Form 5310 from $3,000 to $2,300, effective Jan. 2, 2018.

Rev Proc 2018-19 also provides that taxpayers who paid the $3,000 fee in connection with the submission of a determination letter request on Form 5310 will receive a $700 refund.

Interest Rates Increase for the Second Quarter of 2018

The Internal Revenue Service announced that interest rates increased for the calendar quarter beginning April 1, 2018. The rates will be:

• five (5) percent for overpayments [four (4) percent inthe case of a corporation];

• two and one-half (2.5) percent for the portion of acorporate overpayment exceeding $10,000;

• five (5) percent for underpayments; and

• seven (7) percent for large corporate underpayments.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments

the deficiency has not been assessed and the taxpayer may later challenge the proposed deficiency in Tax Court.

Per Code Sec. 6532(a)(1), IRS has six months to review a claim for refund before a taxpayer can file a suit to recover the refund.

IRM 25.12.1 provides that, where a taxpayer is owed a refund for one period and has an unassessed liability for another, the overpayment can be held for up to six months (the refund hold policy). IRS personnel have the ability to release a refund hold for several reasons, including that “the taxpayer is in a declared disaster area and has self identified as an affected taxpayer.” (IRM 25.12.1.14.1(4d))

Under Code Sec. 7508A, IRS may permit taxpayers affected by a Presidentially declared disaster loss to postpone for a fixed period of time the filing of returns, the submission of tax payments, and the performance of other time sensitive acts. Facts. The taxpayer, a victim of a Presidentially declared disaster, had an overpayment for one tax period and a determined but unassessed liability for an underpayment for another period. He inquired as to whether Code Sec. 7508A granted him the right to a refund of the overpayment without a current offset against the unassessed liability.

Possible relief for taxpayer, but not under Code Sec. 7508A. The CCA provided that the requested relief was not available under Code Sec. 7508A but may be available under other IRS policies.

IRS said that Code Sec. 6402(a) provides that a taxpayer with both an overpayment (in one module) and an assessed balance-due liability (in another module) will have the overpayment first offset against the assessed balance-due liability. And nothing in Code Sec. 7508A overrides this provision.

However, IRS also said that its Collection Policy group could implement exceptions to the refund hold policy and allow overpayments to be refunded to taxpayers who are afforded relief under Code Sec. 7508A. It then said, citing IRM 25.12.1.14.1(4d), that “[i]ndeed, it appears that Collection Policy has done so.”

IRS said that it did not locate a parallel provision applicable to credits under IRM 20.2.4.

In any case, it said, such policy decisions are not made, and are not required to be made, under the authority of Code Sec. 7508A.

IRS Modifies User Fee For Determination Letter Request on Form 5310

Rev Proc 2018-19, 2018-14 IRB

IRS has issued a Revenue Procedure that changes the

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is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate determined during Jan. 2018 to take effect Feb. 1, 2018, based on daily compounding.

Battery Added to Solar Energy System Qualified for Residential Energy Credit

PLR 201809003

In a private letter ruling, IRS has held that a battery that was integrated into an existing solar energy system was a qualified solar electric property expenditure eligible for the tax credit under Code Sec 25D.

Background. An individual may claim a 30% credit for qualified solar electric property expenditures made by him during the year. (Code Sec 25D(a)(1); Code Sec 25D(g)) A qualified solar electric property expenditure is an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the U.S. and used as a residence by the taxpayer. (Code Sec 25D(d)(2)) Expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified solar electric property, and for piping or wiring to interconnect such property to the dwelling unit, may be taken into account for purposes of the credit. (Code Sec 25D(e)(1)). The credit for qualified solar electric property expenditures is one component of the credit for residential energy efficient property. (Code Sec 25D(a)(1))

Under Code Sec 25D(e)(8)(A), generally, for purposes of determining the tax year when the credit is allowed, an expenditure with respect to an item is treated as made when the original installation of the item is completed. Under Code Sec 25D(e)(8)(B), in the case of an expenditure in connection with the construction or reconstruction of a structure, such expenditure is treated as made when the original use of the constructed or reconstructed structure by the taxpayer begins.

Code Sec 25D(a)(2) allows an individual a credit against the income tax imposed for the tax year in an amount equal to the applicable percentage of the qualified solar water heating property expenditures made by the taxpayer during such year.

Code Sec 25D(d)(1) defines the term "qualified solar water heating property expenditure" as an expenditure for property to heat water for use in a dwelling unit located in the U.S. and used as a residence by the taxpayer if at least half of the energy used by such property for such purpose is derived from the sun.

Facts. In Year 1, the taxpayer purchased the Solar Energy System. He acquired the Solar Energy System to use solar energy to generate electricity for use in his dwelling unit which he uses as a residence. The Solar Energy System was

interconnected into the electrical grid of the local utility, and installation was considered to be complete for purposes of Code Sec 25D(e)(8)(A) on Date 1. The associated costs of the Solar Energy System met the requirements for "qualified solar electric property expenditures" under Code Sec 25D(d)(2). Accordingly, the taxpayer claimed a tax credit under Code Sec 25D equal to 30% of the costs of the Solar Energy System property in Year 1, the year in which the installation of the property was completed.

Thereafter, he purchased an energy storage product that can be integrated into the existing Solar Energy Systems as an additional Solar Energy System component. The product is comprised of 1) an AC battery; 2) an inverter that will convert solar electricity between AC and DC so the battery can charge and discharge the solar electricity; 3) required wiring to interconnect the product into his current Solar Energy System components and his dwelling unit; and 4) a software management tool that will monitor and control the charging and discharging of energy (collectively, the "Battery"). All energy that is used to charge the Battery can be effectively assured to come from the Solar Energy System. His purchase price for the Battery will include the labor costs allocable to onsite preparation, assembly, and original installation of the Battery. He intends for the original installation of the Battery to be completed in Year 2.

The issues. 1) Whether the Battery will be considered a "qualified solar electric property expenditure" within the meaning of Code Sec 25D(d)(2) when installed as a component part of a Solar Energy System to solely function as an energy storage device and use solar energy. 2) Whether the Battery cost remains a "qualified solar electric property expenditure" when installed in a tax year after the tax year in which the installation of the Solar Energy System components were completed.

IRS rules in favor of taxpayer. IRS ruled in favor of the taxpayer with respect to both of the issues.

It concluded that the Battery meets the definition of a "qualified solar electric property expenditure" under Code Sec 25D(d)(2), and therefore, the taxpayer may claim a tax credit on this Battery. The Battery is considered to be property which uses solar energy to generate electricity for use in his dwelling unit located in the U.S. and used as a residence by the taxpayer. The software management tool portion is only considered part of the qualified solar electric property so long as it is required in monitoring the charging and discharging of solar energy. Additionally, as provided by Code Sec 25D(e)(1), labor costs that are properly allocable to the onsite preparation, assembly, or original installation of the Battery and for piping or wiring to interconnect the Battery to his home are eligible for the credit.

His representation that all energy that is used to charge the Battery can be effectively assured to come from the Solar Energy System is essential for this ruling. Code Sec 25D(d)(1) includes as a requirement in its definition of "qualifiedsolar water heating property expenditure" that at least half

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of the energy used by such property for such purpose is derived from the sun. The definition of "qualified solar electric property expenditure" under Code Sec 25D(d)(2) omits this language. Thus, Congress purposefully chose to include a 50% usage requirement in the definition of "qualified solar water heating property," but Congress did not include such language in the definition of "qualified solar electric property." This demonstrates that Congress expects the energy used by a "qualified solar electric property expenditure" to be derived solely from the sun. Accordingly, 100% of the energy used by the Battery must be derived from the sun. If this is not the case, the Battery does not meet the definition of "qualified solar electric property" in the Code.

As to the second issue, IRS concluded that the Battery cost is a qualified solar electric property expenditure when installed in a tax year after the tax year in which the installation of his other Solar Energy System components are completed. If the Battery qualifies as a qualified solar electric property expenditure, the taxpayer can follow the rules in Code Sec 25D(e)(8) about when the expenditure is treated as being made for purposes of claiming the credit. Earlier installations of qualifying property do not affect the availability of the credit for qualifying property in later years.

Although private letter rulings don't have precedential value, it appears that taxpayers can not only save on their electrical bills and tax bills by installing a solar energy system but will also obtain an additional tax credit and shield themselves from grid outages from storms, etc., by installing a battery and storing the energy generated by their solar equipment. But, note that the battery cost will qualify for the credit only if the battery only stores the solar-generated energy.

IRS Rules on Retirement Plan That Offsets Benefits of Low-Paid Employees

Chief Counsel Advice 201810008

In Chief Counsel Advice (CCA), IRS has ruled on whether an employer's combined defined-benefit/defined contribution retirement plan, under which benefits under the defined benefit plan are offset by benefits under the defined contribution plan only for nonhighly compensated employees (NHCEs), meets plan discrimination and minimum participation requirements.

Background—discrimination rules. Code Sec. 401(a)(4) provides that a plan is a qualified plan only if the contributions or the benefits provided under the plan do not discriminate in favor of highly-compensated employees (HCEs).

Reg. § 1.401(a)(4)-1(b)(2) requires that either the contributions or the benefits provided under the plan must be nondiscriminatory in amount. To be nondiscriminatory in amount, either the contributions alone or the benefits alone must be nondiscriminatory in amount.

Reg. § 1.401(a)(4)-3(c) provides that the employer-provided benefits under a defined benefit plan are nondiscriminatory in amount for a plan year if each rate group under the plan

satisfies Code Sec. 410(b). For purposes of Reg. § 1.401(a)(4)-3(c)(1), a rate group generally consists of an HCE and all other employees with a normal accrual rate greater than or equal to the HCE’s normal accrual rate and who also have a most valuable accrual rate greater than or equal to the HCE’s most valuable accrual rate.

Reg. § 1.401(a)(4)-3(f) provides special rules of application. Reg. § 1.401(a)-4(3)(f)(9) provides that an employee’s accrued benefit under a plan includes that portion of the benefit that is offset under an offset described in Reg. § 1.401(a)(4)-11(d)(3)(i)(D) (pertaining to offsets for pre-participation service). The rule applies only to the extent that the benefit is attributable to periods for which the plan being tested credits pre-participation service or past service. Reg. § 1.401(a)(4)-3(f)(9)(ii), Example 1 illustrates that the ruleapplies to an offset for pre-participation service but not to anoffset for concurrently earned benefits.

Reg. § 1.401(a)(4)-9 sets out the requirements for testing situations in which plan aggregation or restructuring is used to satisfy nondiscrimination.

Reg. § 1.401(a)(4)-9(b)(2)(v)(A) addresses a plan that consists of one or more defined contribution plans and one or more defined benefit plans (a DB/DC plan). Specifically, it provides that unless the DB/DC plan is primarily defined benefit in character or consists of broadly available separate plans, the DB/DC plan must satisfy the minimum aggregate allocation gateway of Reg. § 1.401(a)(4)-9(b)(2)(v)(D) for the plan year in order to be permitted to demonstrate satisfaction of the nondiscrimination in amount requirement of Reg. § 1.401(a)(4)-1(b)(2) on the basis of equivalent benefits.

Reg. § 1.401(a)(4)-9(b)(2)(v)(B) provides that a DB/DC plan is primarily defined benefit in character if, for more than 50% of the non-highly compensated employees (NHCEs) benefitting under the plan, the normal accrual rate for the NHCE attributable to benefits provided under defined benefit plans that are part of the DB/DC plan exceeds the equivalent accrual rate for the NHCE attributable to contributions under the defined contribution plans that are part of the DB/DC plan.

Under Reg. § 1.401(a)(4)-9(b)(2)(v)(C), a DB/DC plan consists of broadly available separate plans if the defined contribution plan and the defined benefit plan that are part of the DB/DC plan each would satisfy the requirements of Code Sec. 410(b) and the nondiscrimination in amount requirement of Reg. § 1.401(a)(4)-1(b)(2) if each plan were tested separately and assuming that the average benefit percentage test of Reg. § 1.410(b)-5 were satisfied.

Reg. § 1.401(a)(4)-9(b)(2)(v)(D)(1) provides the rules for how a DB/DC plan satisfies the minimum aggregate allocation gateway.

Background - minimum participation rules. Code Sec. 401(a)(26) provides a minimum participation rule. It provides thata trust that is part of defined benefit plan is a qualified trustonly if it benefits at least the lesser of (i) 50 employees of

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first group of participants (all of whom are HCEs) consists of the owner-employees of the employer. This group of participants receives the lesser of (1) the maximum pay credit so that the resulting annual benefit will not exceed the limitations of Code Sec. 415(b), and (2) the maximum pay credit that enables the plan to comply with Code Sec. 401(a)(4) (determined using a method specified in the plan).

The second group of participants (all of whom are NHCEs) consists of the lowest-paid group of employees who are not owner-employees and who perform at least one hour of service during the plan year. The lowest-paid group is limited to the number of employees necessary so that the plan covers the lesser of 40% of the total number of employees for the plan year or 50 employees. This second group of participants receives an annual pay credit of 1% of compensation. Because the benefits for this second group of participants attributable to employer contributions under the profit-sharing plan is larger than the benefits payable under the cash balance plan absent the offset, the offset for this second group of employees reduces the benefit under the cash balance plan to zero.

The employer intends to aggregate the cash balance plan and the profit-sharing plan for purposes of nondiscrimination testing. Thus, the aggregated plans are considered a defined benefit/defined contribution (DB/DC) plan.

Issues. (1) How may the employer's combination of plans satisfy the conditions for combined testing on the basis of equivalent benefits under Reg. § 1.401(a)(4)-9(b)(2)(v)? (2) Are the NHCEs whose benefit under the defined benefitplan is entirely offset considered to be benefitting under thedefined benefit plan, and to have a meaningful benefit underthe defined benefit plan, for purposes of determining whetherthe plan satisfies the minimum participation requirement ofCode Sec. 401(a)(26)?

IRS rules on discrimination issue. In order to demonstrate satisfaction of the nondiscrimination requirements on the basis of equivalent benefits without satisfying the minimum aggregate gateway allocation, the aggregated plan must either be primarily defined benefit in character or consist of broadly available separate plans.

The DB/DC plan resulting from aggregating the cash balance plan and the profit-sharing plan is not primarily defined benefit in character within the meaning of Reg. § 1.401(a)(4)-9(b)(2)(v)(B). That is because, for the NHCEs accruing pay credits under the plan, the normal accrual rate attributable to benefits provided under the cash balance plan is zero as a result of the offset by the larger benefit attributable to the defined contribution plan. The offset may not be disregarded because it is an offset for concurrently earned benefits and only an offset for pre-participation service may be disregarded. Therefore the benefit for each NHCE does not exceed the equivalent accrual rate for the NHCE attributable to contributions under the defined contribution plan.

The DB/DC plan resulting from aggregating the cash balance plan and the profit-sharing plan does not consist of broadly

the employer, or (ii) the greater of (A) 40% of all employees of the employer, or (B) two employees (or if there is only one employee, such employee).

A plan that satisfies any of the exceptions described in Reg. § 1.401(a)(26)-1(b) passes Code Sec. 401(a)(26) automatically for the plan year. A plan that does not satisfy one of those exceptions must satisfy Reg. § 1.401(a)(26)-2(a). In addition, a defined benefit plan must satisfy Reg. § 1.401(a)(26)-3 with respect to its prior benefit structure.

Reg. § 1.401(a)(26)-1(b) provides exceptions for plans that do not benefit any highly compensated employees, multiemployer plans, certain underfunded defined benefit plans, and certain plans involved in acquisition or disposition transactions of the employer.

Under Reg. § 1.401(a)(26)-2(a), a defined benefit plan that does not meet one of these exceptions must benefit at least the lesser of 50 employees or 40% of the employer’s employees. And under Reg. § 1.401(a)(26)-3(a), a defined benefit plan that does not meet one of these exceptions in must satisfy Reg. § 1.401(a)(26)-3(c) with respect to its prior benefit structure.

Reg. § 1.401(a)(26)-3(c)(1) provides that a plan’s prior benefit structure satisfies Reg. § 1.401(a)(26)-3(c) if the plan provides meaningful benefits to a group of employees that includes the lesser of 50 employees or 40% of the employer’s employees.

Reg. § 1.401(a)(26)-5(a)(2) provides a rule for determining whether an offset plan provides meaningful benefits. Reg. § 1.401(a)(26)-5(a)(2)(i) provides that generally an employeeis treated as accruing a benefit under a plan that includes anoffset or reduction of benefits that satisfies Reg. § 1.401(a)(26)-5(a)(2)(ii) or Reg. § 1.401(a)(26)-5(a)(2)(iii) if either theemployee accrues a benefit under the plan for the year or theemployee would have accrued a benefit under the plan if theoffset or reduction of the benefit were disregarded.

Reg. § 1.401(a)(26)-5(a)(2)(iii) states: "An offset or reduction of benefits under a defined benefit plan satisfies the requirements of this paragraph (a)(2)(iii) if the benefit formula provides a benefit that is offset or reduced by contributions or benefits under another plan that is maintained by the same employer and several requirements are met, including that the employees who benefit under the formula being tested also benefit under the other plan on a reasonable and uniform basis."

Facts. The employer maintains a cash balance plan and a defined contribution plan for the benefit of its employees.

The defined contribution plan is a profit sharing plan to which the employer makes an annual contribution that is allocated ratably to all participants based on compensation. All employees of the employer are eligible to participate in the defined contribution plan.

The cash balance plan covers two groups of participants. The

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the cash balance plan is not fully offset or reduced by the benefit under another plan under which the employees who benefit under the cash balance plan benefit on a reasonable and uniform basis, the offset may not be disregarded in determining whether the cash balance plan satisfies the minimum participation requirements of Code Sec. 401(a)(26).

An employer may argue that the "reasonable and uniform basis" requirement applies only to the coverage and benefits under the other plan, and that the exception for a “benefit that is offset or reduced by a contribution or benefit under another plan” is not restricted to full offsets that apply to all participants in the defined benefit plan. However, this is an unreasonable interpretation of Reg. § 1.401(a)(26)-5(a)(2)(iii), because the effect of an offset that does not apply fully to all participants is identical to the effect of an offset that applies uniformly to reduce benefits under the defined benefit plan by non-uniform benefits in the offsetting plan.

For example, if each participant in an offsetting defined contribution plan receives an allocation of 6% of compensation (and therefore each participant has uniform benefits), and the benefit under the defined benefit plan is offset by 100% of the benefit under the defined contribution plan, the offset applies uniformly and may be disregarded under Reg. § 1.401(a)(26)-5(a)(2). But if the defined contribution plan provides for an allocation of 6% of compensation to one group of participants and 3% of compensation to another group of participants (so that the employees do not benefit under the defined contribution plan on a uniform basis), application of the 100% offset results in the group with the 6% allocation experiencing a larger benefit reduction as a result of the offset than the group with the 3% allocation. Under Reg. § 1.401(a)(26)-5(a)(2), this offset may not be disregarded, because employees who benefit under the defined benefit plan being tested do not also benefit under the offsetting defined contribution plan on a reasonable and uniform basis. If instead all allocations to participants under the defined contribution plan are 6% of compensation, but the offset under the defined benefit plan is 100% of the defined contribution plan benefits for one group of participants and 50% for another group, the reduction in the benefits in the defined benefit plan being tested is identical to the reduction in the prior alternative offset formulation, which does not satisfy the exception in Reg. § 1.401(a)(26)-5(a)(2).

The regs under Reg. § 1.401(a)(26)-5 are intended to have a meaningful effect and prohibit certain arrangements. This goal would not be accomplished if the reg could be applied to make the requirements so easily circumvented to achieve the prohibited result. Accordingly, the only reasonable reading of Reg. § 1.401(a)(26)-5(a)(2)(iii) is that “a benefit that is offset or reduced by a contribution or benefit under another plan” refers to a benefit to the extent it is offset or reduced by contributions or benefits under that other plan in the same manner for all participants. If the offset were not required to be applied in the same manner for all participants in the defined benefit plan, then, as demonstrated above, the uniformity provision with respect to the other plan would be rendered meaningless. In addition, the effect of such a non-uniform offset would be that the participants in the other plan do not,

available separate plans. Reg. § 1.401(a)(4)-9(b)(2)(v)(C) requires that to be considered broadly available separate plans, each plan separately must satisfy the requirements of Code Sec. 410(b) and the nondiscrimination-in-amount requirement of Reg. § 1.401(a)(4)-1(b)(2) if each plan were tested separately and assuming that the average benefit percentage test of Reg. § 1.410(b)-5 were satisfied. The cash balance plan does not separately meet the coverage requirements, taking the offset into account, because the benefits under the cash balance plan for participants who are NHCEs are reduced to zero under the offset. As discussed above, this offset may not be disregarded in testing the cash balance plan, because it is not an offset attributable to pre-participation service and, under Reg. § 1.401(a)(4)-3(f)(9), the only offsets that may be disregarded are offsets attributable to pre-participation service. After applying the offset to determine the accrued benefit, the cash balance plan does not satisfy the requirements of Code Sec. 410(b) when tested separately, because an insufficient number of employees have normal and most valuable accrual rates greater than or equal to the rates of the HCEs.

Since the aggregated plan is not primarily defined benefit in character and does not consist of broadly available separate plans, in order for the DB/DC plan to be permitted to demonstrate satisfaction of the nondiscrimination requirements on the basis of equivalent benefits, NHCEs must receive sufficient allocations under the profit-sharing plan to satisfy the minimum aggregate allocation gateway of Reg. § 1.401(a)(4)-9(b)(2)(v)(D).

IRS rules on minimum participation requirement issue. The NHCE participants in the cash balance plan are not taken into account for purposes of determining whether the cash balance plan satisfies the requirements of Reg. § 1.401(a)(26)-2 and Reg. 1.401(a)(26)-3.

The cash balance plan does not meet any of the exceptions listed in Reg. § 1.401(a)(26)-1(b). Therefore it must satisfy Reg. § 1.401(a)(26)-2(a) by benefitting a group of employees thatincludes the lesser of 50 employees or 40% of the employer’semployees. Furthermore, the cash balance plan must satisfyReg. § 1.401(a)(26)-3 with respect to its prior benefit structureby providing meaningful benefits to a group of employees thatincludes the lesser of 50 employees or 40% of the employer’semployees.

In order for the offset to be disregarded in determining whether the cash balance plan satisfies Reg. § 1.401(a)(26)-2 and Reg. § 1.401(a)(26)-3 (so that NHCEs, who benefit under the cash balance plan disregarding the offset but not if the offset is taken into account, are counted for purposes of satisfying these requirements), the offset must fall within the exception of Reg. § 1.401(a)(26)-5(a)(2)(iii). That exception applies to a defined benefit plan only if the benefit formula provides a “benefit that is offset or reduced by a contribution or benefit under another plan.” In addition, the rreg provide that employees who benefit under the formula being tested must also benefit under the other plan on a reasonable and uniform basis. Since, as explained below, the benefit under

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in effect, receive uniform benefits under that plan (because the use of the defined contribution plan benefit to offset the defined benefit plan benefit effectively diminishes the value of the defined contribution plan benefit for some participants but not for others).

Under the terms of the cash balance plan, the benefits for NHCE participants are reduced to zero by the offset of the profit-sharing plan benefit, while the benefits for owner-employee participants are not offset. Since the offset does not apply to all of the employees in the cash balance plan but only to NHCEs, it may not be disregarded. As a result of the offset, NHCE participants do not benefit under the cash balance plan and have not accrued a meaningful benefit under the cash balance plan. Moreover, the operation of the offset causes the cash balance plan to exist primarily to preserve accrued benefits for a small group of employees.

Winter Storm Extension: Many Businesses Have Extra Time to Request a 6-month Extension

The Internal Revenue Service granted many businesses affected by severe winter storms additional time to request a six-month extension to file their 2017 federal income tax returns.

The IRS is providing this relief to victims and tax professionals affected by last week’s storm--known as Winter Storm Quinn—and this week’s storm –known as Winter Storm Skylar--that primarily hit portions of the Northeast and Mid-Atlantic.

Business taxpayers who are unable to file their return by the regular due date—Thursday, March 15, 2018--can request an automatic extension by filing Form 7004, on or before Tuesday, March 20, 2018.

Form 7004, available on IRS.gov, provides a six-month extension for returns filed by partnerships (Forms 1065 and 1065-B) and S corporations (Form 1120S).

Eligible taxpayers taking advantage of this relief should write, “Winter Storm Quinn” or “Winter Storm Skylar,” on their Form 7004 extension request (if filing this form on paper). As always, the fastest and easiest way to get an extension is to file this form electronically.

The IRS will continue to monitor conditions and provide additional relief if circumstances warrant.

Additional Time to Make Refund Claims for Wrongful Incarceration Exclusion: File Back-year Claims by Dec. 17, 2018, at Special Address

The Internal Revenue Service announced that wrongfully incarcerated individuals have additional time to take advantage of the retroactive exclusion from income for any civil damages, restitution or other monetary award received in connection with their incarcerations. Under the Bipartisan Budget Act of 2018, a wrongfully incarcerated individual now

has until Dec. 17, 2018, to file a related refund claim.

Under the wrongful incarceration exclusion, a wrongfully incarcerated individual does not include in income any civil damages, restitution or other monetary award received that related to his or her incarceration for the covered offense for which he or she was convicted. A set of frequently-asked questions, available on IRS.gov, provides details on who qualifies for the exclusion, awards that qualify and documentation and recordkeeping requirements.

To file a refund claim, an eligible individual taxpayer must file Form 1040X for each year he or she included a wrongful incarceration award in income and write “Incarceration Exclusion PATH Act” at the top of each Form 1040X.

The IRS has established a special filing address for amended returns claiming the wrongful incarceration exclusion. Send these Forms 1040X, along with any supplemental documentation, to:

Internal Revenue Service333 W. PershingStop 6503 5th FloorKansas City, MO 64108

Allow up to 16 weeks for processing. In most cases, taxpayers can then use the “Where’s My Amended Return?” application on IRS.gov to track the status of their refund claims.

IRS to End Offshore Voluntary Disclosure Program; Taxpayers With Undisclosed Foreign Assets Urged to Come Forward Now

The Internal Revenue Service announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.

“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.

The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600

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Here’s How to Get Prior-Year Tax Information

As people are filing their taxes, the IRS reminds taxpayers to hang onto their tax records. Generally, the IRS recommends keeping copies of tax returns and supporting documents at least three years. Taxpayers should keep some documents — such as those related to real estate sales — for three years after filing the return on which they reported the transaction.

Use a Tax Return to Validate Identity

Taxpayers using a tax filing software product for the first time may need their adjusted gross income amount from their prior year’s tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.Those who need a copy of their tax return should check with their software provider or tax preparer first, as prior-year tax returns are available from the IRS for a fee.

Order a Transcript

Taxpayers who cannot get a copy of a prior-year return may order a tax transcript from the IRS. A transcript summarizes return information and includes AGI. They’re free and available for the most current tax year after the IRS has processed the return. People can also get them for the past three years.

The IRS reminds people ordering a transcript to plan ahead, because delivery times for online and phone orders typically take five to 10 days from the time the IRS receives the request. Taxpayers who order by mail should allow 30 days to receive transcripts and 75 days for tax returns.

There are three ways for taxpayers to order a transcript:

• Online Using Get Transcript. They can use GetTranscript Online on IRS.gov to view, print or downloada copy of all transcript types. Those who use it mustauthenticate their identity using the Secure Accessprocess. Taxpayers who are unable to register or prefernot to use Get Transcript Online may use Get Transcriptby Mail to order a tax return or account transcript type.Please allow five to 10 calendar days for delivery.

• By phone. The number is 800-908-9946.

• By mail. Taxpayers can complete and send either Form4506-T or Form 4506T-EZ to the IRS to get one by mail.They use Form 4506-T to request other tax records: taxaccount transcript, record of account, wage and incomeand verification of non-filing. These forms are availableon the Forms, Instructions and Publications page onIRS.gov.

Those who need an actual copy of a tax return can get one for the current tax year and as far back as six years. The fee per copy is $50. Taxpayers can complete and mail Form 4506 to request a copy of a tax return and mail the request to the appropriate IRS office listed on the form, if taxpayers need

disclosures in 2017.

The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns.

Tax Enforcement

The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.

“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS.”

Streamlined Procedures and Other Options

A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.

The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets. Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets:

• IRS-Criminal Investigation Voluntary DisclosureProgram;

• Streamlined Filing Compliance Procedures;

• Delinquent FBAR submission procedures; and

• Delinquent international information return submissionprocedures.

Full details of the options available for U.S. taxpayers with undisclosed foreign financial assets can be found on IRS.gov.

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information to verify payments within the last 18 months

IRS Provides Additional Details on Section 965, Transition Tax; Deadlines Approach for Some 2017 filers

The Internal Revenue Service provided additional information to help taxpayers meet their filing and payment requirements for the section 965 transition tax.

The Tax Cuts and Jobs Act requires various taxpayers that have untaxed foreign earnings and profits to pay a tax as if those earnings and profits had been repatriated to the‎ United States. The new law outlines details on the tax rates, and certain taxpayers may elect to pay the transition tax over eight years.

As the March 15 and April 17 deadlines approach for various filers, the IRS released information today in a question and answer format. The Frequently Asked Questions address basic information ‎for taxpayers affected by section 965. This includes how to report section 965 income and how to report and pay the associated tax liability. The information on IRS.gov also provides details on several elections under section 965 that taxpayers can make.

The Treasury Department and the IRS previously released three pieces of guidance related to section 965 issues including Notices 2018-07 and 2018-13 and Revenue Procedure 2018-17‎. The IRS will provide additional guidance and other information on IRS.gov in the weeks ahead.

Tax Pros in Trouble

South Valley Tax Preparer Accused of ID Theft, Fraud

We trust tax preparers with some of our most sensitive documents, but a South Valley tax service is accused of betraying that trust, allegedly creating falsified tax documents and stealing identities.

Visalia Police arrested Brandy Engman after an investigation that spanned seven months.

Brandy Engman, 49, is accused of creating falsified tax documents and stealing identities.

The 49-year-old woman runs Engman Tax Service out of the garage of her home located on S Cain St near E Walnut Ave in Visalia.

Police say they first investigated Engman for credit card fraud, but her crimes appear to go much further. She has been charged with check fraud, burglary, ID theft, theft by false pretense, and falsifying tax documents.

If you have any information on Engman or the crimes she is accused of, please contact the Visalia Police Department Property Crimes Unit at 559-713-4720.

Pensacola Man Indicted On 18 Counts of Preparing False Tax Returns

A Pensacola man is facing federal charges for allegedly preparing false income tax returns.

Benell English, 57, has been charged with 18 counts of preparing false returns while working for Select Tax Service in Pensacola.

The Department of Justice said he misrepresented customers' deductions and income and reported incorrect business losses and profits.

If convicted, he could face up to three years in prison on each count.

English's trial is scheduled for April 19.

Chicago Tax Preparer Faces Fraud Charges

Attorney General Lisa Madigan announced she has filed a lawsuit to shut down a Chicago tax preparer for defrauding consumers. Madigan filed the lawsuit in Cook County Circuit Court to shut down Su Familia Income Tax and its operators Michelle Lopez, Melissa Gasca and Vanessa Campos. The lawsuit alleges Su Familia, at 2638 W. 51st St. in Chicago, purports to offer low-cost tax preparation services for a fee of about $150. Madigan alleges, Su Familia signs consumers up for unnecessary and expensive tax-related financial products and deducts significant additional fees from consumers’ tax refunds without their knowledge. These undisclosed fees are typically $500 per person but can be over $1,000 and in some cases account for over 50 percent of a consumer’s expected tax refund.

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the gross receipts and fuel excise tax credit numbers were false. Marilyn Crespo received and cashed the $15,750 refund check at a check-cashing facility in Guttenberg. She cashed many other refund checks for similar false tax returns at this same check-cashing facility.

Jose Crespo pleaded guilty on Sept. 11, 2017, before Judge Linares, to engaging in the fuel excise tax credit scheme and another tax fraud scheme and causing an anticipated loss to the IRS of nearly $1.5 million. He was sentenced Dec. 20, 2017, to three years in prison.

The count of filing a false tax return carries a maximum potential penalty of three years in prison, and a potential $250,000 fine or twice the gross gain or loss from the offense. Sentencing is set for June 20, 2018.

U.S. Attorney Carpenito credited special agents of IRS-Criminal Investigation, under the direction of Special Agent in Charge Jonathan D. Larsen, with the investigation leading to today’s guilty plea.

Announcement of Disciplinary Sanctions from the Office of Professional Responsibility

The Office of Professional Responsibility (OPR) publishes all disciplinary actions in the Internal Revenue Bulletin (IRB). Published sanctions include censure, suspension or disbarment from practice before the Internal Revenue Service. The below listed individuals have recently been disciplined by OPR and are published in IRB Number 2017-51, dated December 18, 2017, on pages 583-585:

To disguise the undisclosed fees that the company takes from consumers’ tax refunds, Madigan alleges Su Familia provided customers fake tax returns showing a lesser tax refund amount. When consumers have discovered this inconsistency and confronted Su Familia, the company has threatened to initiate legal action against the consumers. As a result, customers, many of whom are low-income, do not receive their full tax refund. Along with the lawsuit, Madigan also filed a motion for a temporary restraining order to halt Su Familia’s illegal practices. Cook County Circuit Court Judge Sophia Hall issued an order preventing Su Familia from charging hidden fees by prohibiting the company from taking fees out of consumers’ tax refunds, and instead requiring it to bill consumers directly.

“The court’s order will ensure that no additional consumers are charged illegal fees to file their tax returns,” Madigan said. “Beware of tax preparers that require you to use a tax refund anticipation product with promises of a faster tax refund, because these offers are frequently laden with expensive and hidden prohibited fees.” In filing the lawsuit, Madigan asked the court to ban this company from the tax preparation business in Illinois, pay refunds to impacted consumers and impose civil penalties. To report a complaint involving a tax refund anticipation product, contact one of Madigan’s Consumer Fraud hotlines:

Salem County, New Jersey, Woman Admits Filing False Corporate Tax Returns

A Salem County, New Jersey, woman admitted signing false tax returns for shell companies resulting in $286,742 in fraudulent refunds, U.S. Attorney Craig Carpenito announced.

Marilyn Crespo, 50, of Carney’s Point, New Jersey, pleaded guilty before U.S. Chief District Judge Jose L. Linares in Newark federal court to an information charging her one count of filing a false corporate tax return for tax year 2009.

According to the documents filed in this case and statements made in court:

Crespo previously resided in Guttenberg, New Jersey. At the direction of her husband, Jose Crespo, she signed under penalty of perjury numerous false corporate tax returns, Forms 1120, for fake businesses, knowing that the businesses were not real and that the credits claimed on the tax returns were false.

In signing these false tax returns, Marilyn Crespo took advantage of fuel excise tax credits offered under federal tax law. The federal government taxes gasoline, diesel fuel, and certain other types of fuel, but certain commercial uses of these fuels are nontaxable. Businesses that purchase fuel for a nontaxable use can claim a tax credit by filing Form 4136 entitled “Credit for Federal Tax Paid on Fuels.”

Marilyn Crespo signed a federal corporate tax return for 2009 for Magnum Cleaning Service Corp. that claimed gross receipts of $115,027, a fuel excise tax credit of $20,859 and a resulting refund of $15,750. In fact, Magnum was a shell company and

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20 Latest Tax Preparers Barred From Filing Returns In Maryland

Twenty Maryland tax preparers have been suspended from filing income tax returns because of fraud concerns, which makes 34 total businesses barred from filing this tax season. State officials said the preparers were blocked because of a high volume of questionable returns received. The businesses range from Atlanta to Charlotte, North Carolina, to Baltimore and Prince George's County.

The businesses were sent written notice of the action after they were flagged by the comptroller's fraud unit using modern technology that detects fraud. The agency has a review

process that provides an opportunity for blocked preparers to have their filing privileges restored.

The tax preparers blocked from filing returns are:

• In & Out Tax Service, 1936 Hosea L Willams Drive SE,Atlanta

• Cash Bar Financial & Tax Services, 6475 NewHampshire Ave., Suite 350A, Hyattsville

• Kauffy Tax Services, 600 Washington Ave., Suite 100,Towson

• Tax Lady II Maryland, 65 E. Franklin St., Hagerstown

• Caspero Tax and Accounting Service, 1503 LaurelWood Way, Frederick

• Great Lakes Global Enterprises, LLC, 15 WaldenWillow Court, Gwynn Oak

• Aurathecool accounting solutions, 8101 Sandy SpringsRoad, Suite 106, Laurel

• Gallaye Tax Services, 5690 Stafford Road, Charlotte,NC

• GA Tax Professional, 8811 Utopia Place, Walkerville

• Chris & Nas Tax Services, 22 Montgomery Village Ave.,Suite D, Gaithersburg

• Bey's Tax Service, 3844 Augustine Place, Rex, GA

• A Plus Advantage Prof, 9909 Goodluck Road, Lanham

• Yakob & Co. LLC (aka Yakob & Co. PLLC) 2001Benning Road NE, Washington, DC

• Magnolia Baez, 7411 Riggs Road, Suite 422, Hyattsville

• Santana Gordon Enterprises, LLC, 6071 Gwynn OakAve., Gwynn Oak

• Williams Tax Services, 1516 N Fulton Ave., Baltimore

• Samuel Tax Services LLC, 5459 Park Heights Ave.,Baltimore

• MJC Tax, 239 Florida Ave., Salisbury

• Danish Tax Service, 1722 North Rolling Road, WindsorMill

• Legette Tax Services, 8817 Belair Road, Nottingham

In 2017, the Comptroller's Office blocked suspicious tax returns at 95 tax preparation businesses in 113 locations. Since taking office in 2007, the comptroller's team has identified and

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Louisa Garcia was arrested last year and remains released under supervision of the U.S. Probation Department, Southwick said. She was represented by Martin Wolfson, an assistant federal public defender.

U.S. Attorney Grant C. Jaquith and James D. Robnett, special agent in charge of the New York Field Office of IRS-Criminal Investigation, announced the plea in the release.

Louisa Garcia faces up to eight years in federal prison, post-imprisonment supervised release of up to three years and a maximum $250,000 fine, when she is sentenced July 17 by Senior United States District Judge Thomas J. McAvoy in the federal court in Binghamton, authorities said.

Southwick said many clients weren't aware of what Louisa Garcia had done. He cautioned consumers to work with tax preparers they know and trust. Preparers generally are paid a flat fee and don't charge based on a percentage of a tax refund, he said.

Ragin Cagin

The Tax Cuts and Jobs Act

For 2018–2025, the Tax Cuts and Jobs Act (TCJA) eliminates write-offs for miscellaneous itemized expenses that were previously subject to the 2%-of-adjusted-gross-income (AGI) deduction threshold. That meant your total miscellaneous expenses had to exceed 2% of AGI or you got no write-off. If they did exceed the threshold, you could only deduct the excess. (AGI is the number on the last line of your Form 1040; it includes all taxable income items and certain write-offs such as deductible IRA contributions and self-employed health insurance premiums.)

Because most folks did not have enough miscellaneous expenses to exceed the 2%-of-AGI deduction threshold, this now-disallowed write-off never got much attention. But it was an important tax benefit for some people.

List of affected miscellaneous expenses

Expenses that can no longer be written off as miscellaneous itemized deductions include the following.

blocked more than 88,000 fraudulent returns and intercepted and denied $190.2 million worth of fraudulent refunds.

Returns from Gaithersburg Tax Preparer Blocked

A Gaithersburg tax preparer has been flagged as one of 20 that have a high volume of questionable tax returns,Comptroller Peter Franchot said.

Chris & Nas Tax Services on Montgomery Village Avenue was sent a written notice of the action after they were identified by the fraud unit that operates in the Comptroller’s Office, a news release said.

The Gaithersburg tax preparer was one of 20 announced Friday. Fourteen others have been flagged since January.

The office has a review process that provides an opportunity for blocked preparers to have their filing privileges restored.

In 2016 and 2017, the Comptroller’s Office blocked suspicious tax returns at 95 tax preparation businesses in 113 locations. Since taking office in 2007, the Comptroller’s team has identified and blocked more than 88,000 fraudulent returns and intercepted and denied $190.2 million worth of fraudulent refunds.

Feds: Preparer Filed 110 Fraudulent Tax Returns

An Oxford woman who admitted to preparing more than 110 false tax returns will face up to eight years in prison, federal authorities said.

Lavyette Anna Louisa Garcia, 41, of Oxford, pleaded guilty in U.S. District Court in Binghamton to making a false claim against the United States and to assisting in the preparation of a false return, both felonies, according to Assistant U.S. Attorney Richard Southwick.

As part of her guilty plea, Louisa Garcia admitted that she prepared tax returns for a fee while residing in Oxford and Norwich, Chenango County, a media release said, and she admitted to preparing at least 110 false tax returns between 2011 and 2014, resulting in an intended loss to the United States of $848,196.

Louisa Garcia admitted to preparing a 2012 tax return for a customer that falsely claimed self-employment income and several tax credits, the release said. She also admitted to preparing a 2009 tax return for another customer that falsely claimed income and several tax credits. These false returns caused the United States Treasury Department to issue refunds to which the taxpayers were not entitled.

The IRS made payments on some returns but stopped others, according to Southwick, who said Louisa Garcia will have to pay $72,450 in restitution. Southwick, who prosecuted the case, said an investigation started after a dissatisfied client of Louisa Garcia contacted the Internal Revenue Service.

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• Home office used regularly and exclusively in your workas an employee and for the convenience of your employer

• Depreciation of computer that your employer requires youto use

• Tools and supplies used in your work as an employee

• Union dues and expenses

• Work clothes and uniforms if required for your work and ifnot suitable for everyday use

• Legal fees related to your work as an employee

• Job search expenses to seek new employment in yourcurrent profession or occupation

As you can see, the list of now-disallowed expenses is long, but the ones that are most likely to matter to you are these three.

1. Unreimbursed Employee Business Expenses: Lotsof folks pay relatively large amounts out of their ownpockets to go back to school to improve their resumes.If the education maintains or improves skills used in yourcurrent job or profession, you could claim the cost as anunreimbursed employee business expense under priorlaw. For example, the cost to obtain an MBA degree wouldoften qualify. Another common unreimbursed employeebusiness expense is the cost of using your own car forbusiness-related travel. Since you can’t deduct thatexpense anymore, try negotiating with your employer tocover it through tax-free reimbursements under a so-calledaccountable plan.

2. Tax and Investment Related Expenses: They are incurredby many folks and could be significant enough to get youover the prior-law 2%-of-AGI deduction threshold whencombined with other miscellaneous itemized expenses.

3. Hobby-Related Expenses: Under prior-law you couldtreat hobby-related expenses up to the amount of incomefrom the hobby as a miscellaneous itemized deduction.These expenses were often big enough to clear the2%-of-AGI deduction threshold when combined with othermiscellaneous itemized expenses. Under the new law,as under prior law, you still have to report 100% of hobbyincome on your return. But for 2018-2025, you can nolonger deduct any of your hobby-related expenses. Ouch.

You can still deduct some miscellaneous expenses

Certain other miscellaneous itemized expenses were not subject to the 2%-of-AGI deduction threshold under prior law. For your 2017 Form 1040, those expenses are reported on Line 28 of Schedule A. The TCJA did not eliminate itemized deductions for these expenses. They include gambling losses to the extent of gambling winnings and amortizable bond premiums.

• Tax-related expenses

• Tax preparation expenses

• Tax advice fees

• Other fees and expenses incurred in connection with thedetermination, collection, or refund of any tax

Expenses related to investments and production of taxable income

• Investment advisory fees and expenses

• Clerical help and office rent for office used to manageinvestments

• Expenses for home office used to manage investments

• Depreciation of computer and electronics used to manageinvestments

• Fees to collect interest and dividends

• Your share of investment expenses passed through toyou from partnership, LLC, or S corporation

• Safe deposit box rental fee for box used to store investmentitems and documents

• Other investment-related fees and expenses

• Hobby expenses (limited to hobby income)

• IRA trustee/custodian fees if separately billed to you andpaid by you as the account owner

• Loss on liquidation of traditional IRA or Roth IRA

• Bad debt loss for ill-fated loan made to employer topreserve your job

• Damages paid to former employer for breach ofemployment contract

Unreimbursed employee business expenses

• Education expenses related to your work as an employee

• Travel expenses related to your work as an employee

• Passport fees for business trip

• Professional society dues

• Professional license fees

• Subscriptions to professional journals and tradepublications

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The bottom line

The new tax law giveth and the new tax law taketh away. For most individuals, the giveth comfortably exceeds the taketh away, but it’s not all good news for everybody.

Jerry

Taxpayer Advocacy

IRS Still Evaluating Virtual Appeals, Case Leader Pilots

The IRS Appeals office is still evaluating a pair of pilot programs on virtual appeals conferences and compliance-staff attendance at Appeals team case leader conferences according to IRS Office of Appeals Chief Donna Hansbury.

"We will continue to test and learn our way through the virtual conference world," Hansbury said at a tax law conference hosted by the Federal Bar Association. "As we move into the 21st century, virtual conferencing will be just one more way taxpayers and representatives can be heard."

The virtual conference pilot program, launched last August, gives taxpayers and representatives the option to use virtual technology to remotely attend IRS Appeals conferences through a web-based screen-sharing platform. Hansbury said the "virtual conferences will not be for everyone" and are intended as "one additional way taxpayers and representatives can interface with us in Appeals," with about 90 percent of appeals conferences held by telephone. Participants in the virtual conference pilot program, including taxpayers and representatives, have given virtual conferences "pretty high ratings" and have said they would be willing to try it again, she said.

The launch of the virtual conference piloting programs comes amid resource constraints at Appeals, Hansbury said, and noted that the Appeals office workforce has shrunk by a third since 2010. These factors could make it harder for Appeals to offer in-person conferences in a taxpayer's preferred location, and the office may seek alternative conference methods, she said. "Despite our constraints, we'll continue to work toward our long-term objective of ensuring that taxpayers have the type of conference most conducive to case resolution, whether that conference is held by phone, in person virtually," or using some new type of technology, she said.

Hansbury said the IRS also is still evaluating, and seeking feedback on, the pilot program launched last May that lets IRS compliance officials—who have historically not been present for appeals conferences—attend with technical employees. Inviting compliance officials to ATCL conferences helps the agency get the best understanding of the facts and laws of the case, Hansbury said.

Practitioners have raised concerns that this change to the appeals process makes it harder for taxpayers to be candid with examiners. Hansbury emphasized that compliance officials aren't routinely invited to attend appeals conferences, and that the division isn't trying to "change the traditional appeals session into a mediation session."

"Attendance at appeals conferences by both the taxpayer and compliance, where both parties are heard, is consistent with our quasi-judicial role and is directly aligned with our mission," she said.

IRS Adds New Issues to LB&I's Campaign Audit Strategy

On March 13, IRS's Large Business and International (LB&I) division announced the identification and selection of five additional issues that it will be targeting in its "compliance campaign" audit strategy, which was rolled out last year. This new strategy is aimed at identifying issues representing a risk of non-compliance and making the best use of limited resources.

Compliance campaign strategy. In January of 2017, IRS announced a new audit strategy for its LB&I division known as "campaigns"—essentially, shifting its strategy toward issue-based examinations based on compliance issues that LB&I determines present greater levels of compliance risk and thereby improving return selection. IRS initially selected 13 compliance issues when it rolled out this strategy.

In November of 2017, IRS announced the identification and selection of 11 additional issues.

New issues identified. On March 13, 2018, IRS announced that it has identified and selected the following five additional issues:

• Costs that facilitate a Code Sec. 355 transaction. Coststo facilitate a tax-free corporate distribution under CodeSec. 355, such as a spin-off, split-off or split-up, must becapitalized and are not currently deductible. However, sometaxpayers execute a corporate distribution and improperlydeduct the costs that facilitated the transaction in the yearthe distribution was completed.

• Self-Employment Contributions Act (SECA) tax.Partners report income passed through from theirpartnerships. If the partner is an individual who rendersservices, the partner’s distributive share of income issubject to self-employment tax under SECA. However,some limited partners and limited liability company (LLC)members who render services to clients on behalf of thepartnership or LLC do not report flow-through income asearnings from self-employment and do not pay SECA tax.

• Partnership "stop filer." Partners report income, losses,and other items passed through from their partnership.Some partnerships stop filing tax returns for variousreasons yet still have economic transactions that are not

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being reported to their partners—activity that is likely not being reported by the partners.

• Sale of partnership interest. A partner must report thesale of a partnership interest on his tax return. However,some taxpayers do not report the sale or report the gain orloss correctly. Incorrect reporting may include the amountand character of the gain or loss, such as taxpayersreporting the entire gain as long-term capital gain (usuallytaxed at 15%) when a portion of the gain may be ordinarygain or subject to the 25% or 28% long-term capital gainrates.

• Partial disposition election for buildings. Code Sec.168 disposition regs, issued in August of 2014, providerules for recognizing gain or loss on the disposition ofMACRS property and allow taxpayers to elect to recognizepartial dispositions of property. To comply with the CodeSec. 168 disposition regs and make a partial dispositionelection, a taxpayer must be able to substantiate that it:(i) disposed of a portion of a MACRS asset owned by thetaxpayer; (ii) identified the asset that was partially disposed;(iii) determined the placed-in-service date of the partiallydisposed asset; (iv) determined the adjusted basis of thedisposed portion; and (v) reduced the adjusted basis ofthe asset by the disposed portion. IRS is concerned thattaxpayers aren't accurately recognizing the gain or loss onthe partial disposition of a building, including its structuralcomponents.

Employer Can Offset Taxes Paid By Misclassified Employees Against FICA Liability

Chief Counsel Advice 201808016

In Chief Counsel Advice (CCA), IRS has concluded that—where an employer improperly treated certain workers as nonemployees, those workers paid self-employment tax, the employer was later determined to have been responsible for paying FICA taxes with respect to the workers, and Code Sec. 3509's limitations on liability did not apply—the employer is allowed under Code Sec. 6521 to offset the FICA taxes owed with the self-employment taxes paid.

Background. Code Sec. 1401 imposes a tax on each individual's self-employment income, which is generally defined by Code Sec. 1402(b) as net earnings from self-employment.

Code Sec. 3101 imposes Federal Insurance Contributions Act (FICA) taxes on an employee, and Code Sec. 3102(a) requires an employer to deduct and withhold from the wages of an employee the taxes imposed on the employee by Code Sec. 3101. Code Sec. 3102(b) makes the employer liable for those taxes, but the employee remains ultimately liable, and IRS generally may collect the tax from either the employer or the employee. (Karagozian, TC Memo 2013-164)

Under Code Sec. 3509, an employer who fails to deduct and withhold from wages the employee's FICA taxes without intentionally disregarding its obligations is limited in its

liability for the employee's FICA taxes to 20% of the amount determined under Code Sec. 3101 (40% if the employer failed to file information returns without reasonable cause). Code Sec. 3509(d)(1)(C) provides, in relevant part, that if any part of the employer's liability for tax is determined under Code Sec. 3509, Code Sec. 6521 (see below) does not apply.

Failure to timely deposit taxes generally gives rise to a penalty under Code Sec. 6656. However, under Code Sec. 6521, if (1) an amount of self-employment income is erroneously treated as wages (or vice versa), and (2) correction of the error would require assessment of self-employment tax and refund or credit of the FICA tax imposed by Code Sec. 3101 (or vice versa), and (3) the correction of the error is authorized as to one tax but prevented by rule of law (other than Code Sec. 7122, offer-in-compromise) as to the other, then the authorized amount of the adjustment with respect to the one tax is reduced by the amount of the adjustment prevented by rule of law that would otherwise be required with respect to the other tax. This rule applies only where the required assessment and refund or credit are for the same tax year. (Bronson, TC Memo 1992-648)

IRS clarified the application of Code Sec. 6521 in Rev Rul 86-111, 1986-2 CB 176, which provides that:

If the amount of the employer's liability for the employee's share of FICA is determined under Code Sec. 3509, then Code Sec. 6521 cannot effect a reduction in that employer liability. The only tax liability determined under Code Sec. 3509, however, is the employer's. Moreover, Code Sec. 3509(d)(1)(A) states that the employee's liability is not to be affected bythe assessment and collection of the tax determined underCode Sec. 3509. Accordingly, application of Code Sec. 3509to the employer's tax liability for the employee's share of FICAdoes not preclude the employee from enjoying the benefit ofCode Sec. 6521, if that section is otherwise available.

Facts. Taxpayer treated certain workers as nonemployees who IRS subsequently determined were properly classified as Taxpayer's employees. IRS also determined that Taxpayer was not entitled to relief under Section 530 of the Revenue Act of '78, as amended (which exempts a taxpayer that incorrectly treats an employee as an independent contractor from employment tax liability if certain requirements are met), that Taxpayer was liable for the employer and employee shares of FICA, and that Code Sec. 3509 did not apply because of evidence of intentional disregard.

Taxpayer wanted a credit under Code Sec. 6521 against its employee FICA liability where the workers reported their compensation on their individual income tax returns and paid self-employment compensation. The period of limitations on refund of self-employment tax was closed, but the period of limitations on assessment of employee FICA taxes was open.

Issues. The issues raised in the CCA are: (i) whether Code Sec. 6521 allows Taxpayer to offset self-employment compensation erroneously paid by its employees against its liability for the employees' share of FICA, where Code Sec. 3509 does not

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Has 60 days to tell the IRS that they disagree.

Should provide copies of any records that may help correct the error.

May call the number listed on the letter or bill for assistance.

Can expect the agency to make the necessary adjustment to their account and send a correction if the IRS upholds the taxpayer’s position.

• Here’s what will happen if the IRS does not agree withthe taxpayer’s position:

The agency will issue a notice proposing a tax adjustment. This is a letter that comes in the mail.

This notice provides the taxpayer with a right to challenge the proposed adjustment.

The taxpayer makes this challenge by filing a petition in U.S. Tax Court. The taxpayer must generally file the petition within 90 days of the date of the notice, or 150 days if it is addressed outside the United States.

• Taxpayers can submit documentation and raiseobjections during an audit. If the IRS does not agree with thetaxpayer’s position, the agency issues a notice explainingwhy it is increasing the tax. Prior to paying the tax, thetaxpayer has the right to petition the U.S. Tax Court, andchallenge the agency’s decision.

• In some circumstances, the IRS must provide a taxpayerwith an opportunity for a hearing before an independentOffice of Appeals. The agency must do this:

Before taking enforcement action to collect a tax debt. These actions include levying the taxpayer’s bank account.

Immediately after filing a notice of federal tax lien in the appropriate state filing location. If the taxpayer disagrees with the decision of the Appeals Office, they can petition the U.S. Tax Court.

Recent Decision in FOIA Case Provides OPR with the Opportunity to Highlight an Important Process Change

A recent U.S. District Court decision in a Freedom of Information Act (FOIA) case upheld the IRS’s withholding of certain information related to Circular 230 allegations about a practitioner that were received in the Office of Professional Responsibility (OPR) from another part of the IRS. Because the allegations concerned representation of a taxpayer before the IRS, information in the OPR’s case file was subject to section 6103. The OPR has authority under section 6103 to disclose tax information to a practitioner during an open investigation of a possible Circular 230 violation or during a disciplinary proceeding, but could not comply with this

apply and Code Sec. 6521 applies to the employees; and (ii) the effect of the offset on Taxpayer's penalties and additions to tax.

Conclusions. The CCA first determined that Taxpayer is allowed under Code Sec. 6521 to offset self-employment compensation erroneously paid by its employees against its liability for their share of FICA in this situation. The CCA reasoned that, because Code Sec. 3509(d)(1)(C) does not render Code Sec. 6521 inapplicable to the employee, it must be read to render Code Sec. 6521 inapplicable to the employer. By inference, absent the applicability of Code Sec. 3509, Code Sec. 6521 could otherwise apply to the employer. Thus, where Code Sec. 3509 does not apply and Code Sec. 6521 applies, the employer's liability for the tax imposed by Code Sec. 3101 is reduced by the amount the employees paid as self-employment tax.

The CCA also concluded that the applicability of Code Sec. 6521 doesn't affect Taxpayer's liability for penalties and additions to tax. The CCA noted that, although no provision of law specifically addresses the impact of the employee's payment of Social Security and Medicare taxes required to be withheld by the employer on penalties applicable to the employer, an employer who fails to withhold and deposit FICA taxes has failed to do so regardless of whether its employees pay those taxes. Therefore, Taxpayer may still be liable for the penalty under Code Sec. 6656.

The Right to Challenge the IRS’s Position and Be Heard Taxpayer Bill of Rights #4

Taxpayers have the right to challenge the IRS’s position and be heard. This is one of the Taxpayer Bill of Rights, which clearly outline the fundamental rights of every taxpayer. The IRS wants to make sure taxpayers know about their rights when dealing with the agency.

Taxpayers have the right to:

• Raise objections.

• Provide additional documentation in response to formalor proposed IRS actions.

• Expect the IRS to consider their objections timely.

• Have the IRS consider any supporting documentationpromptly.

• Receive a response if the IRS does not agree with theirposition.

Here are some specific things taxpayers can expect about the right to challenge the IRS’s position and be heard.

• In some cases, the IRS will notify a taxpayer thattheir tax return has a mathematical or clerical error. If thishappens, the taxpayer:

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• Sign an offer or a waiver of restriction on assessmentor collection of a tax deficiency, or a waiver of notice ofdisallowance of claim for credit or refund.

• Sign a consent to extend the statutory time period forassessment or collection of a tax.

• Sign a closing agreement.

An unenrolled return preparer is an individual other than an attorney, CPE or EA who prepares and signs a return as a paid preparer. Unenrolled return preparers may only represent taxpayers before revenue agents, customer service representatives and the Taxpayer Advocate Service during an examination of the taxable period covered by the return they prepared and signed. For returns prepared and signed after Dec. 31, 2015, an unenrolled preparer must also possess a valid Annual Filing Season Program Record of Completion for the calendar year the return was prepared and signed, and for the year the representation occurs. Taxpayers may authorize an unenrolled preparer to inspect and request tax information by filing Form 8821 (see below).

Signing a Tax Return

A power of attorney does not grant the representative the authority to sign a tax return unless the signature is permitted under the tax code and regulations, and the client specifically authorizes providing the signature in the power of attorney.

Representatives are allowed to sign the return if the taxpayer is not able to due to the following circumstances:

• Disease or injury.

• Continuous absence from the United States, includingPuerto Rico, for a period of at least 60 days before the daterequired to file the return.

• Other good cause if specific permission is requestedand granted by the IRS.

Note that Form 2848, Power of Attorney and Declaration of Representative, authorizing the signature, must accompany the tax return.

Form 2848 and Other Related Forms

Form 2848, Power of Attorney: A power of attorney is given when the taxpayer authorizes someone in writing to receive their confidential tax information from the IRS and perform

practitioner’s request for information because by then the case was closed. The OPR has modified its process to give the practitioner in cases like this an opportunity to seek information before it closes the case, providing an affected practitioner a fuller opportunity to understand and respond if the practitioner chooses to do so.

The District Court decision involved access under the FOIA to agency records related to a report the OPR received about possible practitioner misconduct. After reviewing the matter, the OPR sent the practitioner a “soft letter” that generally described the allegations and informed the practitioner that the OPR had decided not to take action on the matter. The “soft letter” advising the practitioner of the matter also advised him that the OPR investigation was closed. The practitioner sought further information about the allegations from the OPR, but the OPR was required to deny the request because its disclosure authority under section 6103 is limited to disclosures related to open investigations. The practitioner then submitted his FOIA request, and took the matter to U.S. District Court when the IRS continued to deny specific information regarding the allegations.

When the OPR issued the “soft” closing letter, the OPR did not foresee the subsequent events, in particular, a request for information that it could not act on because of the closed status of the case. In hindsight, the OPR found this result inconsistent with its commitment to provide practitioners a full and fair opportunity to respond to allegations, and in 2016 modified its processes to address the problem. OPR now sends a letter to the practitioner advising of the issues presented in the matter under investigation and gives the practitioner an opportunity to comment, and, then, when it’s an appropriate disposition of the case, sends a second letter with the “soft” closing language. This two-letter process gives a practitioner who wants to know more about the allegation(s) an opportunity to make a request before the OPR closes the matter, thus fitting within the framework of the 6103 provision. The revised “soft letter” process follows longstanding communication processes used by the OPR in investigations that could result in action under Circular 230, such as a reprimand, censure, suspension or disbarment.

Editor's Note: This provides additional information found in the Tax News article.

Representing Clients Before the IRS: Power of Attorney

At some point in your tax practice, you’ll no doubt have clients who need representation before the IRS, or you may want to expand your practice to include this service. Here’s what you need to know with regard to IRS representation and power of attorney.

The following acts can be performed by attorneys, certified public accountants (CPAs) and enrolled agents (EAs):

• Represent a taxpayer before any office of the IRS.

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certain actions on their behalf in front of the IRS. Some examples include representing the taxpayer at a meeting with the IRS, and preparing and filing a written response to an IRS inquiry. If the authorization is unlimited, the representative can generally perform all acts a taxpayer would perform, except negotiating a check. The authorized individual must be eligible to practice before the IRS.

A power of attorney is not required when the third party is not dealing with the IRS as the taxpayer’s representative, such as the following:

• Providing information to the IRS.

• Authorizing the disclosure of tax return informationusing Form 8821, Tax Information Authorization, or otherwritten or oral disclosure consent.

• Allowing the IRS to discuss return information with athird party via the checkbox provided on a tax return orother document.

• Allowing a tax matters partner to perform acts for thepartnership.

• Allowing the IRS to discuss return information with afiduciary.

Form 8821, Tax Information Authorization: Use this form to authorize an individual or organization to request and inspect the taxpayer’s confidential tax return information when the taxpayer does not want to authorize an individual to represent them before the IRS.

Form 4506-T, Request for Transcript of Tax Return: Use this form to authorize an individual or organization to request and inspect transcripts of the taxpayer’s confidential return information when the taxpayer does not want to authorize an individual to represent them before the IRS. This form is typically used by third parties to verify tax compliance.

Form 56, Notice Concerning Fiduciary Relationship: This form is used to notify the IRS of the existence of a fiduciary relationship (trustee, executor, administrator, receiver or guardian). The fiduciary stands in the position of the taxpayer or entity, and does not act as a representative.

Disclosure of Return to a Third Party

A representative is not allowed to consent to the IRS disclosing the tax return or related information to a third party unless this authority is specifically provided for on line 5 of Form 2848.

Incapacity or Incompetency

A power of attorney is generally terminated once the taxpayer becomes incapacitated or incompetent. However, the power of attorney may continue if there is authorization on line 5 of Form 2848 and the non-IRS durable power of attorney meets IRS requirements.

Retention and Revocation of Prior Power of Attorney

A newly filed power of attorney will revoke a previously filed power of attorney if it involves the same matter. A new power of attorney will not revoke a prior power of attorney if it is stated so and either of the following documents are attached to the new power of attorney: a copy of the unrevoked prior power of attorney, or a statement signed by the taxpayer listing the name and address of each representative authorized under the prior power of attorney.

Revocation of Power of Attorney by Taxpayer

To revoke a previously executed power of attorney without naming a new representative, the taxpayer must write “REVOKE” across the top of the first page of the Form 2848, along with a current signature and date immediately below the annotation. A copy of the revoked power of attorney is then mailed or faxed to the IRS.

Withdrawal by Representative

For the representative to withdraw, they must write “WITHDRAW” across the top of the first page of the Form 2848 with a current signature and date below the annotation, and provide a copy of the withdrawn power of attorney to the IRS.

Substitute to Form 2848

Form 2848 is used to appoint a recognized representative to act on the taxpayer’s behalf in front of the IRS. Representatives are listed and must complete Part 2 of the form. The IRS will accept a non-IRS power of attorney, but Form 2848 must be completed and attached as well.

A taxpayer can use a substitute document, other than Form 2848, to authorize a representative, but it must contain the following information:

• Name and mailing address.

• Social security number and/or employer identificationnumber.

• Employer plan number (if applicable).

• Name and mailing address of representative.

• Types of tax involved.

• Federal tax form number.

• Year(s) or period(s) involved.

• Decedent’s date of death (for estates).

• Expression of intention concerning the scope ofauthority granted to representative.

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• Signature and date.

The taxpayer also must attach to the non-IRS power of attorney a signed and dated statement made by the representative (Declaration of Representative, Part II of Form 2848). The statement should read:

• I am not currently under suspension or disbarmentfrom practice before the Internal Revenue Service or otherpractice of my profession by any other authority.

• I am subject to regulations contained in Circular 230 (31C.F.R., Subtitle A, Part 10) as amended, governing practicebefore the Internal Revenue Service.

• I am authorized to represent the taxpayer(s) identifiedin the power of attorney.

• I am a (naming the capacity in which representation isundertaken, as set forth in the list of eligible representativesat Part II of Form 2848).

The IRS has a centralized computer database (CAF) system that contains information about the authority of taxpayer representatives. The process enables IRS personnel to verify the authority of the taxpayer’s representative and the IRS to automatically send copies of notices and other IRS communications to their representative. A non-IRS power of attorney can be entered in the CAF system by attaching it to a completed Form 2848.

Resources

• IRS Publication 547 (excerpts included above).

• Circular 230, Regulations Governing the Practice ofAttorneys, Certified Public Accountants, Enrolled Agents,Enrolled Actuaries, and Appraisers before the InternalRevenue Service.

State News of Note

Nevada To Regulate Tax Preparers, Require Bonds

Nevada tax preparers have been required to comply with a number of new requirements as of July of last year. These requirements include the necessity to pay application and renewal fees to become registered as a document preparation service, as well as to obtain and maintain a surety bond.

Requirements of Assembly Bill No. 324

AB 324 introduced a series of new registration requirements for document preparation services in the state of Nevada. To begin with, the bill expanded the definition of such service to also include:

• Anyone who receives payment to assist other personsin preparing all or most of their federal or state tax returnsas well as claims for tax refunds (i.e. tax preparers)

• Paralegals who perform such services, unless theywork under the direction and supervision of an authorizedattorney

• Bankruptcy petition preparers

• Enrolled agents authorized to practice before the IRS

Along with the expanded definition, the Bill also amends the requirements for being allowed to practice as document preparation service in the state. Previously, licensees were not required to pay application or renewal fees which has now changed.

Beginning July 2017, applicants for a document preparation service registration are required to pay a $50 nonrefundable application fee and a $25 renewal fee. Registrations expire on a yearly basis, and must be renewed prior to running out.

Bond Requirement for Tax Preparers

Since AB 324 includes tax preparers in the definition of document preparation service, they are required to post and maintain a $50,000 surety bond with the Secretary of State as part of their registration. This makes Nevada the fifth state to have introduced regulations and a bond requirement for tax preparers.

The Nevada Revised Statutes (NRS) Chapter 240A specifies the conditions of the bond and its purpose. The bond is required in order to provide compensation to any person who suffers a loss or damage due to a tax preparer's actions, as they are specified in the Chapter. Such actions include fraud, dishonesty, and negligence. But they also include any acts or omissions that violate any other provision of the chapter, but also federal and state law.

In any of the above instances, if a complaint is brought against a tax preparer by a customer to request indemnification, a claim can be filed against the bond. When a claim is filed against

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Once the penalty component of the regime is eliminated, the complaint argues, the requirement to maintain health insurance can no longer be upheld as a valid exercise of this power.

The U.S. Justice Department did not immediately respond to a request for comment on whether the Trump Administration would defend the law in court.

Paxton and Schimel were joined in the lawsuit by 18 states including Arizona, Florida, Georgia, Utah and West Virginia. It was filed in U.S. District Court in the Northern District of Texas.

2017 Tax Reform: Recent Developments Regarding Workarounds, Challenges to SALT Deduction Limitation

The Tax Cuts and Jobs Act (the Act) limitation on the deduction of nonbusiness state and local taxes (SALT) has resulted in the recent introduction of workaround bills in the Connecticut and New Jersey legislatures, an agreement among the governors of New Jersey, New York and Connecticut to sue the federal government, and tax planning ideas from practitioners.

Background—deductions for state and local taxes and charitable contributions. One of the provisions of the Act that President Trump signed into law on Dec. 22, 2017 limited post-2017 annual deductions for state and local taxes to a maximum of $10,000 and provided no carryover for amounts that exceed $10,000. The limit doesn't apply to taxes paid in connection with a trade or business or in connection with the production of income. (Code Sec. 164(b)(6), as amended by Act Sec. 11042) As a result of this change, many taxpayers will not get a full federal income tax deduction for their 2018-and-later payments of state and local taxes.

While federal law limits the deduction for an individual's charitable contributions, the limits are generally much higher than $10,000 (see Code Sec. 170(b)(1)), and there is a carryover of charitable contributions that exceed the charitable deduction limits. (Code Sec. 170(d)(1))

Background—previous state activity regarding the limitation. In early January, California Senate President Pro Tempore Kevin de León, a Democrat, and two other senators, introduced Senate Bill 227 that would allow individual taxpayers to make a charitable donation to the new California Excellence Fund (the Fund) and receive a credit for the full amount paid to the Fund on their California income tax return.

The Fund would be created by the bill to accept monetary contributions for exclusively public purposes as specified under Code Sec. 170. Where the credit exceeds the taxpayer's California income tax, it could be carried forward for six years. Also, in early January, New York Governor Andrew Cuomo said that he would sue the federal government over the new SALT limitation, on the grounds that it is an unconstitutional violation “of states' rights and the principle of equal protection.” He also

a surety bond, the surety usually extends compensation to claimants which can be as high as the full amount of the bond. In return, the bonded tax preparer must then reimburse the surety for any such compensation in full.

An important point here is that the cost of the bond is not the same as the bond amount!

Cost of Your Bond

First-time applicants for a bond often wonder if they need to pay the full bond amount to get bonded. Bond amount and bond cost are different! The amount of your bond, also known as the penal sum, is the full amount of compensation that can be made available by the surety in case of one or several claims.

The cost of your bond, or the premium, is the sum you need to pay to obtain the bond from the surety company. This cost is typically a small fraction of the full bond amount. It is determined by the surety when you apply. In determining the cost of your bond, the surety will review your personal credit score and possibly a number of other items, such as your financial statements, your assets, and even your industry experience.

Applicants with high credit scores are typically offered low rates on their bond, which can be as low as 1% of the whole bond amount or lower. The exact rate is determined once you apply for your bond.

Twenty States Challenge Constitutionality of ACA Without Individual Mandate Penalty

A coalition of 20 U.S. states brought a new challenge to the Affordable Care Act (ACA, or Obamacare) on Monday, Feb. 26. They claim that the ACA isn't constitutional without the individual mandate penalty—i.e., the penalty paid by individuals who either don't comply with the requirement in Code Sec. 5000A to maintain health coverage or qualify for an exception to that requirement. The penalty component of the individual mandate was effectively repealed by the Tax Cuts and Jobs Act (PL 115-97, 12/22/2017), which reduced the amount of the penalty to zero starting in months beginning after Dec. 31, 2018, but the requirement to maintain health insurance remains on the books.

Led by Texas Attorney General Ken Paxton and Wisconsin Attorney General Brad Schimel, the lawsuit said that without the individual mandate, the ACA was unlawful.

“The U.S. Supreme Court already admitted that an individual mandate without a tax penalty is unconstitutional,” Paxton said in a statement.

The Supreme Court, in National Federal of Independent Business v. Sebelius, (Sup Ct 6/28/2012) 109 AFTR 2d 2012-2563, held that the individual mandate, requiring non-exempt individuals to obtain health insurance or face a penalty, reflected a constitutional exercise of Congress's taxing power.

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...Connecticut bill. Connecticut S.B. 11, which contains a proposal from Connecticut Governor Dannel Malloy, calls for an entity-level tax on the net income of pass-through businesses and an offsetting individual income tax credit for the entity's members.

While this proposal would seem to be on firmer ground than the California or New Jersey bills, in that the tax at the entity level would be deductible, it has the following problems: a) it only benefits owners of pass-through businesses; b) Connecticut nonresident owners of Connecticut pass-throughs would be hurt by the arrangement. Those taxpayers would get a credit on their Connecticut nonresident return, but that would decrease the credit-for-other-states'-taxes on their resident state return. Thus, while they could avoid the SALT limitation, their share of the pass-through's income would be decreased by the entity level tax, and their total state tax liability would not decrease.

...New York governor's proposals. In his February 2018 document entitled “Summary of Proposed Tax Reforms,” New York Governor Cuomo set out three SALT deduction workarounds. The first two are very similar to the New Jersey and Connecticut proposals discussed above.

In his third workaround, Cuomo further explained the tax on employers that he initially spoke about in January. Legislation would allow employers to opt-in to a new Employer Compensation Expense Tax (ECET) system. Employers that opt-in would be subject to a 5% tax on all annual payroll expenses in excess of $40,000 per employee. This tax would be phased in over three years beginning on January 1, 2019 according to the following schedule: 1.5% in the first year, 3% in the second year, and 5% in the third year. The ECET would be coupled with income tax relief for employees in the form of a corresponding tax credit on their wages.

...New York Congressman responds. In a Feb. 26, 2018 letter to the U.S. Department of the Treasury (Treasury), Rep. John Faso (R-NY) asked Treasury to issue guidance on whether contributions made under contribution-to-state-authorized-trust-funds proposals, like the California, New Jersey, and New York proposals discussed above, would be deductible as charitable contributions for federal tax purposes.

...Lawsuit by New Jersey, New York and Connecticut governors. On Jan. 26, 2018, the Connecticut, New Jersey and New York governors announced plans to file a joint lawsuit claiming that the SALT deduction limitation is unjust because it targets wealthier states.

...Practitioner-initiated workaround. It has been reported that some practitioners have suggested the following work-around: An individual taxpayer transfers his house or vacation home, plus enough income-earning assets as are necessary to earn as much as his property taxes, to a limited liability company (LLC). He treats the LLC as a disregarded entity and gifts the LLC's interests to multiple non-grantor SLATs. The number of trusts would be the number, when multiplied by $10,000, that would equal his property tax liability. Then each of the SLATs

said that New York state was considering a restructuring that would, to some extent at least, replace the state's personal income tax, which is subject to the SALT limitation, with a tax on employers which would remain deductible under the federal law.

Background—grantor trusts and non-grantor trusts. Code Sec. 671 provides that where it is specified in subpart E of the Code that the grantor or another person is treated as the owner of any portion of a trust, there then is included in computing the taxable income and credits of the grantor or the other person those items of income, deductions and credits of the trust that are attributable to that portion of the trust to the extent that such items would be taken into account in computing taxable income or credits of an individual.

Code Sec. 675(4) provides that the grantor is treated as the owner of any portion of a trust over which there is a power of administration exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity. For purposes of Code Sec. 675(4), the term “power of administration” includes a power to reacquire the trust corpus by substituting other property of an equivalent value.

A trust that is not a grantor trust is a “non-grantor trust.”

Background—Spousal Lifetime Access Trusts. A Spousal Lifetime Access Trust (SLAT) provides access to income and/or principal for the needs of a surviving spouse. A SLAT is funded via gift while the donor is still alive, and it is a non-grantor trust.

Recent developments—workarounds; lawsuit. Since the middle of January, New Jersey and Connecticut legislators have initiated bills to work around the SALT limitation, New York Governor Cuomo has put a series of potential workarounds into a report, the governors of New Jersey, New York and Connecticut have announced that they plan to sue the federal government regarding the SALT limitation, a New York Congressman has asked IRS to rule on a workaround, and tax practitioners have publicized an additional workaround.

...New Jersey bill. On February 26, New Jersey's Senate passed S1893 that would allow New Jersey's towns, counties and school districts to set up charitable funds to which taxpayers could contribute and receive a 90% New Jersey property tax credit. If a taxpayer's tax credit exceeded his property taxes owed, the fund would roll the credit forward for up to five years.

Like the California bill described above, this bill is based on a belief that the contribution would qualify as a charitable contribution.

New Jersey Republican senators that opposed the bill, and U.S. Treasury Secretary Steven Mnuchin on Jan. 11, 2018, have commented that such a contribution would not qualify for the federal charitable contribution deduction

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on a limited partnership. It alleged that its only obligation was to withhold and remit CBT on behalf of its corporate partners if the partner did not consent to New Jersey taxation, and that this obligation was relieved when it submitted a signed Form NJ-1065E on behalf of MNJI. The division argued that MNJI effectively revoked its Form NJ-1065E by filing the refund request, NADE is a taxable entity under New Jersey law and thus subject to CBT, there is no statutory authority for Form NJ-1065E acting as an exemption, and the form only exists as a recordkeeping method for the limited partnership and does not affect its obligation to remit withholding tax.

The tax court rejected all of the division’s arguments, finding that limited partnerships are not included in the definition of corporation under the CBT. The court ruled that the only statutory CBT requirement imposed on a partnership is the duty to withhold and remit tax for nonconsenting nonresident partners and that the corporate partner is the entity subject to CBT, not the partnership itself. Further, existing statutory law and regulations provide that filing a signed Form NJ-1065E “establishes that the partnership is not required to pay tax on a nonresident corporate limited partner’s behalf,” and relieved NADE from the obligation to withhold and remit CBT for the corporate partner. Ultimately, the tax court concluded that existing law provides an exemption for the partnership when the nonresident corporate partner consents to taxation and it cannot be required to later defend itself against the corporate partner’s change of heart. NADE fulfilled its obligations by submitting a valid Form NJ-1065E and cannot be subject to additional requirements, as a result the division lacks the statutory authority to impose CBT on the partnership.

There are currently 18 other states[1] that do not impose income tax on limited partnerships at the entity level, require withholding for nonresident corporate partners, and provide an exception to the withholding requirement for corporate partners who have a business location within the state or consent to be taxed by the state. The exception for consent to taxation in these states functions similarly to New Jersey Form 1065E in that the corporate partner agrees to file a return and pay any applicable tax to the state, thereby relieving the limited partnership of its duty to withhold tax on the partner’s distributive share of income. Though the tax court ruling is not precedential, other states and taxpayers may look to it in any case where the state’s taxing body is seeking to impose the obligation of a corporate partner on the limited partnership itself.

would have income of $10,000 and take a $10,000 property tax deduction.

The SLATs would have to have a provision that cause them to not be grantor trusts—e.g., a provision requiring future distributions from the trust to require the consent of an adverse party.

Corporate Close-Up: Court Rules that New Jersey Cannot Assess Limited Partnership for Corporate Limited Partner’s Share of Corporate Business Tax

In litigation stemming from the landmark BIS LP decision, the New Jersey Tax Court has held in National Auto Dealers Exchange, L.P. v. Director, New Jersey Division of Taxation that the state could not assess Corporate Business Tax (CBT) directly against a limited partnership regardless of whether the partnership’s corporate limited partner had nexus with New Jersey.

In 2011, a New Jersey appellate court ruled in BIS LP., Inc. v. Director, New Jersey Division of Taxation that the state could not constitutionally impose the CBT on an out-of-state limited partner where the partner did not have a place of business or other ties to New Jersey and where it was not unitary with the limited partnership.

Following the BIS decision, Manheim NJ Investments, Inc. (MNJI) a Georgia corporation and a limited partner of National Auto Dealers Exchange (NADE), a New Jersey limited partnership filed a refund claim with the New Jersey Division of Taxation arguing that it did not have a unitary relationship with NADE and, as a result of BIS LP, should be entitled to a refund of CBT it previously paid.

With that litigation ongoing, the division responded by issuing an assessment against NADE directly, resulting in the current ruling on Feb. 26, 2018 in which the tax court granted NADE’s motion for summary judgment dismissing the assessment against NADE.

As background, NADE owned and operated a wholesale automotive auction business in New Jersey and had one general partner and one limited partner, both nonresident corporations with a principal place of business in Georgia. As NADE was a partnership for federal income tax purposes, for the tax years in question, under New Jersey law, it was required to withhold CBT on each corporate partner’s distributive share of income, unless an exception applied. NADE submitted Form NJ-1065E on behalf of both corporate partners, on which MNJI signed a statement that it maintained a regular place of business in New Jersey other than a statutory office. MNJI then filed its own CBT return in New Jersey and paid all applicable taxes.

Following the assessment by New Jersey, NADE filed a motion for summary judgment with the tax court, arguing that the division does not have statutory authority to impose CBT

Use Resources and Toolsfor Tax Professionals

On Our WebsitencpeFellowship.com

Renew Your Membership OnlineIf Your Membership is due

in March and April

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Background. The Foreign Account Tax Compliance Act (FATCA), included within the Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147), added Chapter 4 (Code Sec. 1471 through Code Sec. 1474) to the Code. Chapter 4 generally requires withholding agents to withhold a 30% tax on certain payments to a foreign financial institutions (FFI) unless it has entered into an FFI agreement with the U.S. to, among other things, report certain information with respect to U.S. accounts. Withholding can also apply to FFI account holders who refuse to identify themselves as U.S. taxpayers. The FATCA rules are essentially a mechanism to enforce reporting requirements. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents, with respect to certain payments made to certain non-financial foreign entities (NFFEs).

The participating FFI must appoint an RO to oversee the participating FFI's compliance with the requirements of the FFI agreement. The RO must (either personally or through designated persons) establish a compliance program that includes policies, procedures, and processes sufficient for the participating FFI to satisfy the requirements of the FFI agreement.

The RO is required to make certifications with respect to both the FFI's compliance with various FATCA requirements (the "periodic certification") and certain diligence performed for its preexisting accounts. The due date for these certifications is is July 1 following the third full calendar year after the date the entity registered and received a global intermediary identification number (GIIN).

Draft certifications provided. IRS noted on its website that it will be updating the “FATCA Registration Portal” on its website that contains FATCA certifications, but that such will not be available prior to July 2018. For entities that have certifications due by July 1, 2018, any RO that is required to certify will have no less than three months from when the certifications are posted on the FATCA Registration Portal to submit them.

In an effort to assist ROs in preparing to complete the FATCA certifications, IRS is releasing draft versions of the certification questions.

IRS provided five sets of draft certification questions with respect to the certification of preexisting accounts, including certifications of compliance with the due diligence requirements for: (i) preexisting accounts of participating FFIs, (ii) consolidated compliance groups, (iii) registered deemed-compliant FFIs (RDCFFIs)/local FFIs, (iv) RDCFFIs/restrictedfunds FFIs, and (v) sponsoring entities of sponsored FFIs.

Twelve sets of draft certification questions were provided for periodic certifications, including for: (1) participating FFIs, (2) consolidated compliance groups, (3) RDCFFIs/local FFIs, (4) RDCFFIs/nonreporting members of participating FFIgroups, (5) RDCFFIs/qualified collective investment vehicles,(6) RDCFFIs/qualified credit card issuers or servicers, (7)RDCFFIs/restricted funds, (8) sponsoring entities of sponsoredFFIs, (9) sponsoring entities of sponsored direct reporting

Foreign Taxes

Government Accountability Office - Foreign Workplace Retirement Plans

A recent Government Accountability Office (GAO) report found that U.S. individuals who participate in foreign workplace retirement plans encounter serious difficulties in reporting their retirement savings for tax purposes. (GAO-18-19) According to GAO, there are two key reasons for this—complex federal requirements governing the taxation of foreign retirement accounts and a lack of clear guidance on how to report these savings.

"For example, stakeholders told GAO it is not always clear to U.S individuals or their tax preparers how foreign workplaceretirement plans should be reported to IRS, and the processfor determining this can be complex, time-consuming, andcostly," the report said. "In the absence of clear guidance onhow to correctly report these savings, U.S. individuals whoparticipate in these plans may continue to run the risk of filingincorrect returns," it added.

The report also noted that U.S. individuals in foreign retirement plans face problems transferring retirement savings when they change jobs. While in the U.S. transfers of retirement savings from one qualified plan to another are exempt from tax, "foreign plans are generally not tax-qualified under the Code, and such transfers could have tax consequences for U.S. individuals participating in foreign retirement plans," the report said.

"Without action to address this issue, U.S. individuals may not consolidate their foreign retirement accounts or may have to pay higher U.S. taxes on transfers than taxpayers participating in qualified plans in the United States, threatening the ability of U.S. individuals to save for retirement abroad," GAO said

IRS Releases Draft Questions To Aid Preparation For Upcoming FATCA Certifications

On its website, IRS has released draft certification questions to Responsible Officers (ROs) who are preparing to complete upcoming FATCA certifications due this summer.

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have held that expenses paid or incurred by a taxpayer in connection with the determination, collection, or refund of a foreign tax are deductible under Code Sec. 212(3) in the same manner as expenses paid or incurred in connection with the determination, collection, or refund of a domestic tax.

CCA's conclusion. In the CCA, IRS upheld its assessment. IRS said that the value of the employer-provided tax preparation services did not qualify as a working condition fringe benefit because the cost of such services was not deductible by the employees under Code Sec. 162 since Code Sec. 212(3) explicitly provides that all the ordinary and necessary expenses paid or incurred during the tax year in connection with the determination, collection, or refund of any tax are deductible under that section (and thus not under Code Sec. 162). IRS noted that the assignees were obligated to file tax returns (both domestic and foreign), and the tax preparation services provided to them by the employer had a direct bearing on their ability to fulfill this personal obligation. Case law supported the finding that if an employer pays a personal expense of an employee, the payment results in taxable income to the employee.

Calculating the fair market value of the services. In general, the the fair market value (FMV) of a fringe benefit is determined on the basis of all the facts and circumstances. Specifically, the FMV is the amount an individual would have to pay for a particular fringe benefit in an arm's length transaction. Thus, the cost incurred by the employer, and the employee's subjective perception of the value of the benefit, were not relevant to the determination of the FMV. (Reg. § 1.61-21(b))IRS said that the facts and circumstances here made it reasonable to use the amounts the employer paid for the tax preparation services provided to the assignees (i.e., the employer's actual cost) as the best indicator of the FMV of such services. IRS had no reason to believe that the employer and CPA firm did not engage in an arm's length transaction in arriving at a fair cost for the services.

FICA taxes. IRS concluded that the value of the tax preparation services was subject to FICA taxes, but pointed out that depending on the country of assignment and the length of the foreign assignment, a totalization agreement between the U.S. and the foreign country involved, might apply to determine the FICA taxation of the tax return preparation services.

Withholding taxes. Under Code Sec. 3401(a)(8)(A)(i), the value of the tax return preparation services might be excludable from wages for income tax withholding purposes if the employer had a reasonable belief, at the time the services were provided, that the value of the services would be excludable from the assignee's gross income under Code Sec. 911 (citizens or residents of the U.S. living abroad), provided the value of the fringe benefit combined with all other remuneration paid to the employee for the services performed was below the threshold.

In addition, if any of the laws of the foreign countries in which assignees were stationed required the employer to withhold income tax on remuneration paid to the assignees, then the value of the tax return preparation services provided to

NFFEs, (10) sponsoring entities of sponsored FFIs and sponsored direct reporting NFFEs, (11) trustee documented trusts, and (12) direct reporting NFFEs.

Tax Preparation Services Given to Employees Working Abroad Not a Tax-free Fringe Benefit

Chief Counsel Advice 201810007

In Chief Counsel Advice (CCA), IRS has determined that the value of tax preparation services provided by a domestic company for the benefit of its employees working in foreign countries was includable in the employees' gross income and subject to employment taxes unless certain exclusions apply.

Facts. A large American company employed thousands of U.S. citizens or residents in many countries around the world. The company's employees frequently transferred from country to country. The employer maintained a "tax equalization" policy in order to facilitate the transfers of its employees ("assignees") to and from its international affiliates. Tax equalization was a process that was intended to result in assignees paying the same amount of income tax as the assignee would have been paid if he or she had not been stationed away from the country of citizenship on an international assignment.

In connection with its tax equalization policy, the employer engaged a CPA firm to assist with the assignees' tax matters. The CPA firm was a large, multinational accounting and consulting firm. The employer's tax equalization policy provided that the CPA firm would: (1) prepare foreign, U.S., and state tax returns; and (2) compute the approximate and actual hypothetical tax and tax equalization settlements for the tax-equalized assignees.

The employer paid the CPA firm for the preparation of each assignee's federal tax return and one state return. The employer also paid the CPA firm a flat fee for foreign tax returns, which varied depending on the country.

On audit, IRS proposed substantial adjustments to the employer and assignee tax returns for several reasons, including that the employer failed to reflect the proper value of the tax preparation services in the assignees' wages, which resulted in wage underreporting and employment tax underpayment.

Background. Code Sec. 132(d) provides an exclusion from gross income for any fringe benefit that qualifies as a working condition fringe. A working condition fringe means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as an income tax deduction under Code Sec. 162 (trade or business expenses) or Code Sec. 167 (depreciation).

Code Sec. 212(3) provides that, in the case of an individual, a deduction is allowed for all the ordinary and necessary expenses paid or incurred during the tax year in connection with the determination, collection, or refund of any tax. Courts

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affected by Code Sec. 965, as added by the Tax Cuts and Jobs Act (P.L. 115-97, 12/22/2017), including how to report such income and how to pay the associated tax liability.

Background. Code Sec. 965 generally requires U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the U.S.

This provision allows taxpayers to reduce the amount of such inclusion based on deficits in earnings and profits with respect to other specified foreign corporations. The effective tax rates applicable to such income inclusions are adjusted by way of a participation deduction set out in Code Sec. 965(c). A reduced foreign tax credit applies to the inclusion under Code Sec. 965(g).

Under Code Sec. 965(h), taxpayers may elect to pay the transition tax in installments over an 8-year period. Generally, a specified foreign corporation means either a controlled foreign corporation (CFC) or a foreign corporation (other than a passive foreign investment company, that is not also a CFC) that has a U.S. shareholder that is a domestic corporation.

Code Sec. 965 applies with respect to the last tax year of certain specified foreign corporations beginning before Jan. 1, 2018, and the amount included in income under this provision is includible in the U.S. shareholder’s year in which or with which such a specified foreign corporation’s year ends. Taxpayers may have to pay tax resulting from Code Sec. 965 when filing their 2017 tax returns. For example, Code Sec. 965 may give rise to a 2017 tax liability for a calendar year U.S. shareholder holding an interest in a calendar year specified foreign corporation.

New guidance. The FAQs provide information on filing 2017 tax returns that include an amount under Code Sec. 965. The following are some of the highlights of the information provided.

The FAQs provide that a person that is required to include amounts in income under Code Sec. 965 in its 2017 tax year---whether because the person is a U.S. shareholder of a deferred foreign income corporation or because it is a direct or indirect partner in a domestic partnership, a shareholder in an S corporation, or a beneficiary of another passthrough entity that is a U.S. shareholder of a deferred foreign income corporation---is required to report amounts under Code Sec. 965 on its 2017 tax return. (FAQs, Q&A 1)

Amounts required to be reported on a 2017 tax return should be reported on the return as reflected in the table included in Appendix: Q&A 2. The table reflects only how items related to amounts included in income under Code Sec. 965 should be reported on a 2017 tax return. It does not address the reporting in other scenarios, including distributions made in 2017, which should be reported consistent with the Code and the current forms and instructions. (FAQs, Q&A 2)

The FAQs provide that a person that has income under Code

the assignees stationed in those foreign countries would be exempt from income tax withholding. (Code Sec. 3401(a)(8)(A)(ii))

Concern Raised Over Withholding Computation for Nonresident Aliens

During the March 1, IRS payroll industry telephone conference call, a tax practitioner has told IRS that some of her clients were having difficulty making the 2018 withholding tax computation for nonresident alien employees.

Background. The withholding calculations for nonresident alien employees are different than for other employees, because nonresident alien employees are not entitled to the standard deduction that is built into the withholding tables. Employers must add an amount (add-back amount) to the wages of a nonresident alien employee before determining withholding under the wage bracket or percentage method withholding tables in order to offset the standard deduction.

The Tax Cuts and Jobs Act (P.L. 115-97, 12/22/2017) made many changes to the tax law, effective Jan. 1, 2018, including substantially increasing the standard deduction. As a result, the add-back amounts that employers must add to the wages of nonresident aliens for the 2018 tax year have more than tripled from the amounts for the 2017 tax year. For example, the add-back amount to compute the withholding for a nonresident alien employee paid on a weekly basis was $44.20 in 2017. This amount is $151.00 in 2018 (see IRS Notice 1036).

Concerns.On the IRS payroll industry telephone conference, Debera Salam, Ernst & Young Director, Payroll Information Services, and author of Thomson Reuter's Principles of Payroll Administration and Payroll Practitioner's Compliance Handbook, said that several of her clients have told her that, the fact that the add-back amounts went up so much this year has put some nonresident aliens in a negative pay situation (withholding greater than wages). She asked IRS for guidance on how to handle this situation.

In response, IRS asked Salam to provide them with an example of this situation which IRS will forward to its personnel who have oversight over the nonresident alien guidance. Salam noted that this concern came from more than one client and suggested that maybe some instruction could be put in Notice 1392 (Supplemental Form W-4 Instructions for Nonresident Aliens) to assist employers/employees on how to handle this issue.

2017 Tax Reform: Guidance on Return Filing and Tax Payment for Transition Tax (Deemed Repatriation)

IR 2018-53, 3/13/2018

With the April 17 deadline approaching for various filers, IRS has released guidance in a Frequently Asked Questions (FAQ) format that addresses basic information ‎for taxpayers

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Sec. 965 for its 2017 tax year is required to include with its return an “IRC 965 Transition Tax Statement,” signed under penalties of perjury and, in the case of an electronically filed return, in Portable Document Format (.pdf) with a filename of “965 Tax”. The IRC 965 Transition Tax Statement must include the information specified. A model statement is included in Appendix: Q&A 3. Adequate records must be kept supporting the Code Sec. 965(a) inclusion amount, deduction under Code Sec. 965(c), and net tax liability under Code Sec. 965, as well as the underlying calculations of these amounts. Further, additional reporting may be required when filing returns for subsequent tax years, and the manner of reporting may be different. (FAQs, Q&A 3)

The FAQs note that Code Sec. 965 allows multiple elections related to amounts included in income by reason of Code Sec. 965 or the payment of a taxpayer’s net tax liability under Code Sec. 965. Statutory elections can be found in Code Sec. 965(h), (i), (m), and (n). Further, IRS has announced another election that may be made with respect to the determination of the post-'86 earnings and profits of a specified foreign corporation. This election is described in Notice 2018-13, 2018-6 I.R.B. 341, Section 3.02. (FAQs, Q&A 4)

The elections under Code Sec. 965 are limited as follows: to taxpayers with a net tax liability under Code Sec. 965 (in the case of Code Sec. 965(h)); taxpayers that are shareholders of S corporations and that have a net tax liability under Code Sec. 965 (in the case of Code Sec. 965(i)); taxpayers that are REITs (in the case of Code Sec. 965(m)); or taxpayers with an NOL (in the case of Code Sec. 965(n)). Thus, a domestic partnership or an S corporation that is a U.S. shareholder of a deferred foreign income corporation may not make any of the elections under Code Sec. 965. (FAQs, Q&A 5)

The FAQs provide that an election with respect to Code Sec. 965 must be made by the due date (including extensions) for filing the return for the relevant year. If an election is made under Code Sec. 965(h) to pay a net tax liability under Code Sec. 965 in installments, the first installment must be paid by the due date (without extensions) for filing the return for the relevant year. (FAQs, Q&A 6)

A person makes an election under Code Sec. 965 or the election provided for in Notice 2018-13, Section 3.02, by attaching to a 2017 tax return a statement signed under penalties of perjury and, in the case of an electronically filed return, in Portable Document Format (.pdf), for each such election. Each such statement must include the information specified. Model statements are included in Appendix: Q&A 7. (FAQs, Q&A 7)

The FAQs provide the following instructions on how a taxpayer pays the tax resulting fromCode Sec. 965 for a 2017 tax return. A taxpayer should make two separate payments as follows: one payment reflecting tax owed without regard to Code Sec. 965, and a second, separate payment reflecting tax owed resulting from Code Sec. 965 (the Code Sec. 965 Payment). Both payments must be paid by the due date of the applicable return (without extensions). The Code Sec. 965

Payment must be made either by wire transfer or by check or money order. This may be the first year’s installment of tax owed in connection with a 2017 tax return by a taxpayer making the election under Code Sec. 965(h), or the full net tax liability under Code Sec. 965 for a taxpayer who does not make such election and does not make an election under Code Sec. 965(i). For the Code Sec. 965 Payment, there is no penalty for taxpayers electing to use wire transfers as an alternative to otherwise mandated EFTPS payments. Accordingly, taxpayers that would normally be required to pay through EFTPS should submit the Code Sec. 965 Payment via wire transfer or they may be subject to penalties. (FAQs, Q&A 10)

Wayne's World

Court Case of Note - Company President Was Responsible Person Despite Lender's Security Interest

Davis v. U.S., (DC CO 3/06/2018) 121 AFTR 2d ¶2018-508

This month a very interesting court case came across my desk where a district court has concluded that a company president was a responsible person liable for the trust fund recovery penalty under Code Sec. 6672(a), finding that his failure to pay over employment taxes was willful despite a security agreement with a lender that required the lender's prior approval before any payments could be made.

In way of introduction:

Under Code Sec. 6672(a), if an employer fails to properly pay over its payroll taxes, IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a person who: (1) is a "responsible person," i.e., one who is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility.

In determining who is a responsible person, the courts generally look at several factors. These factors include: (1) the duties of the officer as outlined by the corporate by-laws; (2) the ability of the individual to sign checks of the corporation; (3) the identity of the officers, directors, and shareholders of

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the corporation; (4) the identity of the individuals who hired and fired employees; and (5) the identity of the individuals who are in control of the financial affairs of the corporation.

A responsible person acts willfully if he or she: (1) pays other creditors after he knows of the employer's failure to pay the withheld funds to IRS; or (2) recklessly disregards a known risk that the taxes weren't being paid over. Even in the absence of actual knowledge, a person is liable if he or she acts with a reckless disregard of the facts and obvious and known risks that presently due withholding taxes aren't being paid. Negligence is not enough to satisfy the willfulness requirement. However, a responsible person's failure to investigate or to correct mismanagement after being notified that withholding taxes have not been paid satisfies the willfulness requirement. (John Denbo v. U.S., (CA 10 1993) 71 AFTR 2d 93-1317)

The Colorado Trust Fund Statute provides that "All funds disbursed to any contractor or subcontractor under any building, construction, or remodeling contract or on any construction project shall be held in trust for the payment of the subcontractors, laborer or material suppliers, or laborers who have furnished laborers, materials, services, or labor." ( C.R.S. § 38-22-127(1)) Thus, the statute treats all funds "disbursed" to a contractor as progress payments on a given construction job to be held by that contractor in a constructive trust to guarantee that any subcontractors, laborers, or material suppliers that have furnished labor or services to the contractor will be paid in full.

About the case:

Between 2005 and 2009, Mr. Kelly Davis and Ms. Allyce Card were co-owners of WVC, a construction contractor. Mr. Davis was WVC's president and managed the company's field operations. He was responsible for the hiring and firing of WVC's field staff (Ms. Card hired office staff), and he set the hourly rates of pay for its employees. Ms. Card was WVC's bookkeeper and managed its finances and office staff. However, Mr. Davis had signing authority on the company checking account and would sign payroll and vendor checks (that had been prepared by Ms. Card) when she was not available. He also had the ability to go to Ms. Card and request that she produce a check (say, for payment to a vendor) that either he or she would sign. WVC withheld money from employee paychecks to satisfy federal payroll tax obligations, but it did not pay those funds over to IRS. Instead, it diverted those funds to pay operating expenses, creditors, and, apparently, personal obligations of Mr. Davis and Ms. Card.

Prior to 2009, WVC entered into an agreement with Mutual of Omaha Bank (MOB) under which MOB would extend a line of credit to WVC in exchange for a security interest in effectively all of WVC's assets, including accounts receivable. WVC also executed a commercial security agreement with MOB, by which WVC agreed that it would not assign, convey, lease, sell or transfer any of the collateral, i.e., its physical assets, accounts receivable, or even cash-on-hand, without MOB's prior written consent.

By early 2009, Mr. Davis became aware of WVC's failure to remit withheld payroll taxes to IRS. Although WVC continued to operate throughout the remainder of 2009, Mr. Davis never caused WVC to rectify the tax delinquencies with IRS.

IRS assessed nearly $1 million in tax penalties against Mr. Davis, personally, under Code Sec. 6672 for non-payment of the employment taxes.

Mr. Davis sought a declaration that he owed nothing to IRS, which counterclaimed for a determination that Mr. Davis owed the penalties under Code Sec. 6672.

Parties' positions. Mr. Davis argued that it was Ms. Card, and only Ms. Card that was responsible for WVC's nonpayment of payroll taxes, and so he was not a responsible person under Code Sec. 6672. He also offered two justifications for his failure to remit the delinquent taxes when he was the sole owner of the company in 2009: (1) the application of the Colorado Trust Fund Statute, and (2) WVC having ceded control over all its assets to its lender, MOB, with the result that MOB had absolute control over the use and disposition of all of WVC's assets, effectively preventing Mr. Davis from making any payments other than those approved by MOB.

The Court ruled:

The district court concluded that Mr. Davis was a responsible person for purposes of WVC's failure to remit delinquent employment taxes during the period at issue.

The court found that, throughout the company's life span, Mr. Davis was a corporate officer of WVC, he held stock in the company, and he had the ability to hire and fire employees. Although it was clear that Ms. Card exercised considerable, if not dominant, control over WVC's finances, it was apparent that she did so effectively by Mr. Davis' delegation of that authority, and not because Mr. Davis lacked the power to control the company's finances.

The court reasoned that responsible person status turns on whether a given individual has the authority to direct that taxes be paid, not whether the individual's job called upon him to exercise that power. It was noteworthy that when Ms. Card was unavailable to sign checks, the checks did not go unsigned due to the absence of any other empowered official; Mr. Davis simply signed them. Mr. Davis could request that Ms. Card issue checks for him to sign and Ms. Card would do so, and Mr. Davis testified that he could not recall an occasion where he requested a check and Mr. Card refused. Most significantly, he requested that she produce a check so that he could spend company funds on a luxury sports car for his personal use; such a request could only be successfully made by a person with at least the ability to dictate the control of company finances.

The district court also found that Mr. Davis acted willfully in failing to use WVC funds in 2009 to pay WVC's unpaid payroll taxes.

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taxes and was rejected, as opposed to silently assuming that the lender would not permit the payment of taxes. Here, the record was undisputed that Mr. Davis never asked MOB for permission to use some of WVC's line of credit to pay the delinquent taxes that both he and MOB knew existed.

References:

For who is a “responsible person,” see FTC 2d/FIN ¶ V-1704 ; United States Tax Reporter ¶ 66,724.

As we have heard many times, tax law and IRS regulation is not our only guidance, but knowledge of tax rulings are equally important.

Wayne

Letters to the Editor

On March 14, 2018 I received a letter from Joseph Dianto, Acting Deputy Director, Accounts Management for the Internal Revenue Service.

It was in response to my January 14, 2018 inquiry as to the change in the third-party authentication procedures when practitioners contacted IRS about taxpayer issues and gave the IRS their CAF number.

His response:

"We have not changed third-party authentication procedures in several years. Previously, we simply verified the information on the Centralized Authorization File (CAF), the Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorization. In the past, we discovered fraudulently filed authorizations. As a result, we reviewed our processes and identified vulnerabilities in our procedures."

It went on to describe "identity thieves and fraudsters" an how they impersonate Tax Professionals.

ncpeFellowship member Diana Bengston Kilborn also inquired of IRS about the request for personal information and received the same letter.

I have been working with the National Taxpayer Advocate regarding the IRS abuse of the PTIN listing and serving tax professionals up to these scammers.

Tax Professionals have a voice - we will be using it!

Beanna

As to the Colorado Trust Fund Statute, the district court noted that courts had held that state lien statutes of this type constituted legal obligations that sufficiently encumber corporate funds such that the failure to use such funds to pay tax delinquencies did not amount to "willful" conduct. (Huizinga v. U.S., (CA 6 1995) 76 AFTR 2d 95-7025) For these reasons, the district court assumed, without necessarily finding, that funds received by WVC from its customers as progress payments on existing jobs were encumbered by operation of the Trust Fund Statute, and that Mr. Davis did not willfully fail to pay over those funds to IRS to satisfy WVC's tax obligations.

However, in analyzing other funds available to the company, the district court noted that there was a split of authority over the question of whether contractually-imposed, voluntarily-assumed restrictions on a company's ability to direct funds constituted an "encumbrance" that would preclude a finding of "willful" non-payment of payroll taxes. The majority rule recognizes that a company's voluntary decision to grant a security interest or other control over company funds to a lender does not create an encumbrance on those funds that thereafter excuses a failure to rectify tax delinquencies; it is only legally-imposed encumbrances (e.g. those created by statute or regs) that excuse payment of tax obligations. By contrast, the minority rule holds that where the taxpayer's use of funds is subject to restrictions imposed by a creditor holding a security interest in the funds which is superior to those of IRS, the funds are regarded as encumbered if those restrictions preclude the taxpayer from using the funds to pay the trust fund taxes.

The Tenth Circuit (to which this case would be appealable) has, in effect, adopted the majority rule. (Bradshaw, J. Larry v. U.S., (CA 10 1996) 77 AFTR 2d 96-2181) Even if Mr. Daviswas correct and MOB effectively controlled WVC's spendingas of 2009, the fact remained that such control was ceded,voluntarily and by contract, from WVC to MOB. Thus, any fundsthat WVC received from MOB, and the record reflected thatWVC routinely drew on a line of credit from MOB throughout2009, were not "encumbered."

The record reflected that, in addition to receiving periodic progress payments from its customers (which would be encumbered by the Trust Fund Statute), WVC also received funds from its line of credit with MOB. MOB was advancing a line of credit for WVC to operate so that they could get their receivables, and WVC used the money advanced by MOB for materials, lease payments, rent payments, payroll. Thus, those funds were not encumbered for purposes of Code Sec. 6672, and Mr. Davis was required to apply those funds to WVC's tax delinquencies before using them to pay for operating expenses. It was undisputed that he failed to do so, and thus his actions in 2009 amounted to a "willful" failure to remit delinquent payroll taxes.

The court noted that even assuming that the court were to adopt the minority rule, that rule would require an inquiry into whether the responsible person sought permission from the lender to use the encumbered funds to satisfy the delinquent

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