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Monthly Newsletter for ncpeFellowship Members Vol. 8 No. 3 March 2017

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Remarks from Beanna

Who We Are

Ten years ago when I was the Director of National Public Liaison (NPL) for the IRS, our research estimated about 800,000 to be return preparers.

IRS reports that the cumulative number of individual issued PTINs since 9/28/2010, the first year required PTIN registration was in place, is 1,313,921

Some preparers have multiple professional credentials and qualifications.

The Internal Revenue Service, through their PTIN program, currently reports the following numbers on return preparers.Return Preparer Office Federal Tax Return Preparer Statistics

Although the Internal Revenue Service is retiring numbers of qualified individuals to be Enrolled Agents, the numbers are

not growing.

Could it be that the only differences between an Enrolled Agent , CPA and Attorney and a participant in the Annual Filing Season Program is that the AFSP participant must have prepared the return of the taxpayer they want to represent and they cannot represent the taxpayer in collection division of IRS?

IRS does not list the number of PTINs issued to non-credentialed individuals. Certainly, the IRS does not even estimate the number of ghost (self-prepared) returns.

As a preparer of tax returns, I find myself more than ever before not only in competition with other preparers in my area but now in competition with the IRS free file. National firms offering to prepare tax returns for free entice the adult children of my clients to seek their services, not mine. VITA sites provide income tax preparation if income under a certain level which attracts my older clients, seniors looking for low cost preparation. And, Turbo Tax – Do It Yourself software, for taxpayers who want to play fast and loose with the tax system.

We wonder why our colleagues are leaving the business of tax.No, generally these are not the clients you and I seek but it is indicative of a changing tax preparation landscape.

When the filing season is over and we have had time to analyze our efforts and changing business the Fellowship will ask your input and experience.

In the meantime – Stay well and Finish Well.Beanna

Beanna@ncpefellowship.com or 877-403-1470

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Remarks from Beanna (1)

Tax News (5)TurboTax is Not Happy Americans are Dragging Their Feet Filing Taxes (5)Groups Want Trump to Close Loophole Allowing Illegal Immigrants to Abuse Tax Credits (5)What’s New on 2016 Forms 1120, 1120S and 1065? (6)IRS Hunts Debit Cards for Tax Evasion, As Court Approves John Doe Summons (6)Social Security Taxability (8)Claiming a Parent as a Dependent Is a Tax-time Headache (9)The 3 Biggest Tax Mistakes Retirees Make (10)Qualified Longevity Annuity Contracts Reduce RMDs and Yield Other Benefits (11)Decision on Clergy Housing Tax Benefit Coming This Summer (12)The 10 Most Commonly Googled Tax Questions — Answered (14)When Is a Good Time to Start Receiving Social Security Benefits? (15)Then and Now: How Tax Brackets Have Changed Over the Past 100 Years (16)Practitioners Walk Fine Line on Silent Returns (17)Tax Tips for Farmers in 2017 (18)New Form I-9 in Effect (18)Proposed CMS Regs Could Result in Smaller Premium Tax Credits (19)

Practice Management (20)

Question of the Month (20)Learn What Happens When You Convert an Asset from Business to Personal Use (20)

News from Capitol Hill (22)Fauxahontas Proposes an IRS Takeover of Tax Preparation (22)Cohen Introduces Bill to Protect Consumers from Fraudulent Tax Preparers Like Mo’ Money Taxes (22)Trump, Republicans Set Timeframe for Introducing Obamacare Replacement (23)Tax Reform, Health Care, and More: Speaker Ryan’s Interview on PBS NewsHour (23)Taming IRS Imperialism (24)

Military Taxes (24)

Estate and Trust News (25)Form 1041 Charity: When You Do and When You Don’t Get a Tax Deduction (25)Trust Ownership of S Corporation Stock – QSSTs and ESBTs (26)

People in the Tax News (28)IRS Selects New Advisory Council Members (28)A Loss to the Tax Professional Community (28)Howard Stern Sued for Reportedly Airing Woman’s IRS Conversation (28)Mary Tyler Moore and The IRS (28)IRS Professional Responsibility Lawyer Charged In Drug Distribution Conspiracy (29)Not Paying Taxes to Protest Trump? Watch Out For IRS (30)Washington Businessman Pleads Guilty to Filing Fraudulent Federal Tax Return (31)Plastic Surgeon Sentenced to Jail in Tax Fraud Case (31)FBI: Former New Jersey Coin Dealer Admits Identity Theft, Income Tax Evasion (31)Michael Jackson Tax Judge Allows Trial Testimony About Intellectual Property Mashups (31)

Table Of Contents (page)

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Michael Jackson Estate Tax Case Moving Forward (32)John Branca Takes the Stand in Michael Jackson Tax Trial (33)

IRS News (34)IRS Audit Rate of Individuals (0.7%), Businesses (0.5%) Falls To 10+ Year Lows Due To Budget Cuts (34)Most IRS Regs Likely Exempt from Administration’s “2-for-1” Rule (34)Early Withdrawals from Retirement Plans (35)Don’t Fall for Scam Calls and Emails Posing as IRS (35)Fake Charities on the IRS “Dirty Dozen” List of Tax Scams for 2017 (36)Updated IRS Pub 15-B Features New Information on Excluded Benefits (37)Avoid the Rush; Use IRS.gov for Quick Answers to Questions (38)Avoid the Rush: Be Prepared to Validate Identity if Calling the IRS (39)IRS Makes Approved Form 1023-EZ Data Available Online (40)IRS Summarizes “Dirty Dozen” List of Tax Scams for 2017 (40)

Tax Pros in Trouble (41)Announcement of Disciplinary Sanctions from the Office of Professional Responsibility (41)Two Pennsylvania Men Plead Guilty to Conspiring to File Federal Tax Returns Using Stolen IDs (42)Baton Rouge Tax Preparer Arrested for Tax Fraud Scheme Involving “Ghost” Companies (42)Tax Fraud Blotter: Defrauded, Disgorged and Deceased (42)Tax Preparers and Recruiter Admit Filing False Returns in Elaborate Tax Return Scam (44)20 MD. Tax Preparers Suspended by State (44)

Ragin Cagin (45)The On-Line NCPE Book and Much, Much More (45)

Taxpayer Advocacy (46)

Foreign Taxes (47)International WSOP Players May Have Tax Issues After ITIN Rule Changes (47)IRS Reminds International Taxpayers of Tax Obligations; Clarifies Rules for Tax Withholding Agents (48)

State News of Note (49)How Federal Tax Reform Could Affect States (49)

Fellowship Members You Should Know (50)A. Katherine Hubbard (50)

Wayne’s World (51)IRS Confirms: Calendar Year C Corporations Can Get 6-month Filing Extension (51)

Letters to the Editor (51)

Tax Jokes and Quotes (52)

Sponsors of the Month (54)Target Professional Program (54)

Table Of Contents (page)

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Tax News

TurboTax is Not Happy Americans are Dragging Their Feet Filing Taxes

Americans are apparently dragging their feet on tax filing this year.

A sluggish start to tax season undermined TurboTax owner Intuit’s earnings. The online filing software company warned that “tax season is forming more slowly than usual,” which will translate into a worse-than-expected performance for the fiscal second quarter ended Jan. 31.

Whether it’s unseasonably warm weather that’s encouraging people to get out of the house or a national hangover from a dreadfully polarizing election, the reasoning isn’t clear.

But the impact on Intuit is concrete: The company lowered its outlook for quarterly revenue, operating income and earnings. In the long run, the company expects full-year earnings to achieve its targets.

“Data points to the tax category forming slowly for all prep methods,” said Dan Wernikoff, executive vice president and general manager of Intuit’s TurboTax business, in a statement. “We believe we have a strong and winning hand that combines innovation across the end-to-end experience, an effective go-to-market campaign and great value for taxpayers. One thing we know about the tax business is that everyone needs to file by April 18. We are looking forward to a strong finish to the season.”

Revenue is now expected to range from $1.01 billion to $1.02 billion, down from a previous projection of $1.05 billion to $1.07 billion. Operating income is projected at $15 million to $20 million, down from a previous prediction of $60 million to $70 million.

And the company is now expected to barely eek out a profit for the quarter, with earnings of 4 to 5 cents per share, down from an earlier expectation of 12 to 15 cents.

The good news for Intuit is it still expects to meet its goals for the full year, suggesting that customer spending is simply shifting to the next fiscal quarter.

The company declined to comment beyond their statement.

Intuit shares fell several percentage points in early trading but pared those losses and was down only 0.7% at 12:46 p.m.

The revision stems from the IRS reporting that total returns processed through Jan. 27 tumbled 33%, compared to a year earlier.

Intuit said it had processed 29% fewer consumer returns during that period.

TurboTax controlled 65% of the do-it-yourself market for tax software, according to UBS analysts, after three years of market share gains.

Several competitors have popped up in recent years, potentially presenting a threat. But the company has gained momentum with a free option that “converts” into paid subscriptions over time, UBS analyst Brent Thill said in a recent analyst report.

One wild card for the company is the possibility of a dramatically simplified tax code, which President Trump and Republicans have identified as a key priority.

But Intuit CEO Brad Smith has identified a simplified tax code as an advantage to TurboTax because it would theoretically encourage more people to relinquish professional tax preparers in favor of do-it-yourself software.

Groups Want Trump to Close Loophole Allowing Illegal Immigrants to Abuse Tax Credits

Illegal immigrants need only one number to access billions of dollars in free taxpayer cash.

The Individual Tax Identification Number (ITIN) unlocks an exclusive gateway for non-citizens to receive monies meant for working, low-income Americans. The nine-digit code was created by bureaucrats in 1996 for foreigners who had to deal with the IRS. It allows people without a Social Security number, including those in the country illegally, to file taxes.

“It’s just a farce to say it was created to collect taxes,” Robert Rector, senior research fellow at the Heritage Foundation, told Fox News. “It’s nothing but a welfare program designed for illegal immigrants. ITINS are for tourists or illegals. No ITIN filer is eligible to work in the United States.”

The problem with ITIN, critics say, is gives non-citizens access to federal cash that they should not be entitled to receive. Once illegal immigrants file ITIN tax returns, they can apply for a Child Tax Credit – which entitles them to $1,000 per child. Unlike the Earned Income Tax Credit, which requires a Social Security Number to qualify, the Child Tax Credit is a cash program that does not.

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Critics say that makes it ripe for abuse.

Numerous investigations by the Treasury Inspector General for Tax Administration have chronicled not only improper Child Tax Credit fraud and error payments ranging from $5.9 billion to $7.1 billion, but schemes such as nearly 24,000 ITIN payments going to the same address. The audit reports also found IRS management was “not concerned with addressing questionable applications” but “interested only in the volume of applications that can be processed, regardless of whether they are fraudulent.”

Another audit report examining ITIN usage found Child Tax Credit claims more than quadrupled in five years, from $924 million in 2005 to $4.2 billion in 2010.

An agency spokesman said ballooning payouts are because a larger number of non-citizens are applying for ITIN and also because of fraud and error.

A Social Security number is required to qualify for any federal public benefit. Green card holders, refugees and those granted asylum receive Social Security Numbers. But workers without a Social Security Number can still file taxes – and apply for certain tax credits – with an ITIN number.

“If you don’t have a Social Security number, you shouldn’t be getting a tax payment,” David North of the Center for Immigration Studies told Fox News. “It keeps happening and nobody pays attention.”

Some are calling for President Trump to close the loophole and require people to obtain a Social Security number in order to receive a Child Tax Credit. North says no such course correction was included in an immigration-related draft order leaked to The Washington Post late January.

“The order overlooks one of the largest sources of payments to non-citizens,” North said. “The federal government should not be subsidizing people who are in this country illegally.”

North said the program has little oversight and abuse is not taken seriously.

“The Treasury Department is not careful who gets a number,” North said. Documents can be obtained through the mail, proving foreign status via a passport or combination of such documents as a VISA, foreign voter ID or school and medical records, without in-person interviews.

While congressional attempts to adjust the practice have sputtered, Indiana Congressman Luke Messer is resurrecting an effort to address the issue.

“After eight years of the Obama administration, it’s clear the law isn’t clear enough,” Messer told Fox News. “There is no policy reason why we should be supporting families who are here illegally.”

Messer’s proposal, H.R. 363, would ensure only taxpayers

with a valid Social Security number are able to claim the Child Tax Credit.

He says his legislation will save America billions of dollars and “could be a method to pay for the wall.”

Messer says he hopes to package the law into congressional tax reform efforts but would “welcome an administrative fix.”Rector concurs, saying Trump needs to step in and take action.

“An executive order could stop this immediately,” he said. “It violates welfare reform to make these payments to illegal immigrants.”

What’s New on 2016 Forms 1120, 1120S and 1065?

IRS has issued final versions of 2016 Form 1120 (U.S. Corporation Income Tax Return), Form 1120S (U.S. Income Tax Return for an S Corporation), Form 1065 (U.S. Return of Partnership Income), and the instructions for those forms. In this article, we summarize how those forms and instructions were changed from their 2015 counterparts.

Form 1120. New question regarding filing Forms 1042 and 1042¬S. Form 1120 Schedule K, which is entitled “Other Information” has a new question, question 19, which asks whether the corporation made payments that require it to file Forms 1042 and 1042-S under chapter 3 or 4 of the Code.

In general, a withholding agent must file an information return on Form 1042-S (Foreign Persons’ U.S. Source Income Subject to Withholding) to report amounts paid to foreign persons that are reportable under Chapter 3 and Chapter 4 of Subtitle A of the Code. And, withholding agents must file a withholding return, Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons).

Information reporting by specified domestic entities. Beginning in 2016, domestic corporations formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000 on the last day of the tax year or $75,000 at any time during the tax year. “Specified foreign financial assets” are: (1) depository or custodial accounts at foreign financial institutions; and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity. The form to be used for this filing is Form 8938, Statement of Specified Foreign Financial Assets.

A domestic corporation required to file Form 8938 with its Form 1120 for the tax year should check “Yes” to Form 1120, Schedule N (Foreign Operations of U.S. Corporations), Question 8, and also include that form with its Form 1120.

Alternative tax for corporations with qualified timber gains.

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For tax years beginning in 2016, if a corporation has both net capital gain and qualified timber gain (as defined in Code Sec. 1201(b)(2)), a 23.8% alternative tax may apply to the portion of the corporation’s taxable income attributable to the qualified timber gain (or, if less, the corporation’s net capital gain for the tax year). The tax is figured on Schedule D (Form 1120), Part IV and is entered on Form 1120, Schedule J, Line 2.

Suspension of 10% limitation on certain Native Corporations. In past years, qualified farmers and ranchers (as defined in Code Sec. 170(b)(1)(E)(v)) that do not have publicly traded stock could deduct contributions of qualified conservation property without regard to the general 10% limit on charitable contributions. That rule continues to apply for 2016 and has been expanded to also apply to Native Corporations (as defined in Code Sec. 170(b)(2)(C)(iii)) that contribute property which was land conveyed under the Alaska Native Claims Settlement Act. The total amount of the contribution claimed for the qualified conservation property cannot exceed 100% of the excess of the corporation’s taxable income over all other allowable charitable contributions.

Changes in due date for filing corporate returns. Historically, domestic corporations had to file their returns by the 15th day of the 3rd month after the end of the tax year; thus, those with a calendar year had to file their returns by March 15 of the following year.

However, as a result of 2015 legislation, for tax years beginning after 2015, the due date for filing corporate returns generally is the 15th day of the 4th month after the end of the corporation’s tax year. Under the exception to this rule, a corporation with a tax year ending June 30 must file by the 15th day of the 3rd month after the end of its tax year.

Form 1120S. Food inventory contributions. S corporations must provide certain information on a statement attached to Schedule K-1, including the shareholder’s pro rata share of the amount of the charitable contributions under Code Sec. 170(e)(3) for qualified food inventory that was donated to charitable organizations for the care of the ill, needy, and infants. The charitable contribution for donated food inventory is the lesser of (a) the basis of the donated food plus half of the appreciation (gain if the donated food were sold at fair market value on the date of the gift), or (b) twice the basis of the donated food. For tax years that begin after Dec. 31, 2015, a corporation that does not account for inventories and is not required to capitalize indirect costs under Code Sec. 263A may elect to treat the basis of the donated food as equal to 25% of the fair market value of the food. See Code Sec. 170(e)(3)(C) for more details.

Credit for increasing research activities. Schedule K (and K-1), Line 13g is “Other Credits.” The 1120S Instructions provide that the credit for increasing research activities is one such “other credit.” That credit is subject to different limits if the taxpayer is an eligible small business (Code Sec. 38(c)(5)(A)) New for 2016, the 1120S instructions provide that the S corporation must indicate on an attached statement whether or not the corporation is an eligible small business.

Information reporting by specified domestic entities. See “Information reporting by specified domestic entities” under Form 1120, above.

Form 1065. Information reporting by specified domestic entities. For tax years beginning after Dec. 31, 2015, domestic partnerships that are formed or availed of to hold specified foreign financial assets (“specified domestic entities”) must file Form 8938 with their Form 1065 for the tax year. Form 8938 must be filed each year the value of the partnership’s specified foreign financial assets meets or exceeds the reporting threshold.

A domestic partnership required to file Form 8938 with its Form 1065 for the tax year should check “Yes” to new question 22 of Schedule B, Form 1065.

New question regarding filing Forms 1042 and 1042¬S. New question 21 of Schedule B, Form 1065 is the same question as that under “Form 1120. New question regarding filing Forms 1042 and 1042¬S,” above.

Food inventory contributions. The new requirements here are the same as those under “Food inventory contributions” under Form 1120S, above.

Credit for increasing research activities. The new requirements here are the same as those under “Credit for increasing research activities” under Form 1120S, above.

Due date for Form 1065. For tax years beginning after 2015, the due date for a domestic partnership to file its Form 1065 has changed to the 15th day of the 3rd month following the date its tax year ended.

IRS Hunts Debit Cards for Tax Evasion, As Court Approves John Doe Summons

The IRS has gone after tax evasion in Swiss and other offshore accounts, and has collected a staggering $10 billion. Then, the IRS turned to virtual currencies like Bitcoin, after a court allowed an IRS John Doe summons for bitcoin and other virtual currencies. Now, the IRS is going after some debit card use, too.

How does the IRS get on to you, you might wonder? If the IRS knows who you are, it can audit or investigate you. But increasingly, one important technique is the John Doe Summons. In 2008, the lid came off the hushed world of Swiss banking when a judge allowed the IRS to issue a John Doe summons to UBS for information on U.S. taxpayers using Swiss accounts. Now, the IRS has turned to certain debit cards.

With a normal summons, the IRS seeks information about a specific taxpayer whose identity it knows. A John Doe summons allows the IRS to get the names of all taxpayers in a certain group. The IRS needs a judge to approve it, but recent IRS success may lead to more. The IRS tells its own examiners to use a John Doe Summons only after trying other

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Social Security checks as something they’ve earned. Yet that doesn’t stop Uncle Sam from taking its cut of your benefits in the form of income taxes. Not everyone on Social Security has to pay tax, but those who do can end up having to include as much as 85% of their benefits as taxable income on their tax returns. Below, we’ll look more closely at how taxation of Social Security works and just how much the typical American ends up having to include on their tax returns.

Why would you have to pay tax on Social Security?

In 1984, the federal government ran into its first Social Security funding crisis. As part of the solution, lawmakers enacted rules that made benefits taxable in some cases. Specifically, if you earn more than a certain amount of income from other sources while also collecting Social Security, then you’ll have to add a certain amount of your benefit payments to your taxable income on your return.

The calculation for determining the portion of your Social Security benefits subject to tax is a bit complicated. The first step is to add up all of your wages, investment income, taxable pensions, and alternative sources of income other than Social Security. Then, add one-half of your total Social Security benefits for the year to that total.

As the chart above shows, if the result is greater than the first column of numbers, then you could end up paying tax on as much as 50% of your Social Security benefits. If it’s greater than the numbers in the last column, then that taxable percentage could jump to as much as 85%. The actual amount depends on exactly how much you receive in benefits as well as the extent to which your income goes above those threshold amounts.

Why a rising number of Social Security recipients will get taxed on their benefits

routes. The IRS Manual says it may be possible to obtain taxpayer identities without issuing a John Doe summons.

A federal court in Montana has authorized the IRS to serve a John Doe summons on Michael Behr of Bozeman, Montana, seeking information about U.S. taxpayers who may hold offshore accounts established by Sovereign Management & Legal LTD (SML), a Panamanian entity. The IRS wants records of U.S. taxpayers issued a Sovereign Gold Card debit card between 2005 and 2016 that could be used to access the funds and to evade U.S. taxes. U.S. taxpayers seeking to hide their offshore assets often utilize the services of offshore trusts and corporate service providers that open bank accounts, create corporations and other entities, and serve as nominee officers.

In its petition seeking the John Doe summons, the United States alleges that SML advertises various “packages” to allow taxpayers to hide their assets offshore. These packages include corporations owned by other entities (to include fake charitable foundations), all held in the name of nominee officers provided by SML. SML then opens bank accounts for these entities and provides debit cards in the name of the nominee to the taxpayer. By using such cards, taxpayers seek to access their offshore funds without revealing their identities.

The court found a reasonable basis for believing that U.S. taxpayers may be using the Sovereign Gold Card to violate federal tax laws. The Justice Department previously obtained a similar order from the U.S. District Court for the Southern District of New York, authorizing eight John Doe summonses on banks and other entities for information related to SML and its customers.

The recipient of a John Doe Summons is often between a rock and a hard place. The recipient may want—or be required to—protect its customers. But it also will not want trouble with the IRS. And fighting in court can be expensive and unproductive.

As occurred in the recent John Doe Summons served on Coinbase, there was no allegation that Coinbase has engaged in any wrongdoing in connection with its virtual currency exchange business. Rather, the IRS uses John Doe summonses to obtain information about possible violations of internal revenue laws by others, individuals whose identities are unknown. The debit card case is similar.

There may be court battles, and the IRS may not get the information it wants right away. Even when it does, it will take the IRS time to collate and process it. In the end, though, it is a good bet that the IRS will put the information it acquires to good use. That suggests that for offshore accounts users (and SML debit card holders) who have not yet made corrective filings with the IRS should consider it. Once it is too late, it is too late.

Social Security Taxability

To get Social Security retirement benefits, you have to work for at least 10 years, and therefore many retirees see their

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The number of people paying tax on Social Security benefits has gone up steadily over the years. In 2014, the most recent year for which IRS data are available, about 27.4 million taxpayers included Social Security benefits on their tax returns. Of those, almost 70% -- more than 19 million -- indicated that some of their benefits were taxable.

The interesting thing about those figures is that they’re far larger than lawmakers ever anticipated at the time the law was passed. Early in the provision’s history in the 1980s, the threshold numbers above were set in a way that made only a small number of high-income taxpayers have to pay tax on Social Security. Over time, though, inflation has pulled more retirees into the taxable status, because the law has no provisions to let the threshold numbers rise along with the Consumer Price Index or other inflation measures.

What’s even more surprising is just how much Social Security money gets taxed. Taxpayers listed a total of $575 billion in total benefits on their returns, and they calculated that they’d have to pay tax on more than $261 billion of that amount, or 45% of their total benefits. That adds up to almost $13,750 on average for those who indicated any taxable benefits, or more than $9,500 on average even when you include those who indicated a zero taxable amount.

Can you cut your tax bill on Social Security?

Avoiding this tax takes some careful planning. What trips up many people in retirement is that taxable IRA and 401(k) distributions adjust your total income higher, making more of your Social Security taxable as well. By contrast, if you have a Roth IRA or Roth 401(k), you can tap those accounts without adding to your income for these purposes, sheltering more of your Social Security income from tax.

Waiting to take benefits until later in your retirement can also help you avoid the tax.

Many people claim early Social Security benefits even while they still have jobs, but the odds are much larger in that situation that your work income will push you over the thresholds. The same is true for married couples in which one spouse has retired but the other is still working. If you wait until that income goes away before taking benefits, your monthly payments will be larger and they might be less likely to be subject to tax.

Lastly, timing your income can sometimes reduce your long-term tax bill. For instance, many retirees wait as long as possible before starting to withdraw money from IRAs and 401(k)s. But at age 70 1/2, most people have to start taking withdrawals from traditional retirement accounts. If you have some room under the Social Security tax threshold, then taking withdrawals earlier than necessary could actually save you tax in the long run.

No one likes to pay tax, and many see taxes on Social Security benefits as being unfair. However, if you know the rules, you can find ways to save as much as you can on your taxes in

retirement.

Claiming a Parent as a Dependent Is a Tax-time Headache

Claiming a parent as a dependent requires meeting a number of tests.

As more Baby Boomers are helping to support an aging parent, come tax time more are wondering whether they can claim the parent as a dependent.

Although it’s possible, even if the parent does not live with you, it doesn’t happen often because there are so many restrictions. When it does happen, it’s usually when one parent has died and the surviving parent has little income other than Social Security and moves in with a child.

“It’s a very common question. For most people, the two tests that are tough to overcome” are the income limit and the support requirement, said Juan Montes, an enrolled agent with offices in San Jose and Ceres (Stanislaus County).

To claim a biological or adoptive parent as your dependent for 2016, the parent must have had less than $4,050 in gross income and you must have provided at least half of the parent’s support for the year. Here’s a closer look at these tests.

Income limit: The $4,050 income limit is per parent. It includes everything except tax-free income. If the parents are married, count each parent’s income from his or her pension, taxable withdrawals from retirement accounts, the taxable portion of Social Security and half of income from joint accounts. Tax-free interest does not count toward the $4,050 limit, nor does the nontaxable portion of Social Security.

Anywhere up to 85 percent of Social Security benefits are taxable, depending on how much other income the parent has. There is a formula for figuring this out, but here’s a shortcut:

If your parent has almost no other income (including, in this case, tax-exempt interest), none of your parent’s Social Security is taxable and he or she will pass the income test for being a dependent. If any of your parent’s Social Security is taxable, that means he or she has more than $4,050 in other income and will flunk the income test.

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Support test: To determine whether you provided at least half of a parent’s support, the Internal Revenue Service has a complicated worksheet.

But in general, support includes food, lodging, clothing, education, medical and dental care, recreation, transportation, and other necessities. If your parent lived with you, you can count the fair rental value of his or her space in the home as lodging. For food, divide the cost among the number of people in the household and count just the parent’s share, said Tim Dilworth, an enrolled agent and certified public accountant in Kalispell, Mont.

Other requirements: To qualify as a dependent, your parent must be a U.S. citizen or resident or a resident of Canada or Mexico. Also, your parent must not file a joint return, except to claim a refund. There could be other issues, so be sure to consult a tax pro.

Although most parents who qualify as a dependent live with a child, they don’t have to. If they’re living in their own home, they generally have few expenses other than rent or property taxes, medical costs and food, Dilworth said.

How much is this tax break worth? If you claim your parent as a dependent, you get an extra personal exemption that reduces your income by $4,050 in 2016. If you are in the 25 percent tax bracket, this saves you just over $1,000.

In addition, if you are single, claiming your parent as a dependent could let you file your tax return as head of household. This filing status essentially gives you a lower tax rate and higher standard deduction than filing as single, Montes said. (The higher standard deduction doesn’t help if you itemize deductions.)

There’s one more twist: If you paid your parent’s medical expenses and provided more than half of your parent’s support, you might be able to claim those medical expenses as an itemized deduction, even if your parent fails the income test. Bear in mind that you can only deduct medical expenses, including your own, that exceed 10 percent of your adjusted gross income (or 7.5 percent if you or your spouse turned 65 before Jan. 2, 2016), Dilworth said.

Larry Granillo of Patterson (Stanislaus County) was hoping he could claim his mom as a dependent for 2016. She had to quit work early last year to care for his dad, who has Alzheimer’s and diabetes and needs round-the-clock care. “I was just trying to claim my mom, I was paying right around half her expenses,” he said. “Once we found out she made more than $4,000 in the first couple months” before she stopped working, he stopped trying to claim her as a dependent. He’s hoping to get his dad in a facility this year so his mom can go back to work.

The 3 Biggest Tax Mistakes Retirees Make

It’s not unusual for seniors to find themselves cash-strapped in retirement. Once you stop working and move over to a fixed

income, you’ll probably have less financial flexibility than you did during your working years. That’s why it’s important to be mindful of the impact taxes will have on your finances. To avoid surprises, be sure to steer clear of these major tax mistakes.

1. Forgetting about taxes in the first place

Though there are a number of tax breaks available to seniors, many are shocked to learn that some, or most, of their income is taxable in retirement. Take Social Security, for example. Seniors without much additional income typically don’t pay federal taxes on their benefits, but if you have a healthy amount of extra income coming your way, you might be taxed on your Social Security payments. To see whether you’ll pay taxes on Social Security, you’ll need to calculate what’s known as your provisional income as follows:

• Take your total income outside of Social Security• Add in any tax-free interest you receive (such as municipal bond interest)• Add in 50% of your Social Security benefit amountIf your total falls between $25,000 and $34,000 as a single filer or between $32,000 and $44,000 as a joint filer, you could be taxed on up to 50% of your Social Security benefits.

Furthermore, if your provisional income exceeds $34,000 as a single filer or $44,000 as a joint filer, you could be taxed on up to 85% of your benefits.

In addition to federal taxes on Social Security, these 13 states tax benefits to some degree:

• Colorado• Connecticut• Kansas• Minnesota• Missouri• Montana• Nebraska• New Mexico• North Dakota• Rhode Island• Utah• Vermont• West Virginia

But it’s not just Social Security income that’s taxable in retirement. Unless you have a Roth retirement account, withdrawals from your IRA or 401(k) are also subject to taxes -- ordinary income taxes, in fact. If you fail to factor taxes into the equation when taking withdrawals, you could wind up with a hefty IRS bill. And if you don’t have the money on hand to pay that bill, you may need to resort to withdrawing extra money from your retirement account to cover it and then paying additional taxes on that added withdrawal. Ouch.

To avoid this situation, plan to be taxed on your retirement income from the get-go and set aside money to pay whatever taxes you might end up owing. If you’re not yet retired, another option is to open a Roth account or convert your non-Roth

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account into one. Roth withdrawals are always taken tax-free in retirement, and they’re not subject to required minimum distributions, which, as you’ll see next, can be another major tax trap for seniors.

2. Neglecting required minimum distributions

While required minimum distributions (RMDs) don’t apply to Roth accounts, if you have a traditional IRA or 401(k), you’ll need to start taking minimum withdrawals once you turn 70 1/2. The exact amount you’ll need to take will be based on your account balance and life expectancy at the time, but if you fail to make that withdrawal, you’ll lose out big time. Specifically, you’ll be hit with a 50% tax penalty on whatever amount you neglect to remove from your account. So if your RMD for the year is $5,000 and you don’t take it, you’ll be kissing $2,500 goodbye.

It’s important to pay attention to RMD deadlines so you don’t get slapped with that penalty. Your initial RMD will need to be taken by April 1 of the year following the calendar year in which you turn 70 1/2. So if you turn 70 in May 2017 and 70 1/2 in November 2017, you’ll need to take your first RMD by April 1, 2018. Following that initial withdrawal, you’ll have until Dec. 31 of each calendar year to take your RMD.

3. Keeping sloppy healthcare spending records

Healthcare is a huge burden for retirees, and countless seniors spend a large chunk of their income on medical costs alone. But if you don’t hang onto your records and receipts, you’ll be doing yourself a major disservice. The reason is that if your out-of-pocket healthcare spending for the year exceeds 10% of your adjusted gross income (AGI), you’re allowed to claim a medical expense deduction on your taxes. This means that if your AGI is $40,000, you can deduct any amount you spend above $4,000. So if your out-of-pocket costs total $6,000, you’ll get a $2,000 deduction. Without proper documentation, however, you won’t know how much to claim or whether you’re eligible to take a deduction in the first place.

Sometimes, all it takes is a single tax error to leave you reeling financially. Avoiding these mistakes can help you better manage your money at a time when it’s the most crucial.

Qualified Longevity Annuity Contracts Reduce RMDs and Yield Other Benefits

Many in the boomer generation are finding that required minimum distributions (RMDs) from qualified plans and IRAs are saddling them with extra tax bills on income they don’t really need for retirement expenses. One way to reduce RMDs is to buy a qualified longevity annuity contract (QLAC), a relatively new type of savings vehicle that carries both investment and tax advantages.

What is a QLAC? A QLAC is a deferred income annuity—one that begins at a later, advanced age—that meets strict parameters carried in the regs. The retirement planning attraction of QLACs is that they provide a form of longevity

insurance: taxpayers use part of their retirement savings to buy an annuity that helps protect against outliving their assets.The tax-planning attraction of QLACs is two-fold:

• (1) The value of a QLAC is subtracted from the retirement plan or IRA balance used to determine RMDs from a qualified plan or IRA. In other words, distributions taken annually by retireds to satisfy the RMD rules will be smaller after a QLAC is purchased. This is valuable to those who have substantial other retirement income sources (e.g., pensions) and are looking to minimize taxable RMDs.

• (2) Tax on the annuity will be deferred until payments under the contract commence.

To be treated as a QLAC, a deferred income annuity must meet a number of requirements. Here’s a review of the key rules.

Limitation on premiums. In brief, a taxpayer can use up to the lesser of $125,000 (adjusted for inflation in $10,000 increments) or 25% of the total of all his IRA accounts balances to buy a QLAC.

Thus, the $125,000 limit will apply if the total of a taxpayer’s IRA account balances exceeds $500,000.

In more technical terms, premiums paid for a QLAC contract on a date can’t exceed the lesser of a dollar limitation, or a percentage limitation.

The dollar limitation is the excess of $125,000 over the sum of (1) the premiums paid on the contract before that date and (2) the premiums paid on or before that date on any other contract intended to be a QLAC and that is bought for the IRA owner under the IRA, or any other plan, annuity, or account described in Code Sec. 401(a), Code Sec. 403(a), Code Sec. 403(b), or Code Sec. 408, or eligible governmental plan under Code Sec. 457(b). (Reg. § 1.408-8, Q&A 12(b)(2))

The percentage limitation is an amount equal to the excess of 25% of the total account balances of the IRAs (other than Roth IRAs) that an individual holds as the IRA owner (including the value of any QLACs held under those IRAs) as of Dec. 31 of the calendar year immediately preceding the calendar year in which a premium is paid, over the sum of (1) the premiums paid before that date on the contract, and (2) the premiums paid on or before that date on any other contract intended to be a QLAC and that is held or was purchased for the individual under those IRAs. (Reg. § 1.408-8, Q&A 12(b)(3))

The value of IRAs held as the beneficiary of another taxpayer (e.g., a spouse) isn’t counted for purposes of the percentage limitation.

The technical definitions of the dollar and percentage limits for qualified plans are similar to those for IRAs; see Reg. § 1.401(a)(9)-6, Q&A 17(b)(2) and Reg. § 1.401(a)(9)-6, Q&A 17(b)(3).

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provide for a benefit paid to a beneficiary after the death of the taxpayer equal to the excess of the premium payments for the QLAC over the payments already made under the QLAC. If a QLAC provides for a life annuity to a surviving spouse, it also may provide for a benefit paid to a beneficiary after the death of both the taxpayer and the spouse in an amount equal to the excess of the premium payments for the QLAC over the payments already made under the QLAC. (Reg. § 1.401(a)(9)-6, Q&A 17(c)(4))

Decision on Clergy Housing Tax Benefit Coming This Summer

Freedom From Religion Foundation’s fight against a special tax benefit for the clergy has been grinding along as these things do. The latest development is the intervention of some actual clergy in the case.

Thanks to the work of the Becket Fund, a non-profit, public-interest law firm, Bishop Ed Peecher of Chicago Embassy Church and Father Patrick Malone of Holy Cross Anglican Church have been allowed to intervene in Gaylor v Lew, FFRF’s latest attack on the dubious constitutionality of Code Section 107(2), the parsonage exclusion. Their churches are also recognized as intervenors along with the Diocese of Chicago and Mid-America of the Russian Orthodox Church Outside of Russia.

The Parsonage Exclusion

Code Section 107 is one of the shortest sections of the Internal Revenue Code.

§ 107 Rental value of parsonages.

In the case of a minister of the gospel, gross income does not include—

107(1)the rental value of a home furnished to him as part of his compensation; or107(2)

Detailed rules in the regs protect taxpayers who inadvertently exceed the dollar or percentage limit on premium payments and allow them to correct the excess without disqualifying the annuity purchase. ( Reg. § 1.401(a)(9)-6, Q&A 17(d)(1)(ii)(B))

When distributions must commence. Distributions under a QLAC must commence no later than a specified annuity starting date that is no later than the first day of the month after the taxpayer’s 85th birthday. (Reg. § 1.401(a)(9)-6, Q&A 17(a)(2))

Distributions after death of taxpayer. Allowable QLAC benefits payable after the death of the taxpayer depend on whether or not a surviving spouse is the sole beneficiary and whether or not the taxpayer died before or after the annuity starting date.

...Where sole beneficiary is taxpayer’s surviving spouse. If the sole beneficiary is taxpayer’s surviving spouse and the taxpayer dies on or after the annuity starting date, the only benefit that may be paid (except for return of premiums, explained below) after the taxpayer’s death is a life annuity payable to the surviving spouse. The annuity payment can’t exceed 100% of the annuity payment that was payable to the taxpayer. (Reg. § 1.401(a)(9)-6, Q&A 17(c)(1)(i))

If the sole beneficiary is taxpayer’s surviving spouse and the taxpayer dies before the annuity starting date, the only benefit allowed (except for return of premiums, explained below) is a life annuity payable to the surviving spouse, which must commence no later than the date on which the annuity payable to the taxpayer would have started under the contract if the taxpayer had not died. The payments to the surviving spouse can’t exceed 100% of the annuity payment that would have been payable to the taxpayer as of the date that benefits to the surviving spouse start. The annuity may exceed 100% of the annuity payment that would have been payable to the taxpayer to the extent necessary to satisfy the requirement to provide a qualified preretirement survivor annuity. (Reg. § 1.401(a)(9)-6, Q&A 17(c)(1)(ii))

...Surviving spouse is not the sole beneficiary. Where the surviving spouse is not the sole beneficiary, the only benefit allowed after death (except for return of premiums, explained below) is a life annuity payable to the designated beneficiary. However, the annuity payment can’t exceed the applicable percentage (determined in a table in the regs) of the annuity payment that is payable (if the taxpayer dies on or after the annuity contract’s starting date) or would have been payable (if the taxpayer dies before the annuity contract starting date) to the taxpayer. The applicable percentage varies with the age difference between the taxpayer and the beneficiary. (Reg. § 1.401(a)(9)-6, Q&A 17(c)(2(ii))

For example, if the age difference is two years or less, the applicable percentage is 100%; if it’s five years, the applicable percentage is 70%; and if it’s ten years, it’s 44%. (Reg. § 1.401(a)(9)-6, Q&A 17(c)(2)(ii)(D)

...Return-of-premium provisions. In general, instead of a life annuity payable to a designated beneficiary, a QLAC may

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the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.

The Christian terminology and lack of gender neutral language indicate that the section has been around a long time. The in-kind exclusion, not in dispute, goes back to the nineteen twenties and the cash exclusion, which is what is in dispute, goes back to 1954, although it was tweaked in the nineties.Unlike arguably similar exclusions for the military and people living abroad, there is no dollar limitation on the parsonage exclusion. Televangelists and mega-church ministers can and do have cash housing allowances in the hundreds of thousands of dollars.

For most ministers, though, the exclusion is a fairly modest benefit and with Bishop Ed, as he is known and Father Malone, the Becket Fund has found exemplars that illustrate why the loss of the exclusion could be a heavy blow.

Intervention

FFRF is suing the Secretary of the Treasury and the Commissioner of the Internal Revenue Service. There is a presumption that a law passed by Congress and signed by the President is constitutional, so it is expected that the executive branch will defend the law’s constitutionality in court. In order to intervene, the Becket Fund needed to show that the ministers had a stake in the outcome. That was easy.

.... it is undisputed that the proposed intervenors are part of the group that would lose their tax exemption if 26 U.S.C. § 107(2) is invalidated, it is clear that they have a concrete interest in the outcome of the case. In fact, no group of people face more to lose if plaintiffs succeed than ministers such as the proposed intervenors.

Then there is the notion that the government’s interest and perspective is different than theirs. That was not that hard either.

As to the adequacy of the government’s representation, the proposed intervenors do not for the most part challenge the government’s competence, but rather contend that the government’s interests are different from theirs. In particular, the proposed intervenors say that they want to defend § 107(2) from their own perspective, arguing that striking down § 107(2) would violate their constitutional rights under the Free Exercise Clause, the Establishment Clause, and the Due Process Clause. Also, the proposed intervenors want to provide facts to the court related to how the tax exemption they receive works in practice, which they believe will help to demonstrate that § 107(2) has a secular purpose and effect and does not violate the Establishment Clause

Poster Boys For The Modest Benefit

The Becket press release on the ruling allowing intervention

focused on Bishop Peecher - African Amerian pastor joins fight against atheist lawsuit.

The founder of a predominantly African American congregation, Bishop Peecher devotes his life to serving his community in order to decrease gang violence, mentor at-risk youth, and feed and clothe the homeless in Chicago’s poorest neighborhoods. This work is possible because the church supports Bishop Peecher through a small housing allowance, called a parsonage allowance, permitting him to focus on and live just minutes from his congregation and the surrounding communities in need.

I have to say that I am a little concerned that the argument that Becket is making with respect to Bishop Peecher and Father Malone. They are, in effect, saying that the congregations might not be tenable without the tax break to the ministers. In my mind, that argument could be turned around by the other side since it reinforces the idea that the exclusion is supporting the establishment of those churches.

Another County Heard From

A few Unitarian Universalist ministers that I have spoken to have not really thought the exclusion is such great public policy. Following Reilly’s First Law of Tax Planning - (It is what it is. Deal with it.), they take it anyway. My own minister Reverend Aaron Payson of the Unitarian Universalist Church of Worcester has a different view and believes that support of the ministry, by the housing allowance, is good public policy.The history of ministry in New England includes both the role of Parish Minister and “teacher of public piety” which continues in as municipalities, hospitals, non-profit organizations, schools, and a variety of other community organizations call upon religious professionals to provide example, counsel, instruction and ritual presence in service to community welfare, peace and justice.

This story about him doing ride alongs with the Worcester Police is an example of what he is talking about.

A Pragmatic View

I’m very sympathetic with the view that suddenly eliminating the housing allowance could be a shock to some small congregations. On the other hand, the abuse by the big dollar scoundrels, the creeping extension of who qualifies (think basketball ministers) and the notion that the IRS must sort out who is or is not a “minister of the gospel” makes me think it should be gradually phased out. The first order of business should be a dollar limitation. None of that is going to happen, though. This litigation will go on and it is possible that FFRF has it right this time.

Decision This Summer

I spoke with Hannah Smith, a senior attorney with the Becket Fund. Besides clarifying for me the concept of intervention, she did a bit of prognosticating. She expects that there will be a District Court decision in the summer. The last time we went

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through this the appellate decision came down a year later.So if FFRF wins, this matter becomes a concern for church budgets in 2019. I’m hoping there will be a “Make Our Pastor Whole” movement. My experience with small congregation governance is that generally, the problem is people thinking things should be able to run with them dropping the same amount in the plate that their grandparents did forgetting that grandma baked nine million cookies to sell and grandpa painted the church himself. Maybe this will serve as a wake-up call. The 10 Most Commonly Googled Tax Questions — Answered

Taxes can be confusing. We’re here to help. To find out what people’s most burning questions about taxes are, MONEY asked Google for a list of its top tax-related queries—and assembled the information you need.

1. When are taxes due?

It’s April 18 this year. Usually, it’s the 15th — you can read why you get an extra three days here. (If you file for an extension, you get until Oct. 16 to file your return, because Oct. 15 is a Sunday. You must still pay what you estimate you owe by April 18, though.)

2. How to file taxes

This IRS page has links to online forms you can print as well as a locator tool where you can find an office if you prefer to pick up forms in person or don’t have access to a printer. You might also find tax forms at your local library or post office.

If you make less than $64,000, the IRS has a page where you can file your taxes electronically at no charge under the Free File program. If you plan to file with a simple form like a 1040A or 1040EZ, some tax preparation companies like TurboTax, H&R Block, Jackson Hewitt and TaxAct have their own platforms you can use to do your taxes online for free.If you’re not sure which form you should use, the IRS spells out the differences here. Not sure how to file state taxes? This IRS page has links to all of the state governments, including tax departments.

3. When can you file taxes?

The IRS began accepting electronic returns for 2016 on Jan. 23, 2017.

You technically have until 11:59:59 p.m. on April 18 to file your taxes if you’re filing online, according to TurboTax, but waiting until the last second is a bad idea: A pokey computer could cost you big in penalties. If you’re using U.S. mail, you have to have your return and payment postmarked by April 18. Some post offices stay open late for Tax Day; you can find out which ones have extended hours here.

If you (or your accountant) file your taxes electronically, you have the option of paying online using the IRS’s Electronic

Funds Withdrawal function (which is free). You can also pay via credit or debit card (which will cost you a convenience fee of a bit under $3 if you use a debit card, or around 2% of the charge if you use a credit card).

4. How to file a tax extension

If you procrastinated and April 18 is looking like a long shot, experts say you should file for an extension. This doesn’t get you out of paying any taxes you owe by the deadline, but it gives you an extra six months to file. An extension will keep you from getting hit with a late-filing penalty of 5% of the unpaid taxes for each month or part of a month you’re late, up to 25%.

That’s in addition to a late-payment penalty of 0.5% of the unpaid taxes for each month or part of a month—plus interest at a rate of the federal short-term interest rate plus 3%.

If you expect a refund, you obviously have an incentive to get your return in as soon as possible to get those dollars in your pocket. If you file for an extension thinking you’ll get a refund and instead find that you owe, you’ll have to tack on the late-payment charges.

Don’t forget about state taxes. A handful of states will automatically give you an extension if you request one through the IRS, while others require a separate request to that state’s tax department. In some cases, the rules are different depending on whether you owe money or are due a refund.

5. How much do you have to make to file taxes?

There are various thresholds, depending on your filing status, age, and the type of income you receive. For instance, if you’re single, under 65 and your income was below $10,350 last year, you generally don’t need to file federal taxes. This IRS tool can help you figure out if you need to file a tax return.Even if appears you don’t have to file, experts say it’s generally a good idea to fill in the blanks on a return and see what your bottom line would be. About 70% of Americans are expected to qualify for refunds this year, according to the IRS, but many people never file to collect. The average unclaimed refund is nearly $700. Especially for lower-income Americans, a number of credits and deductions could make you eligible for a refund.

6. How long to keep tax records

The IRS says you should hang onto your tax documents for three years; if you get audited, that’s generally the look-back period they’re allowed to cover. However, if they suspect fraud or underpayment of income tax, or if you’ve written off worthless securities, they can request up to seven years’ worth of tax records. Hang onto documents like receipts that justify deductions like business expenses, charitable donations and so on.

7. When is the last day to do taxes?

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Yeah, there are clearly a lot of procrastinators out there. As explained above in No. 1, the filing deadline is pushed back a few days from the usual April 15 this year to the 18th. You have until midnight local time—but if you’re going to put it off that long you should consider just filing for an extension.

8. Is Social Security taxed?

It’s possible. Depending on your income, up to 85% of Social Security benefits may be taxable. If you’re a single filer and your combined income—that is, adjusted gross income, nontaxable interest from municipal bonds and half of your Social Security benefits—is more than $25,000, you will have to pay taxes. If you’re married and file jointly, the threshold is $32,000.

9. How long does it take to get taxes back?

The answer this year might be “longer than usual.” To combat tax fraud, the IRS is taking extra time checking filers’ tax information if they claimed either the Earned Income Tax Credit or the Additional Child Tax Credit. Under a new law, the agency is holding back refunds claiming those credits until at least Feb. 15, and people aren’t likely to see those refunds until the end of February at the earliest. On top of that, “New identity theft and refund fraud safeguards put in place by the IRS and the states may mean some tax returns and refunds face additional review,” the agency warns. For everybody else, the IRS says refunds should be issued in its standard window of 21 days from the time it get your return.

10. Why do I owe taxes?

The first income tax in the U.S. was authorized by Congress in 1861 and levied the following year, to help pay for the Civil War, according to the Civil War Trust, but taxes have been around nearly as long as civilization itself. Historians have found tax records that go back to 6,000 B.C. in what is now Iraq, and the ancient Greek, Egyptian and Chinese cultures all had their own versions. In Biblical times, Roman emperor Caesar Augustus established rules around some personal and inheritance taxes that the English later used to create similar taxes centuries later, according to the Handbook on Tax Administration. Ironically, modern-day Italy has the lowest rate of income-tax compliance out of 10 major developed nations, with less than two-thirds of citizens giving the tax man his due.

And although plenty of Americans have argued in court that they shouldn’t have to pay taxes, the IRS has a helpful 71-page paper that methodically debunks these claims, The Truth About Frivolous Tax Arguments, (which might be equally helpful as a cure for tax-season-induced insomnia.)

When Is a Good Time to Start Receiving Social Security Benefits?

Enjoying a comfortable retirement is everyone’s dream. For over 80 years, Social Security has been helping people realize those dreams, assisting people through life’s journey

with a variety of benefits. It’s up to you as to when you can start retirement benefits. You could start them a little earlier or wait until your “full retirement age.” There are benefits to either decision, pun intended.

Full retirement age refers to the age when a person can receive their Social Security benefits without any reduction, even if they are still working part or full time. In other words, you don’t actually need to stop working to get your full benefits.

For people who attain age 62 in 2017 (i.e., those born between January 2, 1955 and January 1, 1956), full retirement age is 66 and two months. Full retirement age was age 65 for many years. However, due to a law passed by Congress in 1983, it has been gradually increasing, beginning with people born in 1938 or later, until it reaches 67 for people born after 1959.You can learn more about the full retirement age and find out how to look up your own at

www.socialsecurity.gov/planners/retire/retirechart.html.

You can start receiving Social Security benefits as early as age 62 or any time after that. The longer you wait, the higher your monthly benefit will be, although it stops increasing at age 70. Your monthly benefits will be reduced permanently if you start them any time before your full retirement age. For example, if you start receiving benefits in 2017 at age 62, your monthly benefit amount will be reduced permanently by about 26 percent.

On the other hand, if you wait to start receiving your benefits until after your full retirement age, then your monthly benefit will be higher. The amount of this increase is two-thirds of one percent for each month –– or eight percent for each year –– that you delay receiving them until you reach age 70. The choices you make may affect any benefit your spouse or children can receive on your record, too. If you receive benefits early, it may reduce their potential benefit, as well as yours.

You need to be as informed as possible when making any decision about receiving Social Security benefits.

If you decide to receive benefits before you reach full retirement age, you should also understand how continuing to work can affect your benefits. Social Security may withhold or reduce

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your benefits if your annual earnings exceed a certain amount. However, for every month benefits are withheld, it increases your future benefits. That’s because at your full retirement age Social Security will recalculate your benefit amount to give you credit for the months in which benefits were reduced or withheld due to your excess earnings. In effect, it’s as if you hadn’t filed for those months.

Social Security’s mission is to secure your today and tomorrow. Helping you make the right retirement decisions is vital.

Then and Now: How Tax Brackets Have Changed Over the Past 100 Years

Tax season is here, and recent talk of massive tax reform has Americans even more focused on taxes. Yet even as tens of millions of taxpayers look to prepare their returns, tax reformers seek to put today’s tax rates into a longer-term context that looks back at the history of the American income tax system.

When you go back 100 years and look at the way Americans paid income taxes in 1917, you can see how the tax brackets a century ago in some ways stand in stark contrast to what we see today -- yet they also have some interesting similarities.

Tax brackets: 1917 vs. 2017

The tax brackets that Americans currently expect to pay for 2017 depend on filing status. You can get the whole set of 2017 tax brackets here, but below, you’ll find the brackets for joint filers:

Given the way that many people reminisce about the good old days, you might expect that the income tax brackets from 1917 -- which was just four years after the 16th Amendment to the U.S. Constitution authorized a broad-based federal income tax -- would be simpler. Yet as you can see below, the bracket structure was actually more complicated:

Those brackets look particularly intimidating by today’s standards. A top marginal rate of 67% meant that for every $3 top earners had in income, $2 went to the tax man.

However, there are a couple of things to keep in mind. First, this complicated structure of taxes came as a direct result of World War I. The previous year, the top bracket had been 15%, and the year before that had featured a 7% maximum tax rate. However, the War Revenue Act of 1917 sought to boost federal revenue in order to pay for war efforts. In addition to

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the changes to income taxes, the Act also created an excess profits tax, expanding corporate taxation as well as affecting individuals.

Inflation has made these nominal income brackets a lot different. According to the Tax Foundation, price changes have made the $2,000 in income that defined the top of the lowest 2% bracket worth about $35,000 in today’s dollars. Put another way, in order to get to a tax rate that’s above the current low bracket of 10%, one would have had to make the equivalent of $350,000 in income, and the top bracket in 1917 applied only to those earnings the modern equivalent of more than $35 million.

What to expect for the next 100 years

The first 100 years or so of the U.S. income tax system provides some insight into what the future will bring. Taxes have generally followed cycles, starting simple and then gradually becoming more complicated over time. Then, reforms start the cycle anew, creating new, simpler structures as a new benchmark from which future additions again begin to complicate matters. Just as 1917’s complex structure eventually gave way to simpler structures in the late 1920s, tax reforms in the mid-1980s dramatically simplified taxes by creating just two brackets that were later expanded to the current seven.

It’s possible that taxes will once again get simplified in the near future. The Trump administration and Republican lawmakers in Congress have both proposed tax plans that would feature fewer income tax brackets. There’s an outside chance that a simpler structure will apply by the time Americans have to file their 2017 taxes, although most political commentators believe that a 2018 tax law change is more likely.

Taxes have been a constant in the U.S. for more than a century, and they’ll remain so in the coming century as well. By staying up to date with tax changes and keeping a longer-term perspective, you can prepare yourself and take maximum advantage of any tax breaks that you’re entitled to use.

Practitioners Walk Fine Line on Silent Returns

This tax season, for the first time, the IRS intended to reject returns that were silent as to information related to the individual mandate under the Affordable Care Act. A silent return is any Form 1040 return where Box 61 is not checked, indicating full-year health insurance coverage, or where Forms 8965 and 8962 are not included, indicating that an exemption applies, or a premium tax credit was reconciled or a penalty payment is made.

But as a result of President Trump’s “Executive Order Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal,“ the service reversed course earlier this month, saying that it would begin accepting such returns. In a statement, it noted that the law was still in effect, but said that the change will reduce the burden on taxpayers, including those expecting a refund.

The reversal may leave tax preparers in an untenable position, according to Beanna Whitlock, a Reno, Nev.-based practitioner and educator, and former director of IRS National Public Liaison. “The IRS doesn’t have the ability to go out and collect the penalty from a taxpayer for not having health insurance,” she explained.

“Suppose a taxpayer qualifies for the Earned Income Tax Credit and is entitled to a $6,000 refund on the return,” she said. “If they checked the box that they had no health insurance, the penalty on those children would reduce the refund from $6,000 to $4,000. But if they file without disclosing that, what will the IRS do?”

“If a taxpayer doesn’t have health insurance, the only way the IRS can collect the penalty is by deducting it from their refund,” she noted. “The IRS can’t overtly go after the penalty, but I believe they will go after it based on receiving too much refund.”

Nicole Elliott, a former IRS senior advisor for the Affordable Care Act and a current partner with Holland & Knight, agreed, and noted that it’s not a change from previous years. “In years past they were not rejecting these returns,” she said. “This year they were going to start rejecting them, but because of the executive order to make things nice for taxpayers, they decided not to enforce the new set of rules.”

“But even though they’re not rejecting them, the law is still the law until Congress acts,” she said. ”They’re trying to walk a fine line. They won’t make things more stringent this year, but they have three years to look at a return. Given the executive order, it’s unclear if they would be going after people, but they can always say, ‘We saw you had a refund but you had a silent return, could you give us some more information?’ They can do a correspondence audit they want to. It’s a bit unclear how they would do it, but they could slice and dice silent returns once they come in the door.”

To lessen the potential for post-filing-season problems for practitioners, Whitlock recommends they have the taxpayer sign the following disclosure if they decide not to check Box 61 on the return:

“In the course of the preparation of my 2016 U.S. Federal Income Tax Return, I have voluntarily chosen not to report whether there are individuals on this return for which the Individual Shared Responsibility Payment (Penalty for Not Having Health Insurance) would apply or that no one on this return had Health Insurance for which the penalty may apply.“I understand that I may receive a communication from the Internal Revenue Service, experience delayed refunds, and face subsequent collection activity to recoup this payment.

“Although my return preparer has thoroughly explained the issue to me, I have made the decision not to complete Line 61 on the tax form and have so instructed my return preparer. “I further understand that should I request my preparer’s additional assistance in this matter the fee paid for the

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preparation of the return does not include representing me in this matter should the need arise. Should I engage my preparer to represent me in the matter, I understand an additional fee will be required and determined at that time.”

Tax Tips for Farmers in 2017

10 tips to help farmers get the largest return possible

As the old adage goes, “the taxman cometh.”

And like everyone else, farmers want to get the largest return possible.

Here are 10 tips to help you maximize your chances of having a stress-free tax season.

1. Keep good records – Keep all records up to date because disorganized books can be a reason to get audited.

2. Always file a tax return and file on time

3. Time capital gains and losses to reduce your overall tax burden – If farmers earn a capital gain early in the tax year, they can choose to recognize capital losses near the end of the year to offset the gains.

4. Plan borrowing to avoid losing tax deductions – Separating loans between personal and business can help tax preparers and CRA identify tax deduction opportunities.

5. Make mortgage interest tax deductible – Farmers could consider refinancing and investing the equity into their business.

6. Know your capital gain reserve benefits for property to a child – The reserve can be claimed up to a maximum of nine years, which spreads out the capital gain over 10 years. The maximum reserve is calculated as a percentage of the capital gain and can be claimed each year.

7. Use spousal Registered Retirement Savings Plans (RRSP) to split income – Moving reportable income to the spouse in a lower tax bracket can help ensure less tax is paid on the same income upon retirement.

8. Plan RRSP contributions – Tax deductions of RRSPs may be better used in years when you can anticipate a higher net income, whereas Tax-Free Savings Accounts (TFSAs) could be an option for years with lower incomes.

9. Invest in a TFSA – Earned interest or capital appreciation is not included as income.

10. Have a risk management plan – Farm risk management plans at the provincial and federal levels can help farmers protect their farm income and investments from unforeseen market circumstances

New Form I-9 in Effect

The new Form I-9—the form used to verify the identity and employment authorization of all individuals hired for employment in the United States – was released on November 14, 2016, and has been required for use since January 22, 2017. While the new I-9 is intended to be completed as a fillable PDF to reduce errors, it should not be confused with an electronic I-9. An employer must still print the completed I-9, obtain the appropriate signatures (which are not fillable via PDF), monitor reverifications, and retain the form for the proper retention period.

The form has new features and sections, which has led to many questions from employers, including topics such as how the forms should be stored, whether copies are required, how to obtain information from remote employees, who needs to complete the form, and what to do in case of a change in name or address.

1: Do I Need to Have Current Employees Fill Out the New Form?

The new I-9 should be used only for new employees and when you are required to reverify temporary work authorization. You should not request that current employees complete another I-9 simply because of the new form.

2: How Should I-9s Be Stored?

Separately. We recommend that you keep all I-9s in either a separate master file or a three-ring binder. Because I-9 files are subject to unique record retention laws, a separate master file or three-ring binder will help ensure that you retain these forms for as long as necessary and that you can readily discard them after the retention period expires.

For ease of organization, we even recommend removing an employee’s I-9 from the master folder or binder on their termination date and storing it a separate “terminated employee” I-9 file until the appropriate destroy date.

3: Are we required to make copies of the documents?

Usually not. Unless you participate in the E-Verify program, you’re not required to photocopy or scan documents for retention, and doing so is voluntary. However, if you wish to

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make photocopies of documents other than those used for E-Verify, you should do so for all employees, regardless of national origin, citizenship, or work authorization, and you must be consistent with this decision. In addition, these photocopies must be stapled to the I-9 and may not used for any other purpose.

4: Do All Workers Need to Complete the I-9?

No. Non-employees including volunteers, unpaid interns, and independent contractors should not complete an I-9, as none of these workers (if properly classified) are employees.

Additionally, those hired before November 6, 1986, those hired for casual domestic work in a private home, and those who do not perform work on U.S. soil, do not need to complete an I-9.Lastly, those providing labor to you, who are actually employed by a contractor providing contract services (e.g., employee leasing or temporary agencies), do not need to complete an I-9 with you; the I-9 should be done with their primary employer.

5: If an Employee Changes Their Name or Address, Do We Need to Do Another I-9?

Usually not. Except for certain government contractors or in some situations involving use of fraudulent documents, employers do not need to update or complete a new I-9 when an employee changes their legal name or address. An employee is not required to provide documentation to show that they have changed their name for the purpose of the I-9. However, USCIS recommends maintaining correct information on I-9s and taking steps to ensure a name change is legitimate. To update the employee’s original I-9, enter their new legal name in Box A of Section 3, and then sign, date and print your name on the final line.

6: How Long Should We Store an I-9?

Quite a while. Form I-9s should be retained for the full length of an individual’s employment with you. Then, after employment has ended, they must be stored for 3 years after the date of hire, or 1 year after the date of termination, whichever date is later.

Once an I-9 is past its retention period, you may destroy it. We recommend a secure shredding company to ensure proper disposal and that documents related to an employee’s identity are secure.

Proposed CMS Regs Could Result in Smaller Premium Tax Credits

The Centers for Medicare and Medicaid Services (CMS; part of the Department of Health and Human Services that administers programs including the health insurance marketplace) have issued proposed regs that would make a number of reforms to health insurance marketplaces, effective 2018. One of the changes could potentially result in a reduction in the amount of premium tax credits (PTCs) available to lower-income taxpayers under Code Sec. 36B.

The Code Sec. 36B PTC is available on a sliding scale basis for individuals and families with household incomes between 100% and 400% of the federal poverty line who are enrolled in an Exchange-purchased qualified health plan (QHP). A taxpayer’s PTC, regardless of the level of coverage in which the taxpayer enrolls, is determined by reference to the premium for the “applicable second lowest cost silver plan” in the rating area where the taxpayer resides and offered by the Exchange where the taxpayer enrolls in a QHP.

The term “silver plan” refers to one of the four tiers of QHPs offered through an Exchange (the other tiers are bronze, gold, and platinum). A silver plan is a QHP providing a “silver” level of coverage, which means that the insurance company pays benefits that are actuarially equivalent to 70% of the full actuarial benefits provided under the plan. Existing regs provide a de minimis “variation” under which a platinum, gold, or silver plan can deviate from the specified level of coverage by two percentage points in either direction. In other words, under current rules, a silver plan can provide benefits that are actuarially equivalent to 68% to 72%. (The rules for bronze plans are slightly different.)

Proposed PTC change. The proposed regs would adjust the de minimis range used for determining the level of coverage. Specifically, the proposed regs would increase the permissible variation to four percentage points under, and two percentage points over, the specified level of coverage. Under the proposed regs, a silver plan could provide benefits with an actuarial value of between 66% and 72%.

Presumably, a plan that provides a lower level of benefits will have lower premiums. Because of the way that PTCs are calculated, lower premiums would result in lower PTCs.

Other proposed changes. The proposed regs would also:

• . . . expand pre-enrollment verification of eligibility to individuals who newly enroll through “special enrollment periods” (i.e., times that fall outside of the annual open enrollment period) in Marketplaces, so as to require these individuals to submit documentation supporting their eligibility before coverage begins; • . . . allow an issuer to collect premiums for unpaid prior coverage before enrolling a patient in the next year’s plan with the same issuer; • . . . provide that, in reviewing QHPs, CMS would “defer to the states’ reviews in states with the authority and means to assess issuer network adequacy”; • . . . revise the timeline for QHP certification and rate review process for plan year 2018 to provide issuers with additional time to implement any proposed changes that are finalized prior to the 2018 coverage year; and • . . . shorten the upcoming annual open enrollment period for the individual market. Specifically, for the 2018 coverage year, CMS proposes an open enrollment period of Nov. 1, 2017, to Dec. 15, 2017.

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of their roles. Just be sure to have an accountability system in place to make sure tasks are completed properly in the period following training.

4. Host regular office hours

Bombarded with questions from every direction? Choose a certain time of the week or month to host office hours. Invite employees to chat, customers to drop in for coffee, or vendors to show you their new product. By having a set time for these encounters that may often seem like interruptions, you can do your best to eliminate them from batching sessions or periods when you’re trying to unplug.

Figuring out how to balance work with family and personal life is always easier said than done. How do you make time for what’s important to you? If you’re not sure how to get started and feel overwhelmed by your small-business tasks, consider sitting down with a SCORE mentor. They’ve probably been in your same position before!

Question of the Month

Learn What Happens When You Convert an Asset from Business to Personal Use

Question One of my clients who has a potential recapture of nearly $40,000 on the conversion of his pickup truck to personal use. Answer

How you compute depreciation in the year you convert the asset from business to personal use (you do this as if you sold the asset).·That no gain, loss, or recapture under Sections 1245 and 1250 is required, but that such gain, loss, or recapture is computed on a later disposition.

In their explanations of the regulations, the tax services simply omitted the fact that the no-recapture part referred to only “Section 1245 and Section 1250” recapture. Both tax services also failed to mention in their explanations the last sentence in the regulation that requires listed property recapture under IRC Section 280F. Here’s something to think about. Regardless of what rules you trigger at the date of conversion from business to personal use, you have a continuing business basis in the asset. For instance, if you recapture any Section 179 deductions or Section 280 listed property deductions because you now fail the “more-than-50-percent-use” test, that recapture simply increases the basis that comes into play in calculating gain or

Practice Management

4 Ways to Practice Work-Life Balance in Your Small BusinessMany small business owners will tell you the rise of the internet has changed how they work. Newer entrepreneurs may not even be able to imagine moving about their day without email, social media or mobile banking.

But while these tools make it easier to do business in many ways, the pressure of always being “on” can amplify stress for small business owners. Time management can be particularly challenging for entrepreneurs who may be building a business while keeping another job, raising a family or pursuing education, just to name a few examples.

If you’re feeling the pressure, try one or more of these time-management techniques to help you balance work alongside everything else.

1. Batch like tasks

Set aside time each day, week or month, and protect it! Use that time for tasks that take concentration, calculation, analysis or just tend to fall by the wayside when you get busy.

Confident you multitask like a pro? Try tracking your time for an entire day to see how you really spend your time – and how often you get distracted. A hard look at your minute-by-minute workday might surprise you!

2. Set communication guidelines

You’ve heard about people who turn off their WiFi after a certain time of day; or about people who don’t even let their cell phones into their bedrooms.

It may take some time for you to determine the right way to “switch off” after your workday. Whatever works for you, consider communicating it clearly to your small-business team.

Television producer Shonda Rhimes keeps it simple with this autoresponder on emails sent to her after normal business hours:

“I don’t read work e-mails after 7 p.m. or on the weekends, and if you work for me, may I suggest you put down your phone?”Similarly, you could encourage employees to use an email scheduling tool to compose messages if they have a burst of inspiration or feel more productive late in the day. Such tools hold outgoing emails until a specified time so that others don’t see incoming mail alerts at all hours.

3. Start delegating

Training staff members on various tasks takes time, but the return on investment can be huge for a business owner. Delegating tasks can empower employees to take ownership

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loss on your later disposition. Here’s an important point. You recognize gain or loss and Sections 1245 and 1250 recapture on the later disposition. Say we are talking about a vehicle and we are talking five years from now. What are the odds that you will even remember to calculate the gain or loss? Right. You need some type of tickler file or a note in the permanent file to track that asset to its later tax benefit or detriment. Example. Today you convert the vehicle for which you paid $50,000 from business to personal use. You drove the vehicle 125,000 miles total (100,000 business and 25,000 personal). Your net business depreciation, after recapture, is $17,000 at the time of conversion. During the next four years, your family drives the vehicle 50,000 miles, all personal. Next, you sell the vehicle for $5,000. The breakdown of this sale is as follows (pay attention to the business column):

Note the following results:

The $19,287 loss on the personal part of the vehicle is not deductible. The general rule here is that personal losses are not deductible, but personal gains are taxable.

You deduct the $8,713 loss on IRS Form 4797.Personal use erodes the business benefit. (Keep personal use low.)

IRS Mileage Rate Here’s another look from a real-life example. Marie Jones bought a $50,000 car that she deducted using IRS mileage rates. She then quit using the vehicle in business and her husband Bill started using the car. When Mrs. Jones used the car, she drove 20,000 miles a year for a total of 100,000 miles (all business, no personal miles). During this time, the IRS mileage rate depreciated her car by $20,000 (100,000 miles times 20 cents a mile on average in depreciation per mile).6

Mr. Jones drove the car 50,000 personal miles and then sold it outright to a third party for $7,000. Here is how this works out for Mrs. Jones:

Note the results:

The IRS rate contains depreciation and therefore causes gain or loss.

Again, the personal loss is not deductible, but had this been a personal gain (say, from the sale of an antique or classic vehicle), the gain would have been taxable.

The size of the personal loss declines substantially after the conversion where there’s no business use and only personal use.

Mrs. Jones deducts the $8,666 on IRS Form 4797. Final Notes Yogi Berra can describe what you need to remember about the assets that you convert from business to personal use. He would tell you, “It ain’t over ‘til it’s over.” Thus, converting your computer, desk, or vehicle from business to personal use does not eliminate tax ramifications when you finally dispose of those assets. Further, that conversion can trigger recapture taxes at the time of conversion. Make sure you are aware of the recapture and gain or loss rules and that you have a plan before you convert and dispose of these assets. Corporation. Your corporation is a separate legal entity from you. Thus, you do not convert a corporate asset to individual personal use. Instead, you either

purchase the asset from the corporation at fair market value, or

recognize the value of the asset transferred by the corporation to you as income to you or as a dividend from the corporation.

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News from Capitol Hill

Fauxahontas Proposes an IRS Takeover of Tax Preparation

The yearly ritual of submitting tax returns to the Internal Revenue Service (IRS) may not be something most of us look forward to doing, but do we really want the federal government to do it for us?

Sen. Elizabeth Warren (D-MA) hasproposed legislation that would require the IRS to offer you the convenience of doing your taxes for you. The actual bill would require the IRS to create programs that help taxpayers process and file their federal taxes for free. Sen. Warren says taxpayers spend, on average, 13 hours and about $200 for tax preparation services to file their tax returns. Of course, this is unnecessary (if not misleading), as there are plenty of free services available to most Americans.

Having the IRS take over the process of filing our tax returns is not an idea that will make America great again. Our tax system is based on the concept of voluntary compliance, and hollowing this out by replacing it with a government-run tax preparation system moves the IRS from a tax administration, collection, and enforcement agency on to giving “advice” to the people it’s taking money from -- a clear conflict of interest.

How long before such “advice” becomes mandatory?

Can American taxpayers trust the same government agency that wants as much of their money as possible to also decide which benefits and deductions they will receive? Even if such a system were convenient and free, would we really want it?

Sen. Warren’s office claims that the IRS’s Free File program is available to 70 percent of taxpayers, yet only three percent of those eligible actually use the program. Leave it to the government to figure out a way to offer something for free that hardly anyone thinks is worth using. Perhaps that is because the private tax software companies, who offer free electronic filing service to lower-income taxpayers, have figured out how to offer low cost and free services that are more user friendly for taxpayers.

Voluntary tax compliance is an important principle. Its intellectual roots trace back to the founding of our Republic. A government-administered system of tax preparation, which would target low income and lower middle income Americans, should not be added to any comprehensive tax reform that might pass Congress. Such a system would clearly undermine any notion of delivering fairness in implementing our federal income tax.

Our current system gives taxpayers many choices as consumers, and allows for the implementation of federal income taxes in a voluntary manner. Legislation such as that proposed by Sen. Warren would eliminate consumer choices in tax preparation.

Consumers expect a lot of things from tax preparation software and websites, including accuracy. They want to know that the program they use advises them of all available deductions and tax breaks and that they get those deductions and tax credits. Taxpayers also expect the programs to be very user friendly and secure in handling their personal financial information.

Should consumers trust the same IRS, that discriminated against some political groups because of the views they espoused, to also be fair and judicious in the handling of their personal financial information?

Consumers also expect quality help and customer service from the provider of their electronic tax filing products and services. Good luck getting that from the IRS.

The same federal government that will appear to be “helping” you by doing your tax returns for you is the same federal government that will soon take over the process entirely doing your taxes in a way that benefits the government. When it’s too late, you will realize this is help from the government you will regret accepting. The “free” government tax processing service will lack the convenience, security, features, and accuracy you’ve come to enjoy from the private services currently available.

Congress should reject the Warren bill, co-sponsored by Bernie Sander (D-VT) and six other Democratic senators, because there are better alternatives currently available. Market-based solutions are always better than giving the government even more power and competing with private tax software and service providers that help Americans file their taxes easily, securely, and without violating a conflict of interest. Private tax return services are vital parts of the marketplace and they have been innovators as opposed to the stale federal bureaucracy that will be motivated to collect more in taxes, not protect the taxpayers from being over taxed.

Cohen Introduces Bill to Protect Consumers from Fraudulent Tax Preparers Like Mo’ Money Taxes

Congressman Steve Cohen (TN-09) today introduced the Tax Return Preparer Accountability Act to protect consumers from unscrupulous tax preparation businesses like Memphis-based Mo’ Money Taxes. The legislation would give the Internal Revenue Service (IRS) explicit authority to ensure that paid tax preparers are adequately trained and maintain high standards of integrity. Cosponsors of the bill include Reps. Robert “Bobby” Scott (VA-03), Carolyn Maloney (NY-12) and Eleanor Holmes Norton (D.C.-At Large).

“Throughout the country, Mo’ Money Taxes was caught defrauding honest taxpayers with outrageous fees and cheating them out of the refunds they deserved,” said Congressman Cohen. “I’m glad that the Department of Justice shut them down so they can’t prey on Memphians anymore, but there could be other fly-by-night tax preparers just like them that trick hardworking Americans out of their refunds and rarely face any consequences. My bill would help stop these dishonest business practices and protect the pocketbooks of

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middle-class families and the federal treasury alike.”

In September 2013, a federal court permanently barred the owners and a former manager of Mo’ Money Taxes from preparing tax returns for others and owning or operating a tax return preparation business. Mo’ Money Taxes had been the subject of a U.S. Department of Justice Tax Division lawsuit seeking to shut the business down. The suit also accused its owners of creating and maintaining a business environment that encourages the preparation of fraudulent federal income tax returns. In 2015, three Mo’ Money tax preparers were indicted for conspiracy to defraud the United States and for aiding in preparation of 19 false and fraudulent tax returns.

Trump, Republicans Set Timeframe for Introducing Obamacare Replacement

Republicans, who control the White House, the U.S. House of Representatives and U.S. Senate, have long vowed to repeal the Affordable Care Act but have had difficulty agreeing on a detailed plan for replacing the signature domestic policy of former Democratic President Barack Obama.

But announcements from Trump and House Speaker Paul Ryan claimed progress. “We’re doing Obamacare, we’re in the final stages,” Trump told a news conference. “So we will be submitting sometime in early March, mid-March.” Earlier Thursday, Ryan told reporters on Capitol Hill that House Republicans would introduce legislation to repeal and replace Obama’s program after a 10-day recess that begins on Friday. “After the House returns following the Presidents Day break, we intend to introduce legislation to repeal and replace Obamacare,” Ryan said at his weekly press conference. Presidents Day is on Monday, February 20, and the House returns on February 27.

Ryan spoke shortly after many House Republicans huddled in a closed session with newly-installed U.S. Health and Human Services (HHS) Secretary Tom Price to discuss their options to change the 2010 law. The session was part pep talk and part laying out of talking points that can be delivered to constituents during the recess. Lawmakers left the meeting saying there was plenty more work ahead on thorny issues, including squeezing savings from the Medicaid health plan for the poor and disabled and possibly cutting some healthcare tax credits.

Price, who served in the House before becoming HHS secretary, told Republican lawmakers that on Obamacare repeal, “The president is all in on this,” according to a source who attended the meeting.

But the Republican lawmakers do not know exactly what they will be joining forces on. House Ways and Means Committee Chairman Kevin Brady told reporters there is “a range of options” for giving states more say over Medicaid, an important tool for delivering medical coverage to the poor under Obamacare. Brady said there were options to offset the cost of a Republican plan, such as capping the tax exclusion for employer-based healthcare plans.

Tax Reform, Health Care, and More: Speaker Ryan’s Interview on PBS NewsHour

Speaker Ryan appeared on PBS NewsHour for an interview with Judy Woodruff, where he discussed individual and corporate tax reform, repealing and replacing Obamacare, and working with the administration to solve some of the nation’s biggest challenges.

Key Quote: “Remember the promises of Obamacare: lower prices, more choices . . . those things did not happen. We believe we can make good on those kinds of promises, which is improve access to affordable health care coverage.”

Tax Reform

“We’re planning revenue neutral tax reform, which means you have to take away loopholes and special interest deductions if you’re going to lower tax rates. That’s clearly what we’re working on doing. That’s what the House blueprint that we ran on does do. It does affect both what we call the individual side of the tax code and the business side of the tax code.”

“With good, comprehensive, across-the-board tax reform, we really believe we can get the kind of economic growth we need, which will solve so many problems we have in this country. And fundamental tax reform is critical because now, we have the worst tax code in the industrialized world, bar none.”

Obamacare Repeal and Replace

“What we propose—and we ran on a replacement plan, by the way, so we’ve long had a replacement plan for Obamacare, and that’s exactly what we’re focused on right now—is building a replacement plan so we repeal Obamacare and replace it with patient-centered health care, which we are convinced will give us a better system at the end of the day.

“Remember the promises of Obamacare: lower prices, more choices . . . those things did not happen. We believe we can make good on those kinds of promises, which is improve access to affordable health care coverage. Right now, people aren’t getting affordable health care coverage. And so we really do believe, to get this right, you have to repeal and replace this law with something better. And that is exactly what we ran on in 2016.”

“Five states only have one plan left to choose from. One out of three counties in America have only one plan to choose from. Those are monopolies. Seventy percent of counties in America have one or two plans to choose from. Those are duopolies. . . . massive price increases, massive deductible increases. The law is collapsing while we speak.”

Solving Problems

“I think what people want to see happen in government is people work together to solve problems. People work

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anything about it.

Well, yes and no. Only Congress can repeal FATCA. But the whole FATCA edifice has been built on the intergovernmental agreements that Treasury has negotiated with more than 100 countries—agreements for which there is no statutory authority or Congressional ratification. Mr. Trump could take the teeth out of FATCA by announcing he has suspended negotiations for future agreements and won’t enforce the ones we have.So two cheers for Mrs. Persad-Bissessar for asking her question. Let’s hope President Trump gives the answer that Americans deserve, by making clear he intends to deliver on the GOP pledge to dismantle a bad law that never should have been passed.

Military Taxes

How to Deduct Mileage and Travel Expenses for National Guard and Reserves Travel

Did you know that members of the National Guard and military Reserves (including Reserve Corps of the Public Health Service) may be eligible to deduct travel related expenses when they file their tax returns? If you live more than 100 miles from your duty location and stay overnight, you may be able to deduct travel related expenses including mileage, hotel and lodging, parking fees, tolls, and half the cost of your meals. You may also be able to claim expenses if you live less than 100 miles away from your drill location, however, the details are different. In some cases these deductions can be worth hundreds, or even thousands of dollars per year.

Let’s take a deeper look at these deductions to see how to qualify and claim them on your taxes.

Claiming Mileage and Travel Expenses for Guard / Reserve Duty

together to iron out their differences, to make good on making a difference in people’s lives to fix this country’s problems—that is what I believe I was elected to do, and that’s what I’m doing.”

“I’m focused on getting that agenda done. I’m focused on making Congress work. I’m focused on making good on our promises that we made when we ran that I’m trying to implement now.”

Taming IRS Imperialism

The Caribbean nation of Trinidad and Tobago, Kamla Persad-Bissessar, the leader of the opposition coalition in parliament, recently did something no other world leader has done: She read the U.S. Republican Party platform.

There she discovered that the GOP had called for repeal of the Foreign Account Tax Compliance Act, or FATCA, which is best understood as a license for IRS imperialism. The Treasury Department has used the law to demand that foreign countries change their own laws so their financial institutions report information on their American account holders. Upon discovering the Republican call for FATCA’s repeal, Mrs. Persad-Bissessar wrote Donald Trump in January asking if he will keep this promise.

It’s a good question. Mrs. Persad-Bissessar, a former prime minister, wants to know because the Trinidad and Tobago parliament is now considering changing the nation’s laws to accommodate FATCA. It would make little sense to change her nation’s laws, she argues, if FATCA isn’t long for this world.Americans have an even bigger stake in the answer. In theory this 2010 law was designed to go after fat cats hiding their wealth offshore by adding a new reporting form for taxpayers with assets overseas. In reality, the law has become another example of gross federal overreach, adding another burden on Americans overseas who are already paying taxes where they live. ...

Mrs. Persad-Bissessar’s question to Mr. Trump has roiled the pro-FATCA establishment. The American ambassador (appointed by President Obama) has said FATCA is being held up by “some people with cocoa in the sun,” insinuating that only someone with something to hide could be opposed. The FATCA chief at Deloitte & Touche has been telling Trinidad and Tobago that FATCA is here to stay and Mr. Trump can’t do

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Do you travel over 100 miles for drill duty?

Eligibility: To be eligible to claim these expenses, you must be a member of a reserve component of the Armed Forces of the United States, including the Army, Navy, Marine Corps, Air Force, or Coast Guard Reserve; the Army National Guard of the United States; the Air National Guard of the United States; or the Reserve Corps of the Public Health Service.

Only duty-related travel: All related travel expense must be incurred for the sole purpose of serving on official duty in the Guard or Reserves. If your travel is not for the sole purpose of official duty, then you cannot claim it as an expense on your tax return.

How far did you travel? As mentioned, there are two standards for claiming travel related expenses on your tax return if you serve in the Guard or Reserves. Let’s get the easiest one out of the way first. If you live within 100 miles of your duty location, you can only claim travel expenses as a Miscellaneous Itemized Deduction, which is subject to a 2% limit. In basic terms, your travel expenses must be at least 2% of your adjusted gross income (AGI) before you can claim the deduction on your taxes.

Estate and Trust News

Form 1041 Charity: When You Do and When You Don’t Get a Tax Deduction

In 2014, there were 3,170,667 Forms 1041, U.S. Income Tax Return for Estates and Trusts filed. Of these, 107,567 returns had Charitable Distributions Deductions. [Source: Statistics of Income (SOI).] Statistically, it is infrequent that we see the Charitable Distribution Deduction on Form 1041 tax filings.

That said, as tax professionals, we need to understand “the why” and “the when” of the deduction. Individuals may decide to donate to charities at any time and, in compliance with the requirements, may use their contributions on their Form 1040, Schedule A, as itemized deductions.

As entities, estates and trusts do not have the freedom to decide to make a charitable contribution. Their constraint is the document that guides their actions: The Will and / or The Trust.

Bequest vs. Charity Paid from Gross Income

Remembering that Form 1041 is an income tax return makes it easier to grasp the concept that a charitable deduction is available only on payments to charities paid out of the taxable income of the fiduciary, not out of the principal (corpus). Therefore, charitable donations that are bequests, i.e., that are paid from the corpus of the trust or estate, do not create a charitable tax deduction for the fiduciary income tax return.

Form 1041 - Schedule A - Charitable Deduction

This schedule is found on Form 1041 at the top of page 2. General Instructions: Generally, any part of the gross income of an estate or trust (other than a simple trust) that, under the terms of the will or governing instrument, is paid (or treated as paid) during the tax year for a charitable purpose specified in section 170(c) is allowed as a deduction to the estate or trust. It isn’t necessary that the charitable organization be created or organized in the United States.

This is the rule:

Form 1041-A, U.S. Information Return Trust Accumulation of Charitable Amounts, must be filed each year a complex trust claims a charitable deduction. Split-interest trusts (charitable remainder trusts, charitable lead trusts and pooled income funds) are not required to file Form 1041-A. Instead, they file Form 5227, Split-Interest Trust Information Return. An estate is not required to file Form 1041-A.

When an estate claims a charitable deduction, the amount of the deduction is calculated on Schedule A of Form 1041. No other reporting is required.

On the other hand, when a trust, other than a split-interest trust or a non-exempt charitable trust, claims a charitable deduction, it files Form 1041-A, U.S. Information Return Trust Accumulation of Charitable Amounts.

Simple trusts are required to distribute currently to the beneficiaries all the income for the year determined under section 643(b) and related regulations. By definition, simple trusts neither distribute corpus nor make tax-deductible charitable distributions.

When the trust or estate has tax-exempt income as well as charitable contributions paid out of income, then the charitable deduction must be prorated. This is so that only the amount of charitable contribution that is paid out of the taxable income creates a tax deduction. This makes sense. Any portion of the donation that is paid from tax-exempt income does not receive tax-deduction treatment.

In a similar manner, since only the donation paid from taxable income is tax-deductible, then any donation paid from corpus or capital gains attributed to corpus will not be eligible for tax-deduction treatment.

Practical application

When working with fiduciary entities where charitable donations were made, tax professionals must be clear as to whether the donations were as the result of a specific bequest or, alternatively, whether the documents called for the donation to come from the fiduciary assets or from the fiduciary income. The source of the donation will dictate its tax treatment.

As a service to our high net worth individual tax clients, we can share this knowledge and encourage them to review

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their estate plans with their attorneys to ensure maximum deductibility of charitable contributions made from trusts.

Trust Ownership of S Corporation Stock – QSSTs and ESBTs

Only certain types of trusts are eligible to be S corporation shareholders. Having an ineligible shareholder can cause a corporation to lose its S status. Although not all trusts are eligible shareholders, a variety of trusts do qualify. This article, discusses the eligibility rules for two of the types of trusts that qualify: qualified Subchapter S trusts (QSSTs) and electing small business trusts (ESBTs).

QSSTs. A type of trust that is a permitted shareholder of S corporation stock is a QSST. (Code Sec. 1361(d); Reg. § 1.1361-1(j)) A QSST is treated as a Subpart E trust with respect to its beneficiary. To qualify as a QSST, the trust (whether inter vivos or testamentary) must satisfy each of the following requirements during the entire period that the trust is a QSST:

• . . . The trust must be a domestic trust. (Code Sec. 1361(c)(2)(A))

• . . . The trust must have only one current beneficiary (referred to as the “current income beneficiary”) during the life of that beneficiary.

• . . . The current income beneficiary must be an individual who is a citizen or resident of the U.S.

• . . . All trust income must be distributed (or be required to be distributed) annually to the current income beneficiary.

• . . . Any corpus distributed during the life of the current income beneficiary must be distributed only to that beneficiary. (Reg. § 1.1361-1(j)(1))

• . . . No distribution of trust income or corpus may be made in satisfaction of the grantor’s legal obligation to support or maintain the current income beneficiary. (Reg. § 1.1361-1(j)(2)(ii)(B)) Consequently, a parent who sets up a QSST for a minor child should preclude the trustee from making trust distributions to that child in satisfaction of the parent’s legal obligation to support. (Reg. § 1.1361-1(j)(2)(ii)(C))

• . . . The trust must terminate no later than the current income beneficiary’s death.

• . . . If the trust terminates before the current income beneficiary’s death, all trust property must be distributed to the current income beneficiary.

• . . . The current income beneficiary must make a timely QSST election.

QSST election. To be a QSST, the current income beneficiary (or, if the current income beneficiary is under a legal disability,

that beneficiary’s guardian or other legal representative) must sign and timely file a QSST election statement containing the information prescribed by Reg. § 1.1361-1(j)(6)(ii). The QSST election must be filed with the service center where the S corporation files its income tax return. The QSST election must be made separately with respect to each corporation whose stock is held by the trust. Once made, a QSST election may be revoked only with the consent of the Service, which consent must be obtained through a letter ruling request. (Reg. § 1.1361-1(j)(11))

Timely election. The timeliness of a QSST election is circumstance-dependent:

• . . . In the case of a transfer of stock to a trust or the filing of an S election by a C corporation held by a trust, the QSST election must be filed within the 16-day-and-2-month period beginning on the day that the trust first holds S corporation stock, whether by transfer or election. (Reg. § 1.1361-1(j)(6)(iii)(A); Reg. § 1.1361-1(j)(6)(iii)(B))

• . . . In the case of a Subpart E trust that satisfies the QSST requirements and intends to become a QSST, the QSST election must be filed at any time, but no later than the end of the 16-day-and-2-month period beginning on the day that the trust ceases to be a Subpart E trust. (Reg. § 1.1361-1(j)(6)(iii)(C))

• . . . In the case of an electing trust that satisfies the QSST requirements and intends to become a QSST, the QSST election must be filed at any time, but no later than the end of the 16-day-and-2-month period beginning on the date on which the related estate ceases to be treated as a shareholder. (Reg. § 1.1361-1(j)(6)(iii)(C))

• . . . In the case of a testamentary trust that satisfies the QSST requirements and intends to become a QSST, the QSST election must be filed at any time, but no later than the end of the 16-day-and-2-month period beginning on the day after the end of the 2-year period. ( Reg. § 1.1361-1(j)(6)(iii)(D))

Termination of QSST status. A QSST that fails at any time to meet all of the requirements described above (other than the income distribution requirement) ceases to be a QSST as of that time. (Reg. § 1.1361-1(j)(5)) A QSST that fails to meet the income distribution requirement, but satisfies all of the other requirements, ceases to be a QSST as of the first day of the first tax year beginning after the first tax year the trust failed to meet the income distribution requirement. If a corporation’s S election is inadvertently terminated as a result of a trust ceasing to meet the QSST requirements, the corporation should consider seeking Code Sec. 1362(f) relief.

ESBTs. Another type of trust that is a permitted shareholder of S corporation stock is an ESBT. (Code Sec. 1361(e); Reg. § 1.1361-1(m)) Key to understanding the ESBT requirements is distinguishing between the meanings of “beneficiary” and “potential current beneficiary.”

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Once made, an ESBT election may be revoked only with the consent of the Service, which consent must be obtained through a letter ruling request. ( Reg. § 1.1361-1(m)(6)) Unlike a QSST, a trust that is a Subpart E trust, in whole or in part, is eligible to make an ESBT election so long as that Subpart E owner is a permitted shareholder. (Reg. § 1.1361-1(m)(2)(v); Reg. § 1.1361-1(m)(4)(ii))

Timely election. The timeliness of an ESBT election is circumstance-dependent:

• . . . In the case of a transfer of stock to a trust or the filing of an S election by a C corporation previously held by a trust, the ESBT election must be filed within the 16-day-and-2-month period beginning on the day that the trust first holds S corporation stock, whether by transfer or election.(Reg. § 1.1361-1(m)(2)(iii); Reg. § 1.1361-1(j)(6)(iii)(A); Reg. § 1.1361-1(j)(6)(iii)(B))

• . . . In the case of a Subpart E trust that satisfies the ESBT requirements and intends to become an ESBT, the ESBT election must be filed at any time, but no later than the end of the 16-day-and-2-month period beginning on the day that the trust ceases to be a Subpart E trust. (Reg. § 1.1361-1(m)(2)(iii); Reg. § 1.1361-1(j)(6)(iii)(C))

• . . . In the case of an electing trust that satisfies the ESBT requirements and intends to become an ESBT, the ESBT election must be filed at any time, but no later than the end of the 16-day-and-2-month period beginning on the date on which the related estate ceases to be a permitted shareholder. (Reg. § 1.1361-1(m)(2)(iii); Reg. § 1.1361-1(m)(2)(iv); Reg. § 1.1361-1(j)(6)(iii)(C))

• . . . In the case of a testamentary trust that satisfies the ESBT requirements and intends to become an ESBT, the ESBT election must be filed at any time, but no later than the end of the 16-day-and-2-month period beginning on the day after the end of the 2-year period. ( Reg. § 1.1361-1(m)(2)(iii); Reg. § 1.1361-1(m)(2)(iv); Reg. § 1.1361-1(j)(6)(iii)(D))

Termination of ESBT status. An ESBT that fails to meet all of the requirements at any time ceases to be an ESBT at that time; its last day as an ESBT is the immediately preceding day. (Reg. § 1.1361-1(m)(5)(i)) In addition, a trust ceases to be an ESBT on the day after the trust disposes of all S corporation stock. (Reg. § 1.1361-1(m)(5)(ii)) If, however, the trust disposes of the S corporation stock under the installment method of reporting (under Code Sec. 453), then the trust will continue to be an ESBT until the day after the trust receives the last installment payment or disposes of the installment obligation. If a corporation’s S election is inadvertently terminated as a result of a trust ceasing to meet the ESBT requirements, the corporation should consider seeking Code Sec. 1362(f) relief.

Conclusion. When creating a trust to own S corporation stock, it is important that the trust be drafted to qualify as one or

For purposes of the ESBT rules, a beneficiary is any person who has a present, remainder, or reversionary interest in a trust. (Reg. § 1.1361-1(m)(1)(ii)(A)) The term beneficiary does not include, however, a person in whose favor a power of appointment could be exercised, until the holder of the power of appointment actually exercises the power in favor of such person. (Reg. § 1.1361-1(m)(1)(ii)(C)) A potential current beneficiary, on the other hand, is any person with respect to any period who, at any time during such period, is entitled to, or in the discretion of any person may receive, a distribution of trust income or principal. (Reg. § 1.1361-1(m)(4)(i))

In order to qualify as an ESBT, the trust (whether inter vivos or testamentary) must satisfy each of the following requirements during the entire period that the trust is an ESBT:

• . . . The trust must be a domestic trust. (Code Sec. 1361(c)(2)(A))

• . . . The trust cannot have as a beneficiary any person other than an individual (including an individual who is a nonresident alien), an estate, a charitable organization (described in Code Sec. 170(c)(2) through Code Sec. 170(c)(5)) or a state or local government (described in Code Sec. 170(c)(1)) that holds a contingent interest and is not a potential current beneficiary.

• . . . The trust cannot have as a potential current beneficiary any person who is not a permitted shareholder of S corporation stock.

• . . . No interest in the trust can be acquired by purchase.

• . . . The trust cannot be a QSST.

• . . . The trust cannot be exempt from income tax.

• . . . The trust cannot be a charitable remainder annuity trust or charitable remainder unitrust (as defined in Code Sec. 664(d))

• . . . The trustee must make a timely ESBT election.

ESBT election. To be an ESBT, the trustee of the trust must sign and timely file an ESBT election statement containing the information prescribed by Reg. § 1.1361-1(m)(2)(ii). If there is more than one trustee, any trustee with authority to legally bind the trust may sign the election statement. The ESBT election must be filed with the service center where the S corporation files its income tax return.

Generally, only one ESBT election is made for each trust, regardless of the number of S corporations owned by the trust and regardless of whether the trust has separate shares pursuant to Code Sec. 663(c). If, however, the ESBT holds stock in multiple S corporations that file in different service centers, the ESBT election must be filed with all the relevant service centers where the corporations file their income tax returns.

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more of the eligible types of trusts that are permitted to be S corporation shareholders. Failure to properly draft a trust that becomes an S corporation shareholder can result in the S corporation losing its S corporation status. While lost S corporation status can be reinstated, the reinstatement process is time consuming and costly.

People in the Tax News

IRS Selects New Advisory Council Members

The IRS has announced the selection of five new members to the IRS Advisory Council (IRSAC).

One such member is Phyllis Jo Kubey, a member of the ncpeFellowship and a frequent contributor to the resources of the Fellowship. Phyllis knowledge and expertise, along with her organizational support will be an outstanding contributor to the IRS as they work through these most difficult times. Congratulations Phyllis –

A Loss to the Tax Professional Community

Norma Jean Billingsley Ogle, 77 of Hiram, passed away Saturday, February 11, 2017 peacefully in the presence of her family. She was preceded in death by her husband of nearly 50 years, Gerald Wayne Ogle. Born in Atlanta on October 6, 1939, she was the loving daughter of O. C. and Melba Billingsley. She was a graduate of Campbell High School in Smyrna and attended Georgia State University.

In addition to her husband, Wayne and her parents, she is preceded in death by her brother, Charles Raymond Billingsley. She is survived by her three daughters, Julie Blan (Ben) of Hiram, Keelie Floyd (Jerry) of Greenville, TX, Melanie Stout (David) of Euharlee, GA. She was lovingly known as “Grano” to her granddaughter Kristi Skelton, grandson Austin Sparks, step-grandson Bryan Floyd, great-granddaughter Emma Skelton, and godson C. Mark Palm as well as many ‘adopted’ children, grandchildren and great-grandchildren, nieces and nephews and extended family and friends.

Mrs. Ogle was a practicing accountant for over forty-five years and was the Executive Director of the Georgia Association of Accountants and Tax Professionals for 25 years. She was active in both GAATP and the National Society of Accountants who presented her with two of their top awards, Accountant of the Year in 2003 and State Director of the Year in 1997. For two years, she was Chair of the NSA Scholarship Foundation Board of Trustees which awards scholarships to dedicated students who are committed to a career in accounting. She cherished the many happy years spent working and traveling across the country with friends she made through these organizations.

Ms. Norma, a constant at the ncpe seminars in Savannah,

GA was a constant to register and handle any issues at the seminar. Her smiling face will be missed.

Howard Stern Sued for Reportedly Airing Woman’s IRS Conversation

It looks like the King of All Media is getting some unwanted attention.

The Wrap is reporting Howard Stern is being sued by a woman who claimed that her personal and tax information were broadcast on Stern’s show.

In her suit filed in Massachusetts federal court, Judith Barrigas insisted she was on the phone with the IRS service center in May 2015 talking through the potential misapplication of her tax refund, when IRS agent Jimmy Forsythe called the 63-year-old celebrity radio jockey’s SiriusXM show on another line during their conversation.

“While on the phone with Agent Forsythe, Mrs. Barrigas suddenly began to receive a barrage of text messages and phone calls from unknown callers/individuals informing her that her personal information and phone number were being aired on Stern’s show,” said the lawsuit, as reported by the celebrity news site.

“Mr. Stern and ‘The Stern Show’ were fully aware that they were broadcasting and disseminating Mrs. Barrigas’ tax and personal information, yet failed to take any action to stop the broadcast,” revealed the complaint.

“Mr. Stern and ‘The Stern Show’ joked about the publication and broadcast of Mrs. Barrigas’ tax and personal information and conversation with the IRS’s Agent Forsythe and used the broadcast and the humiliation of Mrs. Barrigas as a source of amusement for their listeners.”

Barrigas also claimed that the phone conversation can still be found on the Internet today and she’s received numerous calls and texts that “were harassing in nature and continued for many days, leaving Mrs. Barrigas in a frantic, high-anxiety state.”

In addition to Barrigas’ search for employment was reportedly impacted by the broadcast, she also “has difficulty sleeping and eating since the incident, and has sought treatment as a result.”

Barrigas, who is also suing the United States of America for negligence and other counts, is seeking unspecified damages. Stern has not publicly commented on the claim.

Mary Tyler Moore and The IRS

The bewitching glamor of the 1970s IRS.

The Mary Tyler Moore Show was a Saturday night childhood

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staple in the days of three TV channels. Through the miracle of Amazon, I revisited my 10-year-old viewing habits by downloading an episode from Season 1, 1040 or Fight, in which the heroine gets examined by the IRS.

The fictional tax world of 1970 is a fabulous place. For example, the IRS does evening house calls, scheduling the exam in Mary’s bachelorette pad at 8:03 p.m. The IRS agent shows up right on time with his calculator.

Mary’s friend Rhoda teases her for being so nervous about meeting a “tin man” from IRS when she can deal coolly with a date with a “$20,000 a year engineer.” But who wouldn’t be flustered by the sharp-dressed, tousle-haired young man from IRS?

The agent falls for Mary. That seemed to happen to most young men in the show. He then strings out the exam so he can see her more. I’m sure that’s against all sorts of IRS rules now, and perhaps would be criminal stalking.

Finally the exam settles, and Mary has a very small adjustment (under $100) on, as I recall, about $8,700 of income. She is ecstatic, and agrees to see him again. It must not have worked out, because the Wikipedia episode list has her in a “budding romance” with someone else four shows later.

While the show has lots of very ’70s things — note the ferns and shag carpet – it holds up a lot better than I thought it would. Not the IRS exam part, though.

Editor’s Note: Many of us remember this episode and remembering it again made the loss of this great female comedian all that much more special.

IRS Professional Responsibility Lawyer Charged In Drug Distribution Conspiracy

As tax filing season gets underway, the IRS and Justice Department normally roll out enforcement examples of tax cheats who are caught and brought to justice. These accounts probably have some deterrent effect, particularly for taxpayers who are huddled over their tax returns. Let’s see, should you claim that iffy deduction? But this isn’t the usually timed story. Jack Vitayanon, an attorney adviser in the IRS’s Office of Professional Responsibility and an adjunct professor at Georgetown Law School, has been arrested and charged with conspiring with others to distribute at least 500 grams of methamphetamine.

As detailed in the complaint, Mr. Vitayanon conspired with others in Arizona and on Long Island to distribute meth for several years. Vitayanon recently negotiated with undercover special agents and shipped 460 grams of meth from his apartment in Washington D.C. to Long Island via Federal Express. The recipient of the package, acting at the direction of law enforcement, recorded an online video chat with Vitayanon on December 15, 2016 and during the recorded conversation Vitayanon was observed in his residence smoking what appeared to be meth from a glass pipe, according to the complaint.

A search of the defendant’s Washington D.C. apartment executed pursuant to a court-authorized search warrant led to the seizure of additional quantities of suspected methamphetamine, drug paraphernalia, packaging materials and drug ledgers. “As alleged, the defendant – a federal attorney working for the IRS’s Office of Professional Responsibility – broke bad and supplemented his income by selling distribution quantities of methamphetamine,” stated United States Attorney Capers. “The defendant will now be held to account for his alleged criminal conduct.”

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Surprisingly, the IRS is prohibited by law from labeling people as “illegal tax protesters.” In 1998, Congress even ordered the IRS to purge “protester” from its files. Yet the label remains hard to eliminate, according to an audit report. Using illegal tax protester or other similar designations can stigmatize taxpayers. Congress thought some people were being permanently called tax protesters even though they later stopped acting out. But IRS employees still occasionally refer to taxpayers as “tax protester,” “constitutionally challenged,” or other designations. The report says all IRS employees need reminders not to use ‘illegal tax protester’ or similar labels. In response, IRS management agreed.

There are plenty of negative things you can be called in the tax world–for example “aggressive” or “delinquent”–one of the worst to be called is “frivolous.” In IRS lingo it’s about as bad as you can get, just shy of the other “f” word, “fraudulent.” If the IRS finds your argument or tax position to be frivolous, it can mean a 20% accuracy-related penalty under Section 6662; and a whopping 75% civil fraud penalty under Section 6663.

If you take a position deemed frivolous on an amended return asking for money back, you can also be hit with a 20% erroneous claim for refund penalty (Section 6676). On top of all this, if you file your return late and it includes frivolous positions, the usual penalties for fraudulent failure to timely file an income tax return can be tripled up to another 75% (Section 6651(f)). It is not only frivolous tax returns that trigger penalties, but frivolous other tax forms, too. Under Section 6702, there’s a $5,000 penalty for frivolous tax returns and you can be separately penalized for sending in even seemingly innocuous tax forms throughout the year.

Court positions are affected as well. If you argue frivolous tax positions in court, the court can impose a penalty of up to $25,000 if it concludes that: (1) your position is frivolous, or (2) you instituted a proceeding primarily for delay, or (3) you unreasonably failed to pursue your administrative remedies. (In other words, you went to court without going through all IRS appeals procedures first.)

In the law’s eyes, even worse than taking a frivolous tax position is encouraging others to do so. That can bring a whole raft of penalties. Promoters can include some accountants, tax lawyers, and people who organize tax protester movements. The feds can even bring criminal charges. The IRS publishes a list of frivolous positions. Still, a surprising number of people make these arguments. For example, Scott Grunsted claimed the federal government can only tax income that is federally connected and not from the private sector. Nope, he lost.

In Worsham v. Commissioner, a lawyer concluded that he wasn’t required to file returns or pay taxes. The IRS said he was a protester making frivolous and groundless arguments. Since it was his first batch of flaky arguments, the court just warned him. He had to pay taxes, penalties and interest, but not the big penalties reserved for people formerly known as protesters. Not all cases of this sort end this happily. It can be surprisingly difficult to separate legitimate arguments

The IRS said it could not comment on “specific personnel matters.” But the agency said it held its employees to “high standards and does not tolerate inappropriate behavior.” If there were questions about an employee’s conduct, the agency said it would work with law enforcement. Notably, of course, the charges in the complaint are merely allegations. Like all criminal defendants, this defendant is presumed innocent unless and until he is proven guilty. The government’s case is being prosecuted by the Office’s Long Island Criminal Section. Assistant United States Attorney Charles N. Rose is in charge of the prosecution.

Regardless of whether this defendant is ultimately convicted, it is worth remembering--especially at this time of year--that tax crimes too can be quite serious. Indeed, Al Capone was convicted not of murder, graft or racketeering, but of income tax evasion. No matter how you make your living, the tax laws apply. Deductions can be a problem. We generally pay tax on net income, not gross income. But for criminals, claiming expenses can be a problem. If you report your illegal income--which may be admitting to a crime--tax deductions can be limited.

Illegal payments generally aren’t deductible. And as the medical marijuana industry is learning, Section 280E of the tax code denies even plain vanilla tax deductions for those dealing in controlled substances. In the past, the leading trade publication for the marijuana industry reports that some in the industry are being pushed underground. Whatever your business, be careful out there.

Not Paying Taxes to Protest Trump? Watch Out For IRS

Can you refuse to pay your federal income taxes if you dislike President Trump, or want him to release his tax returns? Even ardent protesters probably know they will have to pay, and pay even more because of the delays and penalties. There are histories to tax protests collected here. Attempting to tap into those traditions, some are saying that they will not pay, withholding taxes to fight Trump. Best case, you will get penalties and interest added to your tax bill. Chances of prosecution are probably small, but make no mistake, you will still have to pay. Anti-Trump rallies are planned for 15 April, the normal tax day. One big focus, it appears, remains public access to President Trump’s tax returns.

The right to protest may be fundamental, but tax protests seem to be treated differently than many others. Despite free speech protections, some arguments about taxes seem almost as incendiary as yelling ‘fire’ in a crowded theater. Tax protests come in all shapes and sizes. From throwing tea into Boston Harbor, paying the IRS in dollar bills, etc. One man set his flock of chickens loose in an Oregon tax office in protest.Protestors gather outside the World Trade Center in Portland, Ore., Tuesday, Jan. 24, 2017. Approximately 150 protestors gathered to protest President Donald Trump and as a show of support for Sen. Jeff Merkley, D-Ore., whose offices are in the building.

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FBI: Former New Jersey Coin Dealer Admits Identity Theft, Income Tax Evasion

A former resident of Old Tappan, New Jersey, today admitted evading personal income taxes on more than $400,000 in income in 2013, U.S. Attorney Paul J. Fishman announced.William Dominick, 68, of Collier County, Florida, pleaded guilty before U.S. District Judge Anne E. Thompson in Trenton federal court to an information charging him with one count of tax evasion and one count of identity theft.According to documents filed in this case and statements made in court:

Dominick owned and operated Westwood Rare Coin out of his home in Old Tappan. He was required to include income earned by Westwood Rare Coin on his individual IRS 1040 form. During calendar year 2013, Dominick failed to report $400,000 USD in income earned by Westwood Rare Coin. He did this by using other people’s identities to open credit cards to purchase bulk quantities coins from the U.S. Mint in order to corner the market. Dominick then sold those coins through his business, retained the proceeds for his personal use, and failed to include the proceeds on the tax return that he signed and filed with the IRS.

The count of identity theft to which Dominick pleaded guilty carries a maximum potential penalty of 15 years in prison; the count of tax evasion carries a maximum potential penalty of five years in prison; both counts also carry a fine of up to $250,000. Sentencing is scheduled for May 23, 2017.

Under terms of his plea agreement, Dominick will file amended returns and make full restitution for years 2010 through 2014.U.S. Attorney Fishman credited special agents of the FBI, under the direction of special agent in charge Timothy Gallagher; special agents of IRS-Criminal Investigation, under the direction of Special Agent in Charge Jonathan D. Larsen; and inspectors of the U.S. Postal Inspection Service, under the direction of Postal Inspector in Charge James V. Buthorn, with the investigation leading to today’s guilty plea.

Michael Jackson Tax Judge Allows Trial Testimony About Intellectual Property Mashups

How does one properly value Jackson’s name and image at

from flaky ones. So whatever your position, consider getting a disinterested second opinion. Many civil and criminal tax cases start with taxpayers blindly following their advisers. Remember Wesley Snipes?

Washington Businessman Pleads Guilty to Filing Fraudulent Federal Tax Return

A Chelan Falls, Washington man pleaded guilty yesterday in the U.S. District Court in Yakima, Washington to filing a fraudulent 2011 federal tax return, announced Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division. According to documents filed with the court, from 2009 through 2012, Jose L. Echeverria, 46, owned and operated a produce sales business. Echeverria filed fraudulent individual income tax returns for each of these years and underreported his income by a total of approximately $564,292. Echeverria admitted that he caused a tax loss of approximately $183,191. Sentencing is scheduled for May 11. Echeverria faces a statutory maximum sentence of three years in prison, a period of supervised release, restitution and monetary penalties. Acting Deputy Assistant Attorney General Goldberg commended special agents of Internal Revenue Service-Criminal Investigation, who conducted the investigation, and Trial Attorneys Lisa L. Bellamy and Gregory Bernstein of the Tax Division who prosecuted the case. Acting Deputy Assistant Attorney General Goldberg also thanked the U.S. Attorney’s Office for the Eastern District of Washington for its assistance. Additional information about the Tax Division and its enforcement efforts may be found on the division’s website. Plastic Surgeon Sentenced to Jail in Tax Fraud Case

A New Jersey plastic surgeon who created shell companies to hide millions in income has been sentenced to three years in prison.

David Evdokimow was sentenced on Thursday in federal court in Newark.

The Harding Township doctor was convicted of falsely claiming $5.8 million as business expenses after a three-week trial in November 2015.

Prosecutors say he actually spent that money on clothing, homes, artwork and jewelry. He avoided paying $3 million in taxes.

Evdokimow already paid the taxes he owed but was assessed with a $96,000 fine.

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With such questions hanging in the background, Holmes issued a ruling on Thursday pertaining to Weston Anson, a licensing expert, whose report included such speculation as a “Michael Jackson theme park.”

The most significant objection to Anson’s testimony dealt with how the expert incorporated the value of trademarks, copyrights, and rights to receive royalties as a performer. Jackson’s estate argued that “mashups” of different rights violated a requirement that every item of property be valued separately.

“This is an especially interesting legal question,” writes Holmes in his order. “In a world without transaction costs, it wouldn’t matter if publishing rights, performance royalties, trademarks, etc were valued separately because a rational buyer would value them as if they could be put together in the most profitable way even if they were bought separately. But it is entirely possible that trial will show that these separate rights would be more valuable if used together. If so, and if the Estate owned these separate rights, it might well be the case that they are worth more together than they would be if summed separately.”

Holmes is allowing Anson’s report and testimony about intellectual property synergies.

Separately, the judge has deferred the issue whether it’s the IRS’ burden to show Jackson’s right of publicity is worth hundreds of millions or whether it’s the Jackson estate’s burden to show it’s worth just $2,105.

Michael Jackson Estate Tax Case Moving Forward

Most estate tax practitioners will tell you estate tax it is all about valuation when assets are other than cash and marketable securities. The estate tax case of the Michael Jackson estate is an ideal demonstration. Tax Court proceedings are presently underway in that case.

The fiduciaries of Michael Jackson’s estate filed an estate tax return showing a value of $7 million. The IRS issued a notice of deficiency claiming a value of $1.32 billion, and demanded additional estate taxes of $505.1 million and $196.9 million in penalties and interest. Wow!

A large issue in the case, and one that is relevant to other celebrities, is the value at death of Jackson’s name and likeness. The estate reported the value at $2,105.00, claiming his reputation was tainted by child-abuse allegations and strange behavior. The IRS pegs that value at $434 million. At the time of his death, he was rehearsing for a comeback tour.

The valuation at death is not supposed to look at post-death events, but there is usually leakage on this issue that informs a court’s judgment. The question for any asset is what a willing buyer would pay for the asset from a willing seller on the date of death (or on a date that is 6 months later if alternate valuation is elected). That Jackson’s estate did a phenomenal job of exploiting his name and likeness after his death is not

the time of his death?

This month, a groundbreaking tax trial begins over what Michael Jackson’s estate owes the Internal Revenue Service for the value of the late entertainer’s image and likeness when he died in 2009. The dispute’s significance not only derives from Michael Jackson’s fame and the stakes — perhaps as much as $1 billion — but also first impression legal questions that will impact how celebrities prepare for their eventual demise.

Maybe it’s no surprise then that as the case nears trial proceedings in California, U.S. Tax Court judge Mark Holmes is having to figure out whether to allow testimony and expert reports from some of the most distinguished legal scholars out there. For instance, UCLA Law School professor Eugene Volokh saw his report on behalf of the Estate ruled inadmissible in December while copyright legend David Nimmer’s report on behalf of the IRS is currently pending a motion to preclude.

The big issue for Holmes to settle is how to properly value Jackson’s right of publicity at time of death. That’s not simple. Does it mean the judge should put emphasis on how Jackson’s name was tarnished before he died, emphasizing charges of child molestation and rumors of drug use? Should he ignore the lucrative deals that executors of Jackson’s estate made with Cirque du Soleil and others after Jackson died? Can the judge incorporate post-death earnings by maybe seeing it through the prism of what a theoretical buyer might have paid Jackson for the right to use his name and image for eternity?

Quincy Jones’ Royalties Dispute With Michael Jackson Estate Inches Toward Trial

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“I’m going to tear up,” Branca said. “Michael was a genius. He was a great guy. When I tell these stories, I actually tell them with affection.”

Among countless deals for the singer, Branca helped renegotiate Jackson’s recording deal to reflect his status as a solo artist and inked a sponsorship deal with Pepsi for his family’s 1984 Victory tour. “Michael made me write into the contract that he would never be seen holding a Pepsi can and he would never be onscreen for more than three seconds,” said Branca.

A decade later, the work wasn’t so easy. By the time Jackson was preparing for his international HIStory tour in the late ‘90s, the first sexual molestation allegations against him had surfaced and no sponsors were interested.

“Were there any offers for the use of Michael’s name and likeness during that period?” asked Weitzman. “Nothing credible that I recall,” said Branca.

Proving Jackson’s reputation had been tarnished by allegations against him and tabloid fodder is key in the estate’s efforts to support their valuation of his likeness rights at the time he died.

After several years of not working together, Branca met with Jackson a little more than a week before the singer’s death and brought with him a list of potential ideas. That list included a “Thriller” film, play and haunted house attraction, as well as album and DVD re-releases — but none of his ideas involved licensing Jackson’s name or likeness.

Weitzman asked if musicians make a lot of money in general merchandising, which he described as licensing an artist’s name and image for mugs, T-shirts and other tchotchkes. “No,” said Branca. “That income for most musicians is dwarfed compared to the money they make from recordings, their songs and especially the tours. Putting out a record is not a name and likeness right.”

That’s also important — because since Jackson’s death, the estate used unreleased rehearsal footage to make This Is It, which is one of the biggest-grossing concert films ever, and launched a lucrative Las Vegas show in partnership with Cirque du Soleil. Branca said neither of those qualify as likeness deals.

After two failed clothing line licensing attempts during the course of his living career, the one likeness deal that shows potential after Jackson’s death is with a teen clothing company

a favorable circumstance for it in this dispute. Nonetheless, allowing a substantial value for name and likeness can create significant difficulties for an estate since this is an intangible asset, and can result in a tax bill far in excess of available assets for payment if these assets cannot be sold. In large celebrity estates, the existence of this issue may prompt a quick sale of these assets to help establish value for estate tax purposes.

John Branca Takes the Stand in Michael Jackson Tax Trial

Prominent music attorney John Branca took the stand on the first day of trial in a potentially billion-dollar tax fight between Michael Jackson’s estate and the IRS.

Branca, who represented the King of Pop off and on for nearly three decades, took the stand after lunch and spent nearly four hours being examined by Jackson estate attorney Howard Weitzman.

The trial is expected to last three weeks, as attorneys for the estate and the government each work to convince a judge that their value of Jackson’s likeness at the time of his death is the correct one. Jackson is widely considered one of the greatest musical talents who ever lived — but the court will have to decide whether accusations of child molestation, rumors of drug use and a lack of tours and album releases in the last few years of his life were enough to lower the value of his brand.

The mood in the courtroom was starkly different than that of others in the same downtown L.A. federal courthouse. U.S. Tax Court Judge Mark Holmes, the attorneys and the witness, Branca, routinely cracked jokes amid a very serious conversation about Jackson’s financial woes.

Branca told the court Jackson was about $400 million in debt when he died, leaving estate attorneys scrambling to avoid foreclosures on his properties and music assets. (The parties also disagree about how much Jackson’s beneficial interest in the Sony-ATV and MIJAC music catalogs were worth.)

The more relaxed atmosphere gave Branca license to be more expositional with his answers to Weitzman’s questions, which would have likely been cut off by a judge in a standard civil law courtroom.

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Most IRS Regs Likely Exempt from Administration’s “2-for-1” Rule

While President Trump’s Jan. 30 Executive Order (EO) on reducing regulation didn’t expressly provide a carve-out for Treasury regs, interim guidance on implementing the EO appears to limit its application to “significant” regulatory actions—a category that excludes the vast majority of IRS regs. One of the main provisions in the EO is a “2-for-1” rule under which, for every new regulation introduced, two existing regulations must be cut.

According to the Congressional Research Service (RS20846, “Executive Orders: Issuance, Modification, and Revocation”), President Reagan issued an EO that directed agencies to implement rules only if the “potential benefits to society for the regulation outweigh the potential costs to society.” Under this rule, agencies were required to prepare a cost-benefit analysis for any proposed rule that could have a significant economic impact.

President Clinton later issued EO 12866, which retained many of the basic features of President Reagan’s order but eased the cost-benefit analysis requirements. President Bush subsequently issued two EOs, both of which amended EO 12866.

President Obama revoked both of the Bush EOs and issued EO 13563, which, among other things, reaffirmed and supplemented the principles of regulatory review in EO 12866, and mandated that agencies develop a preliminary plan to review existing significant regs for potential modifications or repeal.

Review of IRS regs. Most IRS regs released after the issuance of EO 13563 (see, e.g., T.D. 9817, 01/24/2017, T.D. 9815, 1/24/2017, T.D. 9814, 01/23/2017) contain the following statement:

Certain IRS regulations, including these, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563.

A “regulatory action” is defined by EO 12866 in Sec. 3(e) as “any substantive action by an agency (normally published in the Federal Register) that promulgates or is expected to lead to the promulgation of a final rule or regulation, including notices of inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking.”

A “significant regulatory action” is defined by EO 12866 in Sec. 3(f) as “any regulatory action that is likely to result in a rule that may: (1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or

called Supreme. Branca explained to Holmes that kids are “crazy” for the company’s shirts, and the deal is an effort to re-brand Jackson’s image with a younger audience.

“We make no money from it, but maybe someday we’ll get new fans,” he said.

The IRS attorneys declined to cross-examine Branca in favor of calling him back to testify when they present their case.

Before letting Branca leave the stand, the judge took the opportunity to ask him to explain one of Jackson’s lyrics. “You’re familiar with ‘Thriller,’ “ said Holmes. “What exactly does ‘the funk of 40,000 years’ mean?”“Karma,” answered Branca.

IRS News

IRS Audit Rate of Individuals (0.7%), Businesses (0.5%) Falls To 10+ Year Lows Due To Budget Cuts

The IRS, which has lost 30% of its enforcement staffing since the 2010 peak, audited 0.7% of tax returns in the fiscal year that ended Sept. 30, according to preliminary data released. That means the IRS audited roughly 1 in every 143 individual tax returns, down from 1 in 90 back in 2010.

Audits declined even for the high-income households that have been an enforcement priority for the IRS. In 2016, the agency audited 5.83% of returns with income over $1 million, down from 9.55% in 2015 and marking the lowest audit rate for that income group since 2008.

Business audits also dropped in 2016. Overall, the IRS audited 0.49% of business tax returns, the lowest level since 2004. The IRS audited 6,453 large corporations, those with assets exceeding $10 million. Four years earlier, the agency audited more than 10,000.

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the rights and obligations of recipients thereof; or (4) Raise novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in this Executive order.”

As explained by the Government Accountability Office (GAO) in GAO-16-720, Regulatory Guidance Processes (September 2016), few tax regs are deemed “significant” by the Office of Information and Regulatory Affairs (OIRA; an office within the Office of Management and Budget (OMB), an Executive agency) and thus few are subject to additional review and analysis under EO 12866. Between 2013 and 2015, only one of more than 200 tax regs issued was determined to be significant. According to the report, IRS is generally requested to propose to OIRA a designation of a rule as being significant or not significant for this purpose. IRS and Treasury officials told GAO that they rarely designate tax regs as economically significant under EO 12866 because of their view that any economic impact generally stems from the underlying statute, not the reg.

According to GAO, some tax regs are also exempt from OIRA review otherwise required under EO 12866 based on an agreement between Treasury and OMB entered in ‘83 that exempts regs issued by IRS and two other bureaus from further analysis and review unless they were considered “legislative and major” under a prior EO. The agreement also exempts from OMB review revenue rulings, revenue procedures, and “other similar ruling documents.”

President Trump’s EO on regs. On Jan. 30, 2017, President Trump issued an EO directing agencies to cut two existing regulations for each new regulation introduced (the 2-for-1 rule). The EO also requires that the cost of any additional regs be offset completely by undoing existing regs. The EO provided that, with limited exceptions, “the term “regulation” or “rule” means an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or to describe the procedure or practice requirements of an agency.”

The definition in the EO can be contrasted with the definition in a memorandum issued by White House Chief of Staff Reince Preibus implementing a regulatory freeze. That memo specifically stated that the term “regulation” has the meaning given to a “regulatory action” in EO 12866 (above), and also includes any “guidance document” as defined in EO 13422 (i.e., one of the EOs issued by President Bush). That EO defined a guidance document as “an agency statement of general applicability and future effect, other than a regulatory action, that sets forth a policy on a statutory, regulatory, or technical issue or an interpretation of a statutory or regulatory issue.”

Subsequent guidance. On Feb. 2, the Acting Administrator of OIRA issued a memorandum on “Interim Guidance Implementing Section 2 of the Executive Order of January 30, 2017, Titled “Reducing Regulation and Controlling Regulatory Costs.”” The memo provided interim guidance, in the form of questions and answers, on how to satisfy the 2-for-1 rule and

other requirements imposed by the EO.

One of the questions raised in the Feb. 2 memo was which new regulations are covered. The answer provided:

The EO’s requirements for Fiscal Year 2017 apply only to those significant regulatory actions, as defined in Section 3(f) of Executive Order 12866, an agency issues between noon on January 20 and September 30, 2017. This includes significant final regulations for which agencies issued a Notice of Proposed Rulemaking before noon on January 20, 2017.Thus, by limiting the EO to “significant” regulatory actions, most IRS regs would appear to be excluded from its requirements, including the 2-for-1 rule.

Early Withdrawals from Retirement Plans

Many people find it necessary to take out money early from their IRA or retirement plan. Doing so, however, can trigger an additional tax on top of income tax taxpayers may have to pay. Here are a few key points to know about taking an early distribution:

1. Early Withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old.

2. Additional Tax. If a taxpayer took an early withdrawal from a plan last year, they must report it to the IRS. They may have to pay income tax on the amount taken out. If it was an early withdrawal, they may have to pay an additional 10 percent tax.

3. Nontaxable Withdrawals. The additional 10 percent tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the plan. A rollover is a form of nontaxable withdrawal. A rollover occurs when people take cash or other assets from one plan and put the money in another plan. They normally have 60 days to complete a rollover to make it tax-free.

4. Check Exceptions. There are many exceptions to the additional 10 percent tax. Some of the rules for retirement plans are different from the rules for IRAs.

5. File Form 5329. If someone took an early withdrawal last year, they may have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return. Form 5329 has more details.

Don’t Fall for Scam Calls and Emails Posing as IRS

Scams continue to use the IRS as a lure. These tax scams take many different forms. The most common scams are phone calls and emails from thieves who pretend to be from the IRS. Scammers use the IRS name, logo or a fake website

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to try and steal money from taxpayers. Identity theft can also happen with these scams.

Taxpayers need to be wary of phone calls or automated messages from someone who claims to be from the IRS. Often these criminals will say the taxpayer owes money. They also demand payment right away. Other times scammers will lie to a taxpayer and say they are due a refund. The thieves ask for bank account information over the phone. The IRS warns taxpayers not to fall for these scams.

Below are several tips that will help filers avoid becoming a scam victim.

IRS employees will NOT:

• Call demanding immediate payment. The IRS will not call a taxpayer if they owe tax without first sending a bill in the mail.

• Demand payment without allowing the taxpayer to question or appeal the amount owed.

• Require the taxpayer pay their taxes a certain way. For example, demand taxpayers use a prepaid debit card.

• Ask for credit or debit card numbers over the phone.

• Threaten to contact local police or similar agencies to arrest the taxpayer for non-payment of taxes.

• Threaten legal action such as a lawsuit.

If a taxpayer doesn’t owe or think they owe any tax, they should:

• Contact the Treasury Inspector General for Tax Administration. Use TIGTA’s “IRS Impersonation Scam Reporting” web page to report the incident.

• Report the incident to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” to the comments of your report.

In most cases, an IRS phishing scam is an unsolicited, bogus email that claims to come from the IRS. Criminals often use fake refunds, phony tax bills or threats of an audit. Some emails link to sham websites that look real. The scammers’ goal is to lure victims to give up their personal and financial information. If they get what they’re after, they use it to steal a victim’s money and their identity.

For those taxpayers who get a ‘phishing’ email, the IRS offers this advice:

• Don’t reply to the message. • Don’t give out your personal or financial information. • Forward the email to phishing@irs.gov. Then delete it. • Do not open any attachments or click on any links.

They may have malicious code that will infect your computer. All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year 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.

Fake Charities on the IRS “Dirty Dozen” List of Tax Scams for 2017

The Internal Revenue Service today warned taxpayers about groups masquerading as charitable organizations to attract donations from unsuspecting contributors, one of the “Dirty Dozen” Tax Scams for the 2017 filing season.

“Fake charities set up by scam artists to steal your money or personal information are a recurring problem,” said IRS Commissioner John Koskinen. “Taxpayers should take the time to research organizations before giving their hard-earned money.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime, but many of these schemes peak during filing season as people prepare their returns or hire someone to prepare their taxes.

Perpetrators of illegal scams can face significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.The IRS offers these basic tips to taxpayers making charitable donations:

• Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their Employer Identification Numbers (EIN), if requested, which can be used to verify their legitimacy through EO Select Check. It is advisable to double check using a charity’s EIN. • Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution. Scam artists may use this information to steal identities and money from victims. Donors often use credit cards to make donations. Be cautious when disclosing credit card numbers. Confirm that those soliciting a donation are calling from a legitimate charity.

• Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Impersonation of Charitable Organizations

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Another long-standing type of abuse or fraud involves scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

Fraudsters may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims.

To help disaster victims, the IRS encourages taxpayers to donate to recognized charities. Disaster victims can call the IRS toll-free disaster assistance telephone number (866-562-5227). Phone assistors will answer questions about tax relief or disaster-related tax issues.

Find legitimate and qualified charities with the Select Check search tool on IRS.gov. (EINs are frequently called federal tax identification numbers, which is the same as an EIN).

Updated IRS Pub 15-B Features New Information on Excluded Benefits

IRS has recently released an updated version of Publication 15-B, Employer’s Tax Guide to Fringe Benefits, for use in 2017. The 2017 version of Publication 15-B is similar to the 2016 version, but it has some noteworthy clarifications and additions, including benefits that cannot be excluded as de minimis fringe benefits, more details about the limits on employee discounts, and a new discussion on when product testing benefits are excludable as a working condition fringe benefit (WCFB).

De minimis fringe benefits. A de minimis fringe benefit is excluded from the recipient’s gross income. (Code Sec. 132(a)(4)) This is any property or service whose value is so small that accounting for it is unreasonable or administratively impracticable, taking into account the frequency with which similar fringe benefits are provided by the employer to its employees. (Code Sec. 132(e)(1))

The latest version of IRS Pub 15-B lists as examples of de minimis fringes such items as personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes, and occasional cocktail parties, group meals, or picnics for employees and their guests. It also lists as excludible holiday or birthday gifts, other than cash, with a low fair market value. Thhis latest version adds that flowers or fruit or similar items provided to employees under special circumstances (for example, on account of illness, a family crisis, or outstanding performance) also are excludible.

The 2017 version of IRS Pub 15-B adds some examples of

benefits that are not excludible as de minimis fringes, namely:

• . . . season tickets to sporting or theatrical events;

• . . . the commuting use of an employer-provided car or other vehicle for more than one day a month;

• . . . membership in a private country club or athletic facility, regardless of the frequency with which the employee uses the facility; and

• . . . the use of employer-owned or leased facilities (such as an apartment, hunting lodge, boat, etc.) for a weekend.

Employee discounts. A qualified employee discount is excluded from an employee’s gross income. (Code Sec. 132(a)(2)) This is an “employee discount” allowed for “qualified property or services” provided by an employer to an employee, the employee’s spouse or dependent children, to the extent the discount doesn’t exceed the limits described below. (Code Sec. 132(c)(1))

An “employee discount” is the excess of: (a) the price at which property or services are offered by an employer for sale to nonemployee customers, over (b) the price at which the employer offers the same property or services to employees for use by those employees. (Code Sec. 132(c)(3)) “Qualified property or services” means any property (other than real property, or personal property of a kind held for investment) or services that are offered for sale to nonemployee customers in the ordinary course of the employer’s line of business in which the employee works. (Code Sec. 132(c)(4), Code Sec. 132(k))

The excludable amount of a qualified employee discount for property is limited to the gross profit percentage of the price at which that property is offered by the employer to customers. (Code Sec. 132(c)(1)(A)) The excludable amount for discounted services is limited to 20% of the price at which the employer offers the service to nonemployees. (Code Sec. 132(c)(1)(B), Code Sec. 132(k))

The latest version of IRS Pub 15-B takes the position that discounts on items sold in an employee store that aren’t sold to customers aren’t excluded from employee income. It adds that employee discounts provided by another employer through a reciprocal agreement aren’t excluded.

The updated IRS Pub 15-B also reminds businesses to treat discounts provided to the spouse or dependent child of an employee as provided to the employee. A dependent child for this purpose means any son, stepson, daughter, stepdaughter, or eligible foster child of the employee, who is a dependent of the employee, or both of whose parents have died and who hasn’t reached age 25. A child of divorced parents is treated as a dependent of both parents.

Product testing. The use of consumer goods that are manufactured for sale to nonemployee customers, and that are provided to employees for product testing and evaluation

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their questions on IRS.gov.

The IRS will be issuing an “Avoid the Rush” series of news releases that provide tips related to the most common questions asked by taxpayers during the February peak.

The IRS will staff its toll-free telephone service Saturday, Feb. 18, from 9 a.m. to 5 p.m., callers’ local time, and Monday, Feb. 20, from 7 a.m. to 7 p.m., callers’ local time.

To save time and find answers faster, taxpayers should make IRS.gov their first stop. A good place to start is the IRS Services Guide for a quick overview of online services and resources. IRS information and some tools are also in Spanish.

Here are some reasons people call the IRS as well as faster and easier ways to get answers on IRS.gov:

Where’s My Refund?

The IRS issues more than 90 percent of refunds in less than 21 days. IRS representatives cannot provide individual refund information before then. Taxpayers can easily find information about their refund by using the “Where’s My Refund? tool. It’s available on IRS.gov and on the mobile app, IRS2Go. “Where’s My Refund?” provides taxpayers with the most up-to-date information available.

“Where’s My Refund?” Begins Updating Feb. 16 for EITC and ACTC Filers

By law, the IRS must hold Earned Income Tax Credit or the Additional Child Tax Credit refunds until Feb. 15. Taxpayers will begin to see refunds claiming EITC/ACTC the week of Feb. 27. “Where’s My Refund?” will update for EITC/ACTC refunds beginning Feb. 16, with the vast majority updating by Feb. 18.

Do IRS Phone Assistors or Transcripts Have More Up-to-Date Refund Information?

The IRS phone assistors do not have additional information on refund dates beyond what taxpayers have access to on “Where’s My Refund?”. Given high call volumes, taxpayers should not call unless directed to do so by the refund tool. In addition, a common myth is that people can get their refund date earlier by ordering a tax transcript. There is no such “secret” option to find a refund date by calling the IRS or ordering a transcript; just check “Where’s My Refund?” once a day.

Need to Visit a Local IRS Office?

Most taxpayers must make an appointment before visiting a Taxpayer Assistance Center. However, this time of year also is a peak time for TAC visits. The vast majority of people seeking an appointment can find answers to their questions on IRS.gov.

Need Answers to Tax Law Questions?

outside the employer’s workplace, is excludable from the employee’s income as a WCFB if the product testing program meets detailed requirements. (Reg. § 1.132-5(n)) Thus, for example, an employee who tests and evaluates an auto manufactured by his employer under such a program may exclude the value of the use of the auto.

The 2016 version of IRS Pub 15-B didn’t provide any details on product testing as an excludible WCFB. The latest version remedies the omission with an extended entry on product testing, including the following details on the conditions that must be met to qualify for this WCFB:

• Consumer testing and evaluation of the product is an ordinary and necessary business expense for the employer.

• Business reasons necessitate that the testing and evaluation must be performed off the business premises (e.g., testing and evaluation can’t be carried out adequately in the office or lab).

• The business provides the product to an employee for purposes of testing and evaluation, the product is provided for no longer than necessary to test and evaluate its performance, and (to the extent not finished) the product must be returned to the employer at completion of the testing and evaluation period.

• The employer imposes limitations on the employee’s use of the product that significantly reduce the value of any personal benefit to the employee. This includes limiting an employee’s ability to select among different models or varieties of the consumer product, and prohibiting the use of the product by persons other than the employee.

• The employee submits detailed reports on the testing and evaluation.

The program won’t qualify if the employer doesn’t use and examine the results of the detailed reports submitted by employees within a reasonable period of time after expiration of the testing period.

The 2017 version of IRS Pub 15-B also explains factors that tend to show a testing program isn’t bona fide (e.g., the program is essentially a leasing program where employees lease consumer goods for a fee), and tells businesses that the program can’t be limited to certain classes of employees unless there’s a business reason for the restriction. Finally, the updated version of IRS Pub 15-B says there’s no product testing exclusion for independent contractors or company directors.

Avoid the Rush; Use IRS.gov for Quick Answers to Questions

The Internal Revenue Service has reminded taxpayers that the next couple of weeks, especially around Presidents’ Day, marks the busiest time of year for IRS toll-free phone services. Taxpayers can avoid the rush by getting answers to

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taxpayer’s behalf.

Customer service representatives can answer refund questions beginning 21 days after the return was filed. Taxpayers should use “Where’s My Refund?” to track the status of their refund. Taxpayers who are e-filing their return and need their prior year adjusted gross income should use the Get Transcript tool on IRS.gov. IRS telephone assistors cannot provide prior-year adjusted gross income over the phone for filing purposes.

“Where’s My Refund?” will be updated Feb. 18 for the vast majority of early filers who claimed the Earned Income Tax Credit or the Additional Child Tax Credit. Before Feb. 18, some taxpayers may see a projected date or a message that the IRS is processing their return.

By law, the IRS is required to hold EITC and ACTC refunds until Feb. 15. However, taxpayers may not see those refunds until the week of Feb. 27. Due to differing timeframes with financial institutions, weekends and the Presidents Day holiday, these refunds likely will not start arriving in bank accounts or on debit cards until the week of Feb. 27 -- if there are no processing issues with the tax return and the taxpayer chose direct deposit.

The IRS phone assistors do not have additional information on refund dates beyond what taxpayers have access to on “Where’s My Refund?”. Given high call volumes, taxpayers should not call unless directed to do so by the refund tool. In addition, a common myth is that people can get their refund date earlier by ordering a tax transcript. There is no such “secret” option to find a refund date by calling the IRS or ordering a transcript; just check “Where’s My Refund?” once a day.

If Calling About a Personal Tax Account

Before calling about a personal tax account, have the following information handy:

• Social Security numbers and birth dates for those listed on the tax return

• An Individual Taxpayer Identification Number (ITIN) for those without a Social Security number (SSN)

• Filing status – Single, Head of Household, Married Filing Joint or Married Filing Separate

• Prior-year tax return. The IRS may need to verify identity before answering certain questions

• A copy of the tax return in question

• Any letters or notices received from the IRS.

If Calling About a Letter 4883C

At this time of year, the IRS begins sending letters to taxpayers inquiring about suspicious tax returns it has identified. It’s

Taxpayers with questions about what filing status means, whether to file a tax return or who can be claimed as a dependent can use online tools. There’s the Interactive Tax Assistant that takes taxpayers through a series of questions just like a customer service representatives would. Taxpayers may also do a keyword search on IRS.gov; use Publication 17, the annual, searchable income tax guide; or the IRS Tax Map, which allows users to search by topic or keyword to find tax-law information by subject.

How Do I Find 2015 Adjusted Gross Income (AGI)?

If taxpayers changed tax software products this year, they may need to manually enter their 2015 adjusted gross income to complete the electronic filing process. On a 2015 tax return, the AGI is on line 37 of the Form 1040; line 21 on the Form 1040-Aor line 4 on the Form 1040-EZ. See Validating Your Electronically Filed Tax Return for options for taxpayers who did not retain a copy of their 2015 return.

Didn’t Get a Form W-2?

Employers are required to send their employees a Form W-2, Statement of Earnings, by Jan. 31. Employees should allow enough time for their form to be mailed to their address of record. If form W-2 is not received by the end of February, employees should first contact their employer to ensure they have the correct mailing address on file. After exhausting all options with the employer, employees may contact the IRS. The IRS will send a letter to the employer. However, the IRS urges taxpayers to wait until after Feb. 27 to avoid long wait times on the telephone.

Need a Copy of a Tax Return or Transcript?

Taxpayers can easily order a return or transcript on the IRS.gov website. See the Get Transcript tool to download a transcript or have a transcript mailed. More information on these options is available at IRS.gov.

Can’t Pay a Tax Bill?

For taxpayers whose concern is a tax bill they can’t pay, the Online Payment Agreement tool can help determine whether they qualify for an installment agreement with the IRS.

Avoid the Rush: Be Prepared to Validate Identity if Calling the IRS

The Internal Revenue Service said mid-February marks the agency’s busiest time of the year for telephone calls. The IRS is reminding taxpayers who have questions about their tax accounts to be prepared to validate their identity when speaking with an IRS assistor. This will help avoid the need for a repeat call.

The IRS recognizes the importance of protecting taxpayers’ identities. That’s why IRS call center assistors take great care to make certain that they only discuss personal information with the taxpayer or someone authorized to speak on the

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important for the IRS and the taxpayer to confirm whether or not the taxpayer actually filed the return in question. Taxpayers have 30 days to call, which allows time to avoid the rush around Presidents’ Day.

To expedite the process when calling, taxpayers MUST have:

• The IRS letter • Copy of prior year tax return (if filed) • Current year tax return (if filed) • Any supporting documents for each year’s return (such as W-2’s, 1099’s, Schedule C, Schedule F, etc.)

If Calling About Someone Else’s Account

IRS call center assistors will only speak with the taxpayer or their legally designated representative. Before calling, have the following information handy:

• Verbal or written authorization to discuss the account • The ability to verify the taxpayer’s name, SSN/ITIN, tax period, form(s) • If the caller is a third party designee, a PTIN or PIN must be provided • A current, completed, and signed Form 8821, Tax Information Authorization or • A completed and signed Form 2848, Power of Attorney and Declaration of Representative

If Calling About a Deceased Taxpayer

Be prepared to fax:

• The deceased taxpayer’s death certificate, and • Either copies of the Letter of Testamentary approved by the court or IRS Form 56, Notice Concerning Fiduciary Relationship (for estate executors)

IRS Makes Approved Form 1023-EZ Data Available Online

The Internal Revenue Service announced today that publicly available information from approved applications for tax exemption using Form 1023-EZ, Streamlined Application for Recognition of Exemption, is now available electronically for the first time.

The data on IRS.gov is available in spreadsheet format and includes information for approved applications beginning in mid-2014, when the 1023-EZ form was introduced, through 2016. The information will be updated quarterly, starting with the first quarter of calendar year 2017. The IRS’s Tax Exempt and Government Entities division approved more than 105,000 applications for exemption submitted on the Form 1023-EZ from 2014 through 2016.

Previously, Form 1023-EZ data was only available through a lengthier process that included completing and submitting Form 4506-A to the IRS.

“The new online availability of Form 1023-EZ data is an important step forward and will allow taxpayers to more easily research information on tax-exempt organizations,” said IRS Commissioner John Koskinen. The IRS is committed to ongoing improvements in taxpayer service across the agency and we continue to look for innovative ways like this to provide taxpayers the information they need, when they need it.”

Information in the Form 1023-EZ includes basic identifying information such as the name of the organization, Employer Identification Number and the names of officers, directors and trustees. The Form also contains information regarding items such as the organizing documents, state of incorporation, purpose and activities of the organization.

Form 1023-EZ must be filed electronically. The IRS reminds filers that they should not include Social Security numbers on their submissions.

IRS Summarizes “Dirty Dozen” List of Tax Scams for 2017

The Internal Revenue Service today announced the conclusion of its annual “Dirty Dozen” list of tax scams. The annual list highlights various schemes that taxpayers may encounter throughout the year, many of which peak during tax-filing season. Taxpayers need to guard against ploys to steal their personal information, scam them out of money or talk them into engaging in questionable behavior with their taxes.

“We continue to work hard to protect taxpayers from identity theft and other scams,” said IRS Commissioner John Koskinen. “Taxpayers can and should stay alert to new schemes which seem to constantly evolve. We urge them to do all they can to avoid these pitfalls – whether old or new.”

This is the third year the IRS has highlighted its Dirty Dozen list in separate releases over 12 business days. Taxpayers are encouraged to review the list in a special section on IRS.gov and be on the lookout for these con games.

Perpetrators of illegal schemes can face significant fines and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them. Taxpayers should keep in mind that they are legally responsible for what is on their tax return even if it is prepared by someone else. Be sure the preparer is up to the task

Here is a recap of this year’s “Dirty Dozen” scams:

Phishing: Taxpayers need to be on guard against fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a bill or refund. Don’t click on one claiming to be from the IRS. Be wary of emails and websites that may be nothing more than scams to steal personal information.

Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has

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Abusive Tax Shelters: Don’t use abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered.

Frivolous Tax Arguments: Don’t use frivolous tax arguments to avoid paying tax. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims even though they have been repeatedly thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000.

Offshore Tax Avoidance: The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. The IRS offers the Offshore Voluntary Disclosure Program to enable people to catch up on their filing and tax obligations.

Tax Pros in Trouble

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 2016-49, dated December 5, 2016, on pages 791-792:

seen a surge of these phone scams in recent years as con artists threaten taxpayers with police arrest, deportation and license revocation, among other things.

Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. Though the agency is making progress on this front, taxpayers still need to be extremely cautious and do everything they can to avoid being victimized.

Return Preparer Fraud: Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest high-quality service. There are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers.

Fake Charities: Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations.

Inflated Refund Claims: Taxpayers should be on the lookout for anyone promising inflated refunds. Be wary of anyone who asks taxpayers to sign a blank return, promises a big refund before looking at their records or charges fees based on a percentage of the refund. Fraudsters use flyers, advertisements, phony storefronts and word of mouth via community groups where trust is high to find victims.

Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is usually limited to off-highway business use, including use in farming. Taxpayers should also avoid misuse of the research credit. Improper claims often involve failures to participate in or substantiate qualified research activities and/or satisfy the requirements related to qualified research expenses.

Falsely Padding Deductions on Returns: Taxpayers should avoid the temptation to falsely inflate deductions or expenses on their returns to pay less than what they owe or potentially receive larger refunds. Think twice before overstating deductions such as charitable contributions and business expenses or improperly claiming credits such as the Earned Income Tax Credit or Child Tax Credit.)

Falsifying Income to Claim Credits: Don’t invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. Taxpayers are sometimes talked into doing this by con artists. Taxpayers should file the most accurate return possible because they are legally responsible for what is on their return. This scam can lead to taxpayers facing large bills to pay back taxes, interest and penalties. In some cases, they may even face criminal prosecution.

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Olivier is scheduled to be sentenced on May 2, and Pierre, who pleaded guilty on Feb. 8, is scheduled to be sentenced on April 27, before U.S. District Court Judge John R. Padova. Both face statutory maximum sentences of 10 years in prison, a period of supervised release, restitution and monetary penalties. Baton Rouge Tax Preparer Arrested for Tax Fraud Scheme Involving “Ghost” Companies

A Baton Rouge tax preparer faces felony charges for a tax fraud scheme involving “ghost” companies and phony business losses that cost Louisiana taxpayers hundreds of thousands of dollars.

LDR officials say Joseph Gillies prepared and submitted hundreds of tax returns that contained fabricated business losses for companies that, in some cases, did not exist.

Investigators were told by numerous clients that they did not report any business losses when they provided Gillies with their tax records.

Some whose tax returns contained fabricated business losses reported that they weren’t even business owners

From 2012-2015, the alleged fraud scheme cost Louisiana taxpayers an estimated $768,740.00.

LDR Public Information Director Byron Henderson says phony business losses are a common technique used by unscrupulous tax preparers to lure clients with the promise of larger-than-expected income tax refunds.

Gillies was booked into the East Baton Rouge Parish Jail on the following charges.

• Principal to Filing or Maintaining False Public Records• Principal to Illegal Transmission of Monetary Funds

He is the 63rd person arrested under a joint anti-fraud initiative of the Department of Revenue and the state Attorney General’s office.

Tax Fraud Blotter: Defrauded, Disgorged and Deceased

Using your late mother’s Social Security number for fraud, and other highlights of our favorite recent tax fraud cases.

Two Pennsylvania Men Plead Guilty to Conspiring to File Federal Tax Returns Using Stolen IDs

Two Philadelphia, Pennsylvania men pleaded guilty to conspiring to file federal tax returns using stolen IDs, announced Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division and Acting U.S. Attorney Louis D. Lappen for the Eastern District of Pennsylvania. According to the indictment and information presented to the court, Moise Olivier, 27, and Hans Pierre, 28, opened bank accounts in the names of “Moise Olivier Tax Service” and “Hans Pierre Tax Service” even though neither had a tax service. Using stolen personal ID information, members of the conspiracy electronically filed returns seeking fraudulent refunds and directed that the refunds be deposited by the Internal Revenue Service (IRS) into the Moise Olivier and Hans Pierre Tax Service bank accounts. Olivier and Pierre withdrew cash from the accounts to provide to other co-conspirators. Olivier admitted to causing a tax loss of $181,805.10. Pierre admitted to causing a tax loss of $95,157.41.

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Louisiana auditors noticed a suspicious pattern with returns that Navy filed in 2014 and 2015; investigators who interviewed her clients determined that many of them did not claim any business losses when they provided Navy with their tax records and that some did not own businesses at all. The clients interviewed claimed no knowledge of the suspected illegal activity.

Sheboygan, Wis.: Preparer Lesley E. Anzures, 35, has pleaded guilty in connection with defrauding the IRS of nearly $500,000 by helping undocumented immigrants claim refunds based on claims of dependents still in Mexico, according to published reports.

The charge against Anzures, operator of Lesley’s Tax Service, reportedly involves one client’s 2010 return that netted a refund of $3,772 when he actually owed $1,156. The return listed six dependents for the taxpayer but five of them lived in Mexico and could not be legally claimed on the man’s tax return; Anzures knew the return was improper, according to cited records.

Investigators reportedly reviewed 40 returns that Anzures filed for a dozen clients over four years and found more false statements that cost the IRS about $225,000. An audit also reportedly turned up another $274,000 in fraud among the returns of 22 more clients.

For 2010, 2011, 2012 and 2013, Anzures filed almost 9,500 tax returns for a total of more than $34 million in refunds, according to reports that added that the average refund was $3,609 on returns listing an average of three dependents, 70 percent of whom had ITINs, provided through a program meant to encourage those without a Social Security number to file tax returns.

Lauderhill, Fla.: The federal government has filed to bar Aleluya Universal Accounting Services Inc. and its officers Frantz Petit-Dos, Luczor Fertilien and David Joseph from preparing federal income tax returns for others.

The government also requests a court order requiring the business and these officers to disgorge the gross receipts they obtained from preparing federal tax returns that make false claims.

Port Murray, N.J.: Preparer Brian Allen Day, 54, has been charged with filing false individual income tax returns for clients and defrauding banks by misappropriating clients’ funds.

According to the indictment, Day is a self-employed preparer with various prep businesses in New Jersey, such as PTS, Tax Consultants and Tax Consultants LLC. For the tax years 2013 to 2015, he allegedly prepared false individual income tax returns for clients by fabricating and inflating expenses and deductions on Schedules A or supplemental loss deductions on Schedules E.

The false deductions and expenses charged in the indictment total $383,773.

Also according to the indictment, from December 2011 through April 2015, Day falsely advised clients that they owed certain tax payments to the IRS, directed clients to give him checks made payable to the IRS to resolve these purported liabilities, altered the checks to make them appear to be payable to his prep businesses, and deposited the checks into his business bank accounts without making any payment to the IRS on behalf of the clients.

Day then presented his clients with documents purportedly issued by the IRS falsely stating that the agency received payments for the taxes owed, according to the indictment, which added that he stole $61,000 from his clients.

Each count of aiding and assisting in the filing of false tax returns carries a maximum sentence of three years in prison and a fine of $250,000 or twice the gross pecuniary gain or loss from the fraud. The bank fraud charges each carry a maximum of 30 years in prison and a fine of $1 million.

Phoenix: Preparer Kimberly Stewart, 53, has been sentenced to two years in prison for ID theft and been ordered to pay more than $101,000 restitution to the federal government, according to published reports.

According to IRS investigators cited, Stewart, who pleaded guilty to aggravated ID theft last October, owned and operated a prep business from 2003 to 2010. Prosecutors told news outlets that she admitted in her plea agreement that in early 2011 she filed a false return for the 2010 tax year using the name and Social Security number of her deceased mother. Stewart then got a refund of more than $6,400, according to published reports.

Investigators also told news outlets that the IRS had previously contacted Stewart about false returns she prepared and filed on behalf of others.

Baldwin, La.: Preparer Lakesha Navy faces multiple felony charges in connection with a tax fraud scheme that cost Louisiana an estimated $55,000.

Navy allegedly filed hundreds of state income tax returns containing fabricated business losses that improperly reduced clients’ taxable income and, in many cases, inflated refunds.

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Rahim Ali Cummings and Ebrahim Ashamu were local tax preparers in El Cajon, California. Ashamu operated his tax preparation business as Vista Tax Services on El Cajon Boulevard. Rashad Abdul-Rahim worked with Cummings and Ashamu by recruiting customers and obtaining stolen identities to use in their fraudulent scheme. Cummings and Abdul-Rahim pleaded guilty to conspiracy and Ashamu pleaded guilty to filing false claims and aggravated identity theft before U.S. Magistrate Judge Nita L. Stormes. According to the plea agreements, Cummings and Ashamu prepared and filed the false tax returns with the Internal Revenue Service between September 2011 and September 2012. Abdul-Rahim solicited and obtained the personal identifying information from the victims using false pretenses, such as informing the victims they could obtain “free” government money from alleged grant and senior programs. He concealed his intention to use the information to file false tax returns. Abdul-Rahim provided Cummings and Ashamu with the personal information of the victims in order for Cummings and Ashamu to prepare and file the false tax returns. The IRS uncovered the scheme because a majority of the refunds were mailed to addresses controlled by Cummings, Ashamu, and Abdul-Rahim. The plea agreement for each defendant sets forth the amount of refunds directly deposited into bank accounts under their control. In particular, Cummings received approximately $470,042 in fraudulent refunds directly deposited into bank accounts he controlled. Ashamu received approximately $367,631. Abdul-Rahim received approximately $44,937 in fraudulent refunds and additional cash payments from Cummings and Ashamu for providing the victims’ information. As a result of their crimes, Cummings, Ashamu, and Abdul-Rahim caused approximately $882,610 in losses to the IRS. Each defendant has agreed to make full restitution to the IRS for the total amount of false refunds they each received. Furthermore, as part of their plea agreements, Cummings, Ashamu, and Abdul-Rahim agreed to be permanently enjoined from preparing or filing federal income tax returns for anyone other than themselves. A civil complaint will be filed against them, and a permanent injunction will be entered to prevent Cummings, Ashamu, and Abdul-Rahim from acting as a tax preparer in the future. With a new tax return filing season upon us, the public is reminded to always review a copy of any tax return prepared and filed on their behalf and to be skeptical of tax preparers that offer to obtain substantial tax refunds. Cummings, Ashamu, and Abdul-Rahim are scheduled to be sentenced on May 1, 2017 at 9 a.m. before U.S. District Judge Roger T. Benitez. 20 MD. Tax Preparers Suspended by State

Maryland suspended processing electronic tax returns from 20 paid tax preparers because the comptroller’s office has received what it calls “a high volume of questionable returns.”

The complaint alleges that the defendants prepare returns that unlawfully understate income tax liabilities and overstate refunds by fabricating or exaggerating deductions and tax credits. For example, the defendants claimed fuel tax credits for customers who did not qualify for this credit, according to the complaint.

In particular, Joseph falsely advised one client that she was eligible for the fuel credit because she was self-employed and drove herself to work, according to the complaint. Fertilien also told the IRS that he advised that anyone with receipts for gas used in their vehicles could claim the fuel credit, according to the complaint.

The government further alleges that Petit-Dos’, Fertilien’s, and Joseph’s misconduct predates the creation of Aleluya. Prior to Joseph forming Aleluya in June 2013, Petit-Dos and Fertilien owned the prep business Imperial Taxation; the complaint alleges that Petit-Dos, Fertilien, and Joseph (a preparer at Imperial) prepared false returns and committed other violations while there.

Altogether, the complaint alleges that the loss to the U. S. Treasury from the defendants’ activities may be millions of dollars.

Lutcher, La.: Preparer Warren Lavern Bryant is accused of submitting state income tax returns that included phony business losses that improperly reduced his clients’ taxable income and illegally inflated refunds. State auditors grew suspicious of returns that Bryant submitted in 2015; investigators later determined that none of the clients whose returns they examined had claimed any business losses when they provided Bryant with their tax records. Bryant’s alleged fraud cost Louisiana some $116,325.00.

Gulfport, Miss.: Preparer Allen Brice, 35, has been convicted on seven counts of fraud involving false returns he prepared for his clients, according to published reports.

Brice was found guilty of reporting false information on four clients’ self-employment retirement plans, according to news outlets, which added that Brice had been charged along with his employer, Jeremi Washington, in a 16-count indictment on Jan. 20. Washington, also of Gulfport, owned and operated Flash Financial and pleaded guilty to a conspiracy charge last December, according to published reports.

Sentencing is March 22, reports said, adding that Brice faces a maximum of 21 years in prison, $700,000 in fines and the court costs.

Tax Preparers and Recruiter Admit Filing False Returns in Elaborate Tax Return Scam

Two tax preparers and a recruiter working with those preparers pleaded guilty today in federal court, admitting to their involvement in a tax return scam that resulted in the filing of false returns, the use of stolen identities and the receipt of more than $880,000 in bogus tax refunds.

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“These tend to be fraudulent returns with phony information in them,” Comptroller Peter Franchot told WTOP.

“We will not process their tax returns until they come in and show us the documents that support the returns that they’ve filed so far, that we find highly questionable. I predict that not a single one will show up with the documents because our software filters are that accurate. We’re protecting the Maryland taxpayers by putting these folks hopefully out of business.”

Franchot said this is not is about “fudging your taxes” an occasional error.

“We’re talking about out and out brazen fraud.”

The comptroller’s office said taxpayers should be suspicious if a preparer does the following:

• Deducts fees from the taxpayer’s refund to be deposited into the tax preparer’s account;• Does not sign the tax return;• Fails to include the Preparer Taxpayer Identification number “P-TIN” on the return.

Franchot said his office has “headed off more than a million dollars in fraudulent tax refunds and we’re only two weeks into tax season.”

Franchot used the announcement about the 20 firms to push for greater power to go after tax cheats through the judicial system.

“Right now we’re pretty much only allowed to not send them the false refund, not process their tax returns. We don’t have the investigatory power and justice relief we need to really put some of these people behind bars,” he said.

“The missing piece of the puzzle is nobody ever gets brought to justice. That’s changing, we’ve announced some indictments, but we need to announce a lot more so people understand this is not a free ride, you can really get in a lot

Ragin Cagin

The On-Line NCPE Book and Much, Much More

After the Fall Seminar Season, I called Beanna to tell her many of our attendees were interested in joining the ncpeFellowship because of the Tax Practice Policy Manual – 6 or 7 pages of the “what the IRS will look for if auditing YOU”.

She actually hollered at me! “It’s a book Jerry, not a few pages, and it is free to the members of the Fellowship.”

Then I asked her why she put the summer and fall books on line – I have a book.

She said that her book was better. Takes 1 minute to download and sits on your computer. She even told me she hates to get the big book out when a client is in her office. Hates to have them see she has to look something up. While she chats about something, she looks up in the on-line book and never looks like she didn’t know.

Besides that she said, “the on-line book is searchable and all the references are linked for easy access.” Don’t tell her but the on-line book is better!

If you have not downloaded the ncpe manuals – Do IT! No cost to Fellowship members who attended the seminar.

The Resources to the Fellowship Members are incredible not to mention the Taxing Times Newsletter you are reading – all the tax news that is fit to print and some that isn’t, but that is the editor’s job.

Frankly, I don’t know why everyone is not a member of the Fellowship. Tell your colleagues. Don’t let the Fellowship be the best kept secret in the tax business.

Jerry

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• (4) Micro-captive insurance campaign. This campaign addresses transactions described as transactions of interest in Notice 2016-66, 2016-47 IRB 745, in which a taxpayer attempts to reduce aggregate taxable income using contracts treated as insurance contracts and a related company that the parties treat as a captive insurance company. Each entity that the parties treat as an insured entity under the contracts claims deductions for insurance premiums. The approach for this campaign will be issue-based examinations.

• (5) Related party transactions campaign. This campaign focuses on transactions between commonly controlled entities that provide taxpayers a means to transfer funds from the corporation to related pass-through entities or shareholders. The approach for this campaign is issue-based examinations.

• (6) Deferred variable annuity reserves & life insurance reserves IIR campaign. IRS and Chief Counsel have agreed to accept the deferred variable annuity reserves and life insurance reserves issues into the Industry Issue Resolution (IIR) program to develop guidance to address uncertainties on issues important to the Life Insurance Industry. The campaign’s objective is to collaborate with industry stakeholders, Chief Counsel and Treasury to develop published guidance that provides certainty to taxpayers regarding these related issues.

• (7) Basket transactions campaign. This campaign addresses structured financial transactions described in Notice 2015-73, 2015-46 IRB 660 and Notice 2015-74, 2015-46 IRB 663, in which a taxpayer attempts to defer and treat ordinary income and short-term capital gain as long-term capital gain. The taxpayer treats the option or other derivative as open until a barrier event occurs, and, therefore, does not recognize or report current period gains. The gains are deferred until the contract terminates, at which time the overall net gain is reported as a long term capital gain. LB&I has developed a training strategy for this campaign. The approaches for this campaign will be issue-based examinations, soft letters to material advisors, and practitioner outreach.

• (8) Land developers; completed contract method (CCM) campaign. Large land developers that construct in residential communities may be improperly using the CCM of accounting. A developer, whose average annual gross receipts exceed $10 million may only use the CCM under a home construction contract. In some cases, developers are improperly deferring all gain until the entire development is completed. LB&I will provide training for revenue agents assigned to work this issue. The approach includes development of a practice unit, issuance of soft letters, and follow-up with issue-based examinations when warranted.

• (9) TEFRA linkage plan strategy campaign. As partnerships have become larger and more complex, LB&I has regularly revised processes to assess tax on the terminal investors. Recent legal advice provides an opportunity

Taxpayer Advocacy

IRS Rolls Out Large Business and International Campaign Audit Strategy

IRS’s Large Business and International (LB&I) division has described the issues it will be targeting in a new audit strategy known as “campaigns.” IRS identified 13 specific issues spanning a broad range of topics including partnerships, insurance, an energy tax credit, tax techniques used by the television broadcast industry, and foreign businesses and taxpayers. These issues were identified through extensive data analysis, suggestions from IRS compliance employees, and feedback from the tax community.

New campaigns. The campaigns are the culmination of an extensive effort to redefine large business compliance work and build a supportive infrastructure inside LB&I. These campaigns represent the first wave of LB&I’s issue-based compliance work, and more campaigns will continue to be identified, approved, and launched in the coming months. The 13 campaigns selected for this initial rollout are:

• (1) Code Sec. 48C energy credit campaign. This campaign ensures that only those taxpayers whose advanced energy projects were approved by the Department of Energy, and who have been allocated a credit by IRS, are claiming the credit. The approach for this campaign will be soft letters (generally, warning letters intended to encourage self-correction and voluntary compliance) and issue-focused examinations.

• (2) OVDP declines-withdrawals campaign. The Offshore Voluntary Disclosure Program (OVDP) allows U.S. taxpayers to voluntarily resolve past non-compliance related to unreported offshore income and failure to file foreign information returns. This campaign addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord. IRS will address continued noncompliance through a variety of approaches including examination.

• (3) Domestic production activities deduction, multi-channel video program distributors (MVPDs) and TV broadcasters. MVPDs and TV broadcasters often claim that “groups” of channels or programs are a qualified film eligible for the Code Sec. 199 deduction. Taxpayers are asserting that they are the producers of a qualified film when distributing channels and subscriptions packages that often include third-party produced content. LB&I has developed a strategy to identify taxpayers impacted by these issues and will develop training to aid revenue agents in examining them. The approaches for this campaign include the development of an externally published practice unit, potential published guidance, and issue-based exams, when warranted.

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Foreign Taxes

International WSOP Players May Have Tax Issues After ITIN Rule Changes

International players attending the World Series of Poker may have 30% of profits withheld after a tax specialist alleges a change in the law disallows casinos from issuing Individual Taxpayer Identification Numbers.

Professional poker players hailing from the UK have three things going for them.

1. They play a game for a living.

2. They have the freedom to ‘work’ on their terms.

3. They don’t have to pay tax.

But that third one could become a problem if tax professional, writer, and poker player, Russell Fox, is right about a recent rule change that has hit the taxation laws in the US.

Currently, when a player from the UK gets lucky at an event like the World Series of Poker (WSOP) in Las Vegas, they don’t have to pay any tax on their winnings. The ‘special relationship’ that Presidents and Prime Ministers always refer to in time of crisis extends to a tax treaty between the two nations.

So, after spending several hours waiting to get to the cage in the Rio to pick up your winnings, there is no hassle with tax. The casino provides you with an Individual Taxpayer

to make significant changes to how IRS approaches this process. This campaign focuses on developing new procedures and technology to work collaboratively with the revenue agent conducting the TEFRA partnership examination (i.e., the uniform partnership audit rules under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA, P.L. 97-248, 9/3/1982)) to identify, link, and assess tax to the terminal investors that pose the most significant compliance risk.

• (10) S corporation losses claimed in excess of basis campaign. The law limits S corporation shareholders’ losses and deductions to their basis in the corporation. LB&I has found that shareholders claim losses and deductions to which they are not entitled because they do not have sufficient stock or debt basis to absorb these items. LB&I has developed technical content for this campaign that will aid revenue agents as they examine the issue. The approaches for this campaign will be issue-based examinations, soft letters encouraging voluntary self-correction, conducting stakeholder outreach, and creating a new form for shareholders to assist in properly computing their basis.

• (11) Repatriation campaign. LB&I is aware of different repatriation structures being used for purposes of tax-free repatriation of funds into the U.S. in the mid-market population. It has also been determined that many of the taxpayers do not properly report repatriations as taxable events on their filed returns. The goal of this campaign is to simultaneously improve issue selection filters while conducting examinations on identified, high risk repatriation issues and thereby increase taxpayer compliance.

• (12) Form 1120-F non-filer campaign. Foreign companies doing business in the U.S. are often required to file Form 1120-F (U.S. Income Tax Return of a Foreign Corporation). LB&I has data suggesting that many of these companies are not meeting their filing obligations. In this campaign, LB&I will use various external data sources to identify these foreign companies and encourage them to file their required returns. The approach for this campaign will involve soft letter outreach. If the companies do not take appropriate action, LB&I will conduct examinations to determine the correct tax liability. The goal is to increase voluntary compliance by foreign corporations with a U.S. business nexus.

• (13) Inbound distributor campaign. U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions. LB&I has developed a comprehensive training strategy for this campaign that will aid revenue agents as they examine this Code Sec. 482 issue. The approach for this campaign will be issue-based examinations.

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Identification Number (ITIN), and Bob’s Yer Uncle.

But Fox believes that’s about to change.

Fox has heard on Marvin’s Grapevine that casinos are no longer allowed to issue ITINs, meaning you have to turn up with one in tow or the casino withholds 30% of your winnings until you do.

“The IRS sent a major casino here in Las Vegas a letter informing them that because of a provision in the PATH Act no one but the IRS can issue ITINs.”

And that ‘until you do’ part isn’t as easy as it used to be. According to Fox the only way to get hold of an ITIN is via the US Internal Revenue Service (IRS), and apparently, it’s easier to get pregnant on Wonder Woman’s island.

The WSOP Are Chilled Winston

Safe in the knowledge that international poker players are now soiling their knickers, the World Series of Poker (WSOP) very quickly issued this Tweet.

Fox then reacted in kind by suggesting the paperwork from the IRS is likely stuck in the Caesars food chain and hasn’t reached the inbox of WSOP employees via the Rio quite yet.Let’s hope that the tax expert is not an expert, and the WSOP have got their facts straight. Otherwise, there is going to be a lot of whinging Brits peppering them with Tweets in the coming weeks.

IRS Reminds International Taxpayers of Tax Obligations; Clarifies Rules for Tax Withholding Agents

The Internal Revenue Service today reminded non-U.S. citizens who may have taxable income, such as international students and scholars who may be working or receiving scholarship funds, that they may have special requirements to file a U.S. tax return.

The IRS also reminded withholding agents -- such as payroll professionals or universities -- that accurately filed Forms 1042-S help speed any refunds due to their non-U.S. citizen taxpayers. Errors on forms or returns could result in some refunds being delayed.

What Non-U.S. Citizen Taxpayers Must Do

The Internal Revenue Code generally requires non-U.S. citizens, whom the code defines as either resident or non-resident aliens, who are engaged in a trade or business within the U.S. to file tax returns. Non-resident aliens such as foreign students, teachers or trainees temporarily in the United States on F, J, M or Q visas are considered engaged in a trade or business.

Most individuals in F-1, J-1, M-1, Q-1 and Q-2 non-immigrant

status are eligible to be employed in the U.S. and are eligible to apply for a Social Security number if they are actually employed in the United States. Those not eligible for an SSN but who have a tax filing requirement may request an Individual Taxpayer Identification Number from the IRS.

The non-U.S. citizen’s name must be reported exactly as it appears on the official documentation provided to the withholding agent (such as a Social Security Administration card or some other form of official governmental documentation).Filing a Form 1040-NR or 1040NR-EZ is required by non-U.S. citizens who have a taxable event such as:

• A taxable scholarship or fellowship, as described in Chapter 1 of Publication 970, Tax Benefits for Education; • Income partially or totally exempt from tax under the terms of a tax treaty; and/or • Any other income, which is taxable under the Internal Revenue Code.

Non-U.S. citizens also must attach one copy (generally Copy B) for each Form 1042-S received to their tax returns. Non-U.S. citizens should review the Form 1042-S to ensure it accurately reflects their name and income. If the form does not contain accurate information, they must contact the withholding agent for an amended Form 1042-S.

What Withholding Agents Must Do

Generally, non-U.S. citizens who have taxable income also may have withholding of taxes by the source of their income. Withholding agents are required to complete Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.Withholding agents must provide five copies of the Form 1042-S. Copy A should go to the IRS; Copies B, C and D to the recipient of the income; and copy E should be retained by the withholding agent. All information, including the name of the taxpayer, must match exactly on all copies of Form 1042-S.

If withholding agents create a substitute Form 1042-S, all five copies must be in the same physical format. The size, shape and format of any substitute form must adhere to the rules of Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns. The official Form 1042-S is the standard for substitute forms.

A common error is to have a Form 1042-S listing two or more recipients in box 13a. The 2016 instructions to Form 1042-S have been updated to clarify that in the case of joint owners, Form 1042-S can only list one of the owners in box 13a.

Withholding agents should review Fact Sheet 2017-3, where they can find the latest changes to Form 1042-S instructions and common errors that delay processing of tax returns.

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(and probably would) be chaos.

Conformity to the federal tax code will be a major consideration for state lawmakers. State conformity to the IRC encourages taxpayer compliance by eliminating the need for taxpayers to know the rules and procedures for both a federal system and completely separate state tax systems. State tax departments likewise rely on the federal system for administration of their income taxes. That reliance can be seen in how states conduct audits. When a state audits a corporate income tax return, it is generally focusing on whether the corporation properly apportioned its income across the states in which the corporation does business. The audit may also examine whether a corporation is a member of a unitary group or whether the corporation properly characterized some transactions or income. States don’t spend much energy examining whether the corporation properly determined its federal taxable income (generally the starting point on the state return). That task is left to the IRS, with states assuming they will be notified if IRS auditors have determined that a corporation’s taxable income must be adjusted.

The House GOP blueprint would fundamentally reform the corporate tax system. Broadly, the blueprint proposes a destination-based cash flow tax with a border adjustment. The proposal would lower the corporate tax rate to 20 percent, reduce the number of individual tax brackets to three, allow 100 percent business expensing, and eliminate the deductibility of interest for business. There would also be a 50 percent deduction for capital gains, while the estate and alternative minimum taxes would be completely repealed. Most business credits would be removed from the code (except for the research credit). Businesses would be allowed 100 percent business expensing. The proposal includes a border adjustment, which disallows the deduction for receipts from export and foreign-derived profits.

At the outset, state revenue would likely decline, but because eliminating or reducing tax expenditures broadens the tax base, long-term state revenue could increase. Of course, even an increase in revenue can pose a problem for states. Determining what to do with excess revenue has proven difficult in the past.

But given the uncertainty of working out the details of a destination-based cash flow tax, states may also choose to forgo a corporate income tax altogether and move to a gross receipts tax. Seven states impose some form of gross receipts tax, and many others have considered it. For states, gross receipts taxes are attractive because they collect tax based on receipts, not income. This means the states can collect tax from corporations in good times and bad.

Beyond issues of conformity and general tax administration, there is the ever-present issue of state revenue. State budgets are in poor shape. Nearly nine years later, many states have not yet fully recovered from the Great Recession of 2008. At least 25 are facing budget shortfalls, and according to a report from the Urban Institute, the federal government provides nearly one-third of the revenue for state expenditures. If those

State News of Note

How Federal Tax Reform Could Affect States

Since the election of President Trump, Washington has been buzzing with talk of tax reform. Yet, surprisingly little attention has been paid to the effect federal tax reform might have on state tax systems across the country. Because most state, individual and corporate income tax systems rely heavily on federal rules, definitions and calculations, what happens with federal tax reform has broad ramifications on state taxation.

Fundamental income tax reform at the federal level, like that being proposed in the House GOP blueprint, could result in significant changes to state tax bases and the methods by which states collect state income taxes. For states to successfully adapt to federal tax reform, it’s important to open the dialogue now. Giving enough time to properly evaluate the problems presented by that proposal could enable states to take advantage of any opportunity to improve their tax systems. If states are forced to rush to action, the result could

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• Coordinate Regional Practitioner Meetings• President (1999 – 2001)• Treasurer (1997 – 1999); editor of Society’s newsletter, The Texas Times, (1993 – 1997)• Texas Society of Enrolled Agents – Greater Houston Chapter of TxSEA• Greater Houston Chapter of TxSEA President (2011–present)• Greater Houston Chapter, second vice–president (1995).Local Liaison Activities• Regional Practitioner Meetings (RPMs) TxSEA Chair (2013 – present)• Prepare and present two units of CE annually• Coordinate other TxSEA presenters at various cities• Regional Practitioner Meetings (RPMs) speaker participant 2011 – present• First Friday IMRS Calls with SLs 2013 – present• Houston IRS/Practitioner Study Group 2006 – 2013

Professional Accomplishments

Internal Revenue Service Advisory Committee Member 2001 – 2004Montrose Management District officer 2005 – present(Treasurer, 2010 to present)Montrose Tax Increment Reinvestment Zone – officer 2015 – present

Leadership Associations

Leadership America – National Women’s Leadership Networking Program 2012American Leadership Forum – Leadership Networking Program 2002 – 2003Leadership Texas –Texas Women’s Leadership Networking Program 2000Leadership Houston Class XIII – Houston Leadership Program 1994 – 1995

Community Activity

First Lady, City of Houston (2010 – 2015)• Participate in various civic celebrations• Accompany or represent the Mayor in ceremonial activitiesCitizenship Month, City of Houston• Honorary Chair, 2012 – 2015Planned Parenthood of Southeast Texas Action Fund• Political Action Committee board member (2003) and treasurer (2004–present).United Way of the Texas Gulf Coast• Fund distribution organizational review team (1995 – 2012).

Kathy is a knowledgeable and frequent presenter on tax topics.

While this reads like a resume and it actually is, what you should know about Kathy is that she is a tireless volunteer who takes great pride in not only her personal accomplishments but in the success of the organization to which she contributes her time.

funds are reduced or eliminated, states would have the difficult decision of whether to cut or continue some services.

Fellowship Members You Should Know

Editor’s Note: While all ncpeFellowship Members are special individuals who conduct themselves professionally and by doing so enhance our profession and bring credibility to those in the business of tax, this new column is to introduce you to those you may not know and will find value in learning of their skills and accomplishments. In the past I have introduced you to Martin “Marty” Stein and Joan LeValley and to initiate this new feature:.

A. Katherine Hubbard

License Enrolled Agent – Internal Revenue Service 1985 – Present

Experience Hubbard Financial Services, Inc.Houston, TX 1990 to PresentPrincipal and founder of a tax and bookkeeping practice incorporated in 1993

• Manage private tax and bookkeeping practice for individuals,proprietorships, partnerships, corporations, trusts and estates, and non–profit organizations.

• Tax Advocacy Services – Represent taxpayers before IRS audit, appeals or collection divisions.

Professional Associations

• National Association of Enrolled Agents• Government Relations CommitteeTexas Society of Enrolled Agents• Education Committee Chair (2012 – 2015)• Coordinate 19 Hours Convention CE• Coordinate Regional Practitioner Meetings• Oversea Statewide CE quality• Government Relations Chair (2006 – 2014, 2015 – present)

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months). And, for any return for a tax year of a C corporation which ends on June 30 and which begins before Jan. 1, 2026, the automatic extension period is seven months (not six months). (Code Sec. 6081(b) )

Under Code Sec. 6081(a), IRS may grant a reasonable extension for filing any return; such extensions are limited to six months other than in the case of taxpayers who are abroad.

IRS confirms accuracy of draft Form 7004 instructions. On its webpage, IRS has confirmed the accuracy of the Feb. 1, 2017 draft Form 7004 instructions, i.e., it has confirmed that a 6-month extension applies for 2016 and later year C corporation calendar year returns, notwithstanding Code Sec. 6081(b)’s 5-month extension for those returns.

IRS says that it made the webpage posting because it wants to reassure the tax professional community that the information is correct in the Form 7004 instructions regarding the automatic 6-month extension and explain that the reason it’s correct is Code Sec. 6081(a).

Wayne

Letters to the Editor

Hi Beanna:

I got a report from a client about how the IRS is dealing with the shared responsibility payment. This taxpayer didn’t pay his taxes until he received a bill from the IRS. He thought it was curious that the IRS told him he owed less than what I told him to pay by the amount of the shared responsibility payment. He paid what they asked for, and then he received another invoice for the amount of the shared responsibility payment. He called them to ask why they had not asked for that in the first invoice, since it was included on his tax return, and the agent he was speaking with could not tell him why. Then my client said it is probably because you cannot collect on the responsibility payment the way you can for taxes, so it must have to be treated separately. The agent thought my client was probably right since that seemed to make sense. They don’t know how they are supposed to treat the collection of the shared responsibility payment.

I just wanted to share that my client thought it was odd that the IRS didn’t even know what they were supposed to be doing with this “non-tax” item.

Have a great week.

Melissa Simmons

Like many of us, we take the same tenacity of our work life home, as does Kathy, where her home life has seen a family raised and flourishing with her spouse, the former Mayor of the City of Houston.

We are pleased that Kathy is a member of the ncpeFellowship. She is a contributor to the Resources of the Fellowship and we are appreciative of her continued support.

Wayne’s World

IRS Confirms: Calendar Year C Corporations Can Get 6-month Filing Extension

On the IRS website, IRS has confirmed the accuracy of the instruction contained in the most recent draft instructions for Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns) which provides a 6-month extension for 2016 and later year C corporation calendar year returns, notwithstanding Code Sec. 6081(b)’s 5-month extension for those returns.

Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Act), in a major restructuring of entity return due dates, effective generally for returns for tax years beginning after Dec. 31, 2015 (i.e., beginning with 2016 tax year returns filed in 2017), C corporations have to file by the 15th day of the fourth month after the end of the tax year. Thus, C corporations using a calendar year have to file by Apr. 15 of the following year. (Code Sec. 6072(a)) Under a special rule, for C corporations with fiscal years ending on June 30, this rule change won’t apply until tax years beginning after Dec. 31, 2025, and their returns are due on the 15th day of the third month after the end of the tax year. (Act Sec. 2006(a)(3))

Under the Act, effective generally for returns for tax years beginning after Dec. 31, 2015, the 3-month automatic extension of time for corporate returns in Code Sec. 6081(b) was changed to an automatic 6-month extension. (This change conforms the statutory rule with the 6-month automatic extension for corporate returns in Reg. § 1.6081-3(a)). However, for any return for a tax year of a C corporation which ends on December 31 and which begins before Jan. 1, 2026, the automatic extension period is five months (not six

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Hi Miss B,

Thank you for your wonderful assistance to the professional community during this hectic time of the year.

Just had a wonderful “call-in” conversation with the techs at Pro Series. They do have something in the works for this February 3rd, IRS change. They are working on posting program changes sometime soon. There is a go-around but I decided to just wait on the filing of the returns involved at this time.

I would still follow the disclosure you sent out in regards to this change.

Linda & Rick Odemar

Beanna – I received a call from www.good accountants.com telling me that they had a job for a local account to be an off site controller for a local company using “Quickbooks” (wife) doing 2-3 million per. Compensation 2500.00 per month doing reports from the QB print outs. Reports would be p/l / budget / forcast / ? / I asked about tax returns. No that was done elsewhere including personal 1040’s. After the sales pitch. We went to the computer screen and that is where there would be a fee to join this organization. The employee (sub-contractor) would pay, not the company looking for the accountant.

You might want to pass this on. There was an apology for having to “rush” during the “tax” season.

Bill Bailey

Thanks for being so well on the ball and getting us the info on checking the box for health care coverage so promptly. We used it immediately with clients.

Other organizations (edit) still haven’t sent us any notifications. We’re so glad to be affiliated with NCPE. We couldn’t do our job as well without all of you.

Margaret Winschell

Wow, what great info.

Give Bill Nemeth, My thanks for his charts. I have been drawing these same charts for years to explain the credits to clients, but my charts are like stick man drawings compared Bill’s Professional Charts. Wealth of information in this bulletin.

As always, Thank you Beanna

Ron, The Tax Guy (Ron Webber)

Wow! After months of silence, the Fellowship speaks. Thanks to all who let us know and a special thank you to Mr. Bill (Nemeth) for his contributions to the Fellowship Resources.

Tax Jokes and Quotes Estate Planning

Tom was a single guy living at home with his father and working in the family business. He knew that he would inherit a fortune once his sickly father died.

Tom wanted two things:

To learn how to invest his inheritance To find a wife to share his fortune. One evening at an investment meeting, he spotted the most beautiful woman he had ever seen. Her natural beauty took his breath away. “I may look like just an ordinary man,” he said to her, “but in just a few years, my father will die, and I’ll inherit 20 million dollars.”

Impressed, the woman obtained his business card.

Two weeks later, she became his stepmother.

Women are so much better at estate planning than men.

From Bob Dudley, our ncpeFellowship member with a great sense of humor.

The Woman and the Two Men from the Government Ray and Bob, two Government mechanical engineers, were standing at the base of a flagpole, looking up. A woman walked by and asked what they were doing. “We’re supposed to find the height of the flagpole”, said Bob, “But we don’t have a ladder.” The woman said, “Hand me that wrench out of your toolbox.” She loosened a few bolts, then laid the pole down. She then took a tape measure from their toolbox, took a measurement and announced, “Eighteen feet, six inches” and walked away. Ray shook his head and laughed.

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“Ain’t that just like a ‘Miss-know-it-all’ woman?” he said. “We need the height and she gave us the length!” Bob and Ray are still working for the Government.

Thank you to Fellowship Member Joan LeValley for the signs and this story of Bob and Ray!

Joan LeValley sends us some signs we would like to post in our office:

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Next Edition of Taxing Times,ncpeFellowship Monthly Newsletter:

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in February and March)