1

Monthly Newsletter for ncpeFellowship Members Vol. 9 No. 6 June 2018

1

Remarks from Beanna

The Tax Cuts and Jobs Act

It is the topic of the summer. Professional organizations, lunchtime meetings, dinner conversation and of course, every beautician, UPS man and barber is giving advice. Don’t fall prey to this! Only place to learn, understand and ask your questions – ncpe!

Jerry, Wayne and I hit the road the first week in June – go to www.ncpeseminars.com to sign up. 6 hours of quality education followed by 2 hours of 2 Guys and A Doll where the 3 of us will take your questions and give you our best. 8 CPE hours.

If you miss this one-day on the TCJA, sign up for the summer Corporate, Partnership and LLC - much will be covered in this two-day seminar - as always, the BEST!

The Fellowship office will be open and Mr. Tom will be manning the phones and taking your questions. He will reach us if necessary.

I am excited! The ACT is changing tax as we know it and it will be interesting to see it play out. And, if you don’t like it – 1/1/2026 it ends and who knows what it will be, but for many of us this will be played out in the last years of our career in the business of tax.

Knucle down, fasten the seat belt – this likely will be a bumpy ride!

BeannaBeanna@ncpefellowship.com or 877-403-1470

National Center for Professional Education, Inc. (NCPE)

Presents a Seminar onThe Tax Cuts and Jobs Act of 2017

You survived the tax season; now it's time to prepare forthe massive changes under the Tax Cuts and Jobs Act

(TCJA)

This seminar will feature the effects of the TCJA onIndividuals and Businesses

(C Corporations, S Corporations, Partnerships andSchedules C)

Topics:* The basics of the new Tax Cuts and Jobs Act of 2017

* The new tax rates for individuals and businesses* Changes to various categories of itemized deductions* The impact of the tax law on methods of accounting

* New requirements for treatment of stock options[Section 83(I)]

* Qualified business income deduction and how itreplaces corporate AMT

* Understanding the new Section 199A business incomededuction and how your clients qualify

1-day (8 hours) seminar(including 6 hours of lecturing and 2 hours of questions

and answers by our famous panelof Wayne Hebert, Jerry Riles and Beanna Whitlock)

For Locations, Dates And Register:

http://ncpeseminars.com

or call (800) 682-2163

2

WebinarsOn-Demand

With Concinued Education Hoursncpefellowship.com

Today's Internal Revenue Service2 CE Hours

Where Do You Keep Your Ethics?2017 2 CE Hours

The § 754 Election2 CE Hours

The New Offer In Compromise2 CE Hours

Tangible Property Regulations2-CE HOURS WEBINAR

Estate And Gift Tax1-CE HOUR

The Incredible LLCLimited Liability Company

2-CE HOURS

Identity Theft1-CE HOUR

Taxation Of Ministers1-CE HOUR

IRS Audits1-CE HOUR

NCPE Seminar Series Reference Books

Availablencpefellowship.com

2017 Fall Seminar Series Book:Searchable, With References

1040 Individual Income Tax Update Seminar857-Page

2017 Summer Seminar Series Book:Searchable, With References

Corporations (C & S) andPartnerships (LLCs) Seminar

765-Page

2016 Fall Seminar Series Book:Searchable, With References

1040 Individual Income Tax Update Seminar5th Revision, 854-Page

2016 Summer Seminar SeriesSearchable And Reference Book

Corporations (C & S) andPartnerships (LLCs) Seminar

802 Pages

2015 Fall Seminar SeriesSearchable And Reference Book

923 Pages

2015 Summer Seminar SeriesSearchable And Reference Book

840 pages

2014 Fall Seminar SeriesSearchable And Reference Book

1,004 Pages

2014 Summer Seminar SeriesSearchable And Reference Book

840 Pages

3

Remarks From Beanna (1)

Tax News (5)Lessons From the 2018 Tax Season (5)Illegal Immigration and Tax Issues - Recent Changes Affect Available Deductions and Credits for Dependents (6)Surprising Strategies to Avoid the Alternative Minimum Tax Under the New Tax Law (10)The Top 7 Ways the New Tax Law Could Affect Your Startup (13)IRS Expects to Issue Expensing Regulations "By Late June Or Early July" (14)Supreme Court Lets Million Dollar FBAR Penalty Stand (14)Only 32% of Businesses Say They're Ready for Tax Reform Changes (15)AICPA Asks IRS For Changes in Form 990 (16)You Can’t Deduct Hobby-related Expenses Under the New Ttax Law—But Don’t Give Up Hope (17)

Question of the Month (18)What to Does A Taxpayer Do with An ITIN After Receiving SSN? (18)

Tax Practice Management (19)7 Ways to Create a Pleasant Work Environment for Your Employees (19)

Military Taxes (20)Special Tax Benefits for Armed Forces (20)

Estate and Gift Tax (20)Post-TCJA Qualified Personal Residence Trust Planning (20)

News from Capitol Hill (21)Taxpayer First Act Would Impact 1099 Filing (21)New Tax Act – More to Come (22)

People in the Tax News (24)Phyllis Jo Kubey, ncpeFellowship Member Goes to Washington (24)Former Paterson Restaurant Owners Admit to $240,000 Tax Evasion (24)Baltimore Top Cop Suspended After Being Charged with Failing to File Taxes (24)Former Owner of Plastics Recycling Company Convicted of Tax Evasion (25)A Canton Tax Preparer Indicted Last Year Has Been Acquitted of All Federal Tax Fraud Charges (25)Hudson man indicted for claiming false tax credits (25)Taxpayers Personal Information Found in Dumpster (25)Private Eye Who Attempted to Access Trump's Tax Returns Is Sentenced (26)

IRS News (27)Reshaping the IRS (27)New Tool Provides More Information About Exempt Organizations (28)IRS Relief Allows Certain Small Employers to Claim Section 45R Health Care Credit (28)IRS issues updated list of automatic accounting changes (30)Certain Equipment Used in Marijuana Industry Can Be Seized and Sold by IRS (31)

Table Of Contents (page)

4

IRS Announces 2019 ACA Premium Credit Indexing Adjustments (32)Payments Under Disability and Survivor Benefit Plan Qualify as Workers' Comp (33)In Response to Court Order, IRS Issues Justification for 2015 Healthcare Regs (34)IRS Modifies Safe Harbors on Treatment of Loss Corporation's Built-In Gain and Loss After Ownership Change (34)IRS OKs Late ADS Depreciation Election to Utilize NOL Generated by Alimony Payment (36)Rev Proc Explains Deductibility and Reliance Issues Relating to Charitable Contributions (37)IRS Issues New Strategic Plan; Five-year Plan's Goal to Help Taxpayers (40)IRS Issues Inflation-adjusted Health Savings Account Figures for 2019 (41)Automatic Consent to Accounting Method Change for New FASB & IASB Financial Accounting Standards (41)

Tax Pros in Trouble (43)Tax Prepper Accused of Pumping Up Clients' Returns and Keeping the Money (43)West St. Paul Tax Pro Filed Returns For Unknowing Kids (43)Tax Fraud Blotter: In-laws’ outlaw (44)Buffalo Tax Preparer Pleads Guilty a Second Time to Filing Fraudulent Tax Returns (46)Shelby Township Tax Preparer Admits to Fraud (46)North Carolina Return Preparer Sentenced to Prison for Filing False Tax Refund Claims (46)

Ragin Cagin (47)Summary of Preparer Penalties under Title 26 (47)

Taxpayer Advocacy (48)New Law Gives Individuals and Businesses More Time to Challenge a Wrongful IRS Levy; Newly-revised Publication Can Help (48)IRS Issues Revised Levy Exemption Table Reflecting TCJA (48)Taxpayer Bill of Rights Doesn't Provide General Access to IRS Office of Appeals (49)

Foreign Taxes (51)How Do US Taxes Compare Internationally? (51)

State News of Note (52)Disaster Victims in Alabama Qualify for Tax Relief (52)Disaster Victims in North Carolina Qualify for Tax Relief (55)

Wayne's World (56)Internal IRS Guidance Addresses Losses Claimed by S corp Shareholder in Excess of Basis (56)

Letters to the Editor (57)

Tax Jokes and Quotes (57)

Sponsor of the Month (58)TASJ Online Sponsor of the Month (58)

Table Of Contents (page)

5

Tax News

Lessons From the 2018 Tax Season

By Roger Russell

In the future, the 2018 filing season may be remembered with nostalgia.

“Wave goodbye to tax seasons of old,” said Roger Harris, president of Padgett Business Services. “This was the last filing season as we know it, because next year it will be totally different.”

Many preparers spent more time explaining to taxpayers the changes for the year ahead, rather than explaining their 2017 taxes. Harris found a wide difference between what people knew about the new Tax Cuts and Jobs Act, and what they thought they knew. “Most had no idea how it would impact them,” he said. “They had preconceived ideas, but some were right and some were wrong. They fell into different categories and had to be dealt with differently.”

And some of their questions were simply unanswerable. “Many wanted information on the treatment of pass-throughs under tax reform. Unfortunately, we couldn’t answer them,” he said. “We had to tell them that we’d get back to them when we get IRS guidance, hopefully over the summer.”

The season in numbers

In the National Center for Professional Education’s “After Tax Season Survey,” when asked what lessons they learned in conducting their practice, 10 percent of respondents said that they would hire more seasonal help; 25 percent said that they would fire some clients; and 12 percent said that they would attend more education sessions. Among the reasons cited in the “Other” category were the following:

“I need to know how to say no.”

“Clients with K-1s will be put on automatic extension.”

“Will increase rates.”

“I need to improve my organization of records (clean my desk and keep it clean).”

“Get clients to work around our hours rather than us working around theirs."

“I need to delegate more work.”

“More new clients walked in the door because of the TCJA.”

“Businesses were doing better, and many sole proprietors had to be moved to entities such as S corporations.”

When asked how stressful the season was, nearly half said that it was not stressful, while 30 percent said that it was more stressful than other filing seasons, and 26 percent said that it was less stressful than others.

Twenty percent thought that the TCJA would lead to them losing clients, while 5 percent said they would gain clients. Meanwhile, 28 percent cited health insurance as the biggest issue during filing season. Other issues cited were the Earned Income Tax Credit, the Child Tax Credit and education credits, and late receipt of documents such as K-1s and brokerage 1099s, and due diligence paperwork.

Expect the unexpected

Ensuring adequate staffing before tax season begins is crucial, according to Kate Rooney, principal at Boston-based Edelstein & Co.

“I thought we were adequately staffed, but there are some things that you can’t prepare for,” she said. “You can fix last year’s problems, but new ones will pop up. The work was more complicated this year, which demanded more time on the part of preparers.”

“Frontload the tax season as much as possible from an administrative standpoint,” advised Lisa Mrkall, a senior manager of tax at Williamsville, N.Y.-based Tronconi Segarra & Associates. “You can never frontload enough regarding planning, scheduling and organizing.”

Alyce Notaro, also a senior manager at Tronconi, agreed. “And we’ve learned to always have a contingency plan,” she said. “We organize and schedule as to how we hope and expect things will work out, but if a particular deadline gets missed or something else goes astray, what will you do to keep things from spiraling out of control? Basically, we try to anticipate the central issues that may come up.”

Taxpayers this year were confused, mainly because of the press about the new tax law, according to Beanna Whitlock, a San Antonio-based preparer and educator and former director

6

of Internal Revenue Service Public Liaison. “They all thought their taxes were going to go down this filing season,” she said. “When they found out most of the law didn’t apply to them until 2018, they wanted to talk about 2018 taxes, rather than 2017 taxes.”

Citing the Tax Cuts and Jobs Act and the Bipartisan Budget Act, passed in early February, that brought back some of the expiring tax provisions, Whitlock suggested a deadline date after which Congress can no longer make changes affecting the current year. “Give the IRS time to issue regulations and forms, and have the professional community get up to speed on the changes,” she said.

“Tax planning is back,” she noted. “The writers of the tax bill didn’t consider what would happen to outside sales persons under the law. Beginning in 2018, miscellaneous itemized deductions are gone. That includes their unreimbursed employee business expenses.”

“I told them to go to their employer and have the employer reduce their W-2 income, and reimburse the employee’s business expenses under an accountable plan. They’ll make less in wages but keep more in their pocket,” she said. “And why would the employer do that? Because the employer will save on FICA and Medicare taxes.”

“A good preparer will spend additional time with the taxpayer so they can get the arrangement done early in the year,” she said. “Even taxpayers you can’t help need to understand what the law did to them.”

Since investment expenses are no longer deductible, Whitlock advises clients to consider switching to a mutual fund that does not charge an annual fee. “One client was paying $34,000 in investment fees. They complained they wouldn’t make as much in mutual funds as in individual stocks, but if they reduced their return by the $34,000 fee, which is no longer deductible, they’ll come out ahead. But I highly recommend that tax professionals not get into areas of advice for which they are not certified or qualified.”

Whitlock also recommends that preparers get a medical checkup and have any medical issues taken care of before filing season. “Tax season is highly stressful, so make sure you are healthy enough to do it,” she advised. “This past season, five members of the Fellowship died during a stressful filing season.” Whitlock is executive director of the National Center for Professional Education Fellowship.

She says a technical corrections bill will be necessary to fix many things in the TCJA, among them the deduction for meals. “When they took away the entertainment deduction, they took away meals without intending to do it,” Whitlock explained. “This has left a lot of confusion in the industry.”

Michael Greenwald, a partner and corporate and business tax practice leader at Top 100 Firm Friedman LLP, agreed, and would tell Congress “not to pass any more tax bills.”

Just the sheer volume of reporting requirements can be daunting, according to Greenwald. “Because of the new tax bill, it’s especially important to have a really good due-date tracker,” he said. “There are so many reporting requirements at both the state and federal level. It’s critical to be aware of and manage everything you have to file.”

“This year one of the biggest issues was to be sensitive to people who needed to make payments under the tax repatriation provisions passed for controlled foreign corporations,” he continued. “You have to make sure you’re tracking every jurisdiction in which the taxpayer has to file.”

Cryptocurrency has its hazards not only as an investment risk, but in the possibility that a taxpayer may unwittingly be subject to FATCA and FBAR reporting requirements, Greenwald noted. “Anyone who held cryptocurrency outside of the U.S. during the year is subject to reporting requirements,” he said. “They may not realize it, but it’s considered an asset held overseas, and they may be subject to a reporting requirement.”

“The other challenge this year was that information seems to be getting to us later and later,” Greenwald said. “Whether it’s 1099s from brokerage firms or K-1s from partnerships, they’re coming in later and therefore it’s compressing the amount of time available to prepare the return. This year, the problem was compounded by the IRS computers going down on filing day, which provides a cautionary lesson — don’t wait until the last minute. And sometimes it’s better to extend a return, rather than trying to rush it out and risk errors or problems with e-filing.”

Editor’s Note: Those Fellowship Members who participated in the “After Tax Season Survey” didn’t know your responses would be published in Accounting Today Magazine, but they were. Thank you for being quality individuals who express very well what it is like to be a tax professional.

Illegal Immigration and Tax Issues - Recent Changes Affect Available Deductions and Credits for Dependents

Taxpayers may be surprised to know that, prior to the enactment of the Tax Cut and Jobs Act of 2017 (TCJA), under certain conditions illegal aliens or undocumented immigrants could be claimed as a dependent on individual tax returns, which also allowed the taxpayers to claim various tax credits. Section 10 of the TCJA has repealed the old law, making it now impossible to claim this dependency deduction. The law does still allow individuals to claim qualifying aliens for certain tax credits. There are tax preparer due diligence requirements for some of these tax credits, and a new provision in the TCJA extends due diligence to apply to individuals filing as heads of households [Internal Revenue Code (IRC) section 6695(g)].

This article discusses specific considerations when claiming dependency and tax credits for individuals without legal immigration status. The authors review the law prior to the TCJA as important foundational information for claiming

7

tax credits under the new law, as well as for filing amended returns. It will also serve as future reference material when and if the newly enacted laws sunset on December 31, 2025.

Who Are Illegal/Undocumented Aliens?

There is no uniform definition of the term “illegal alien” that has been applied across all contexts; it appears in federal statutes, case law, and federal agency websites. The Department of Homeland Security (DHS) has jurisdiction over immigration matters. In the context of the e-verify system, DHS defines an illegal alien as “as a foreign national who (a) entered the United States without inspection or with fraudulent documentation or (b) who, after entering legally as a non-immigrant, violatedstatus and remained in the United States without authority”(Glossary, DHS, 2018, http://bit.ly/2vOoFRl). Generally, illegalaliens are considered nonresidents, but there are exceptions,as discussed below.

An “alien” is an individual who does not have U.S. citizenship and is not a U.S. national [8 USC 1101(a)(3)]. U.S. tax laws take the view that one is either a resident alien or a nonresident alien. A resident alien will be treated as a U.S. citizen for tax purposes, while a nonresident alien is neither a citizen of the United States nor a resident alien. Immigration officials use other terms to describe non-residents, such as “aliens,” “illegal aliens,” or “undocumented non-citizen (aliens).”

Who Are Dependents?

A dependent is a qualifying child or a qualifying relative [IRC section 152(a)], but the term does not include an individual who is not a citizen or national of the United States unless such individual is a resident of the United States or a contiguous country [IRC section 152(b)(3)(A)]. The TCJA did not repeal the meaning of a qualifying child or relative, as it is applied for uses other than dependency deduction criteria. Therefore, the term “dependent” and its traditional meaning serve as an underlying basis for claiming tax credits.

Generally, qualifying dependents who are non-U.S. citizens can reside in Canada, Mexico, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Commonwealth of the Northern Mariana Islands.

It is worth noting that there is a difference between the terms “dependent” and “dependency deduction.” One must be a dependent to be claimed for a dependency deduction; however, one must also be a dependent to be claimed for certain tax credits. This article will use the term “dependent” to distinguish it from a “dependency deduction.” This article will use the phrase “claiming as a dependent” to generally mean that one can claim an individual as either a qualifying child or relative, for whatever lawful purpose that entails.

There is no uniform definition of the term “illegal alien” that has been applied across all contexts; it appears in federal statutes, case law, and federal agency websites.

How To Become A U.S. Resident For Tax Purposes

An alien has several possible paths to resident status. The most commonly known path is obtaining an alien registration number, also known as a green card, during any part of the tax year. The lesser known paths are passing a substantial presence or a first-year choice test.

Substantial Presence Test.

Under the substantial presence test [IRC section 7701(b)(3)], during the tax year in question, the potentially qualifying dependent must be in the United States for at least 31 days, and at least 183 equivalent days, calculated as follows:

• All the days present in the tax year in question, plus

• One-third of the days present in the preceding tax yearin question, plus

• One-sixth of the days present in the second yearpreceding the tax year in question.

The “at least 31 days” requirement in the tax year in question is part of the 183-equivalent day requirement; that is, if a potentially qualifying dependent is present for 183 days during the tax year in question, that person does not have to be present an additional 31 days. For example, if a person is in the United States for 60 days in 2015, 99 days in 2016, and 140 days in 2017, he is considered substantially present, calculated as follows: (60 days × 1/6 = 10 days) + (99 days × 1/3 = 33 days) + 140 days = 183 equivalent days.

First-Year Choice Test.

An alternative to the substantial presence test is the first-year election [IRC section 7701(b)(4)]. The following criteria must be met to qualify:

• The individual does not meet the substantial presencetest the year the undocumented enters in the United States.

• The individual is not a resident of the United Statesin the calendar year immediately preceding the year heenters the United States.

• The individual is substantially present in the year afterhe enters the United States.

• The individual is present in the United States at least31 consecutive days in the year he enters the UnitedStates.

• The individual is present in the United States in theyear he enters for at least 75% of the time from enteringuntil the end of the year (with up to five days allowed forabsence).

An illegal alien will be treated as a resident of the United States for the portion of the year he is in the country. For

8

children of divorced or separated parents.

Support Test.

To meet this test, the child cannot have provided more than half of her own support for the year. A concern is off-the-books income earned by potentially qualifying dependents. There is a widespread belief that illegal aliens or undocumented immigrants are more likely to work off the books and not report all income. Teenagers may work and earn enough money to provide over half of their own support, but not report the income, which may jeopardize passing the support test.

Claiming A Qualifying Relative

The IRS summarizes the requirements to be a qualifying relative under four tests: not a qualifying child, member of household or relationship, gross income, and support [IRC section 152(d)(1)(A)–(D)]. Unlike the qualifying child test, age is not of concern. Qualifying relatives are only limited to those who are residents of the United States, Canada, Mexico, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Commonwealth of the Northern Mariana Islands because the dependent must reside in one of those locations.

Not A Qualifying Child Test.

A child cannot be the qualifying child of any taxpayer. It is not uncommon for illegal aliens or undocumented immigrants to live in a residence with several adults; this test prevents adults at such a residence from claiming a child as their qualifying relative when the child is in fact the qualifying child of another.

Member Of Household Or Relationship Test.

To meet this test, a potentially qualifying dependent must either live with the taxpayer all year as a member of the household, or be related to the taxpayer as either 1) a sibling or half-sibling; 2) a lineal descendant, including step-, foster, and adopted children; 3) a direct or other ancestor; or 4) an in-law. Cousins, aunts, and uncles are excluded unless living with the taxpayer the whole year.

Gross Income Test.

To meet this test, an individual’s gross income (GI) for the calendar year in which such taxable year begins must be less than the exemption amount [as defined in section 151(d)]. In 2017, the exemption amount is $4,050. GI includes all income in the form of money, property, and services that are not exempt from tax and all taxable unemployment compensation. The TCJA did not overtly state how to measure the GI test in 2018 and beyond, nor has the IRS provided guidance at the time of this writing.

Support Test.

To meet this test, the taxpayer must provide over one-half of the individual’s total support for the calendar year in which such taxable year begins. Total support includes amounts spent to

example, if Tony enters the United States on October 1, 2017, and remains for the remainder of 2017 and all of 2018, an election can be made under the first-year choice test, since he was not a resident in 2016, is substantially present in 2018 (residing in the United States at least 183 days), and in the United States for more than 75% of the time in 2017. Tony will be considered a resident for tax purposes from October 1 until December 31, 2017.

The TCJA did not repeal the meaning of a qualifying child or relative, as it is applied for uses other than dependency deduction criteria.

Claiming A Qualifying Child

The IRS summarizes the requirements to be a qualifying child under five tests: relationship, age, residency, support, and joint return [IRC section 152(b)(3)(A)–(E)].

Relationship Test.

The child must be a lineal descendent of the taxpayer, or a lineal descendent of the taxpayer’s siblings or half-siblings; this includes adopted and foster children. Because illegal aliens do not possess an alien registration number, proving the relationship test may be more challenging. For minors, a taxpayer can apply for an Individual Taxpayer Identification Number (ITIN) by submitting a Form W-7. If taxpayers have an ITIN for the dependent, they should have some level of documentation to establish a relationship.

Age Test.Under the age test, a qualifying child must be under age 19 or a full-time student under age 24 at the end of the year and younger than the taxpayer (or the taxpayer’s spouse, if filing jointly), or permanently and totally disabled at any time during the year, regardless of age. Generally, for illegal aliens, the age test is not a significant concern for those under age 19, especially if the dependent is an applicant for a green card. United States Customs and Immigration Services (USCIS) forms require the taxpayer to extensively document family relationships, including age.

Residency Test.

The residency test for a qualifying child should not be confused with the citizenship or resident test. The tests are similar, because both require at least 183 days in residency; however, the citizenship or resident test can be met through the substantial presence test or first-year choice election, while the residency test must be met with residency during the tax year in a single household. Therefore, the scope of the citizenship or resident test broadly encompasses residence in the United States, Canada, or Mexico, while the qualifying child test narrowly requires residency in a single household. The qualifying child must have the same principal place of abode as the taxpayer for more than half of a taxable year; barring exceptions for temporary absences, children who were born or died during the year, kidnapped children, and

9

provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. One area of common confusion is that food stamps, public house housing, or government medical insurance benefits are considered support provided by the state, not support provided by the taxpayer claiming the dependent.

Joint Return And Dependent Taxpayer Tests.

Potential dependents must also pass the dependency test [IRC section 152(b)(1)] and the joint return test [IRC section 152(b)(2)]. A taxpayer may not claim a dependent if that person could be claimed by another taxpayer. If an illegal alien is married, a taxpayer cannot claim that person as a dependent unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid.

Tax Credits

The following discussion examines the specific tax credits that taxpayers with dependents who are illegal aliens can claim. They include the child tax credit, the American opportunity credit, and the child and dependent care credit, as well as a deduction for student loan interest. Note that taxpayers cannot claim illegal aliens as a qualifying person for the earned income credit, as a valid Social Security number is required.

Child Tax Credit (Ctc).

Prior to the enactment of the TCJA, taxpayers could claim illegal aliens under the child tax credit [IRC section 24(h)]. Taxpayers could claim up to $1,000 per qualifying child, an amount that phased out as a taxpayer’s modified adjusted gross income (MAGI) reached threshold limits based on filing statuses. Effectively, an individual could be claimed as a qualifying child as long as the dependent met the qualifying child tests used for the dependency deduction and was under 17 at year end. In addition, a taxpayer identification number could be used in lieu of a Social Security number.

Although under the TCJA, the income thresholds before phasing out have increased and the credit has doubled, the qualifying child must now possess a valid Social Security number to receive the full benefit of the credit.

Although under the TCJA, the income thresholds before phasing out have increased to $400,000 for a married couple ($200,000 for other filing statuses), and the credit has doubled to $2,000 per qualifying child, the qualifying child must now possess a valid Social Security number to receive the full benefit of the credit. Per IRC section 24(h)(4), however, any taxpayer can claim a $500 nonrefundable child tax credit, as long as the dependent has a taxpayer identification number [TIN, per Treasury Regulations section 301.6109-1(a)(1)], resides in the United States, and meets either the qualifying child test or the qualifying relative test (with the modification of being a nonchild).

Example.

Camila, a DACA student, came to the United States with her parents when she was 10 years old. She is now 13 and meets the substantial presence test. Her parents applied for and obtained an ITIN for her, and she passes the qualifying child test for CTC purposes; therefore, her parents can claim up to a $500 nonrefundable credit, assuming sufficient earned income. Her parents cannot claim more than a $500 credit, however, because Camila does not have a Social Security number.

A dependent cannot obtain a Social Security number after the due date of the return and amend a tax return to claim a child tax credit refund. Per IRC section 24(h)(7)(B), the Social Security number must be disclosed prior to the due date of the return. The TCJA does not address whether the due date includes extensions.

American Opportunity Credit.

Individuals without legal immigration status can continue to qualify for the American Opportunity Credit (AOC) under the TCJA. Under the AOC, a taxpayer can claim up to a $2,500 tax credit per eligible student per tax year for qualified tuition expenses for the first four years of post-secondary education in a degree or certificate program. The credit is dollar-for-dollar credit for the first $2,000 spent and 25% for the next $2,000. The credit AGI is phased out between MAGI of $160,000 and $180,000 for a married couple filing jointly, and between $80,000 and $90,000 for others. The AOC is partially refundable up to 40% of the allowable credit. An ITIN qualifies as a TIN.

Example.

Liam came to the United States from Ireland with his parents on a tourist visa when he was 8 years old, and they never returned after the visa expired. Liam’s parents filed a W7 and obtained an ITIN for him. He is now 18 years old enrolled as a full-time undergraduate student in an accounting degree program at a local college. His parents lawfully claim their $75,000 income and pay all of Liam’s educational expenses, totaling $3,500 per year. Liam’s parents can claim an AOC because they meet the income limitations, the whole family meets the substantial presence test (and are U.S. residents for tax purposes), and Liam is a full-time student in a degree program. His parents can claim $2,375 in qualified tuition expenses (the first $2,000, plus 25% of the next $1,500) as a nonrefundable credit.

The TCJA significantly curtailed taxpayers’ ability to claim deductions and credits related to undocumented aliens, but the surviving credits and deductions can still be significant.

Note that the AOC is distinct from the lifetime learning credit, for which there is only vague guidance regarding whether an illegal alien can be claimed as a dependent.

10

Child And Dependent Care Credit.

The child and dependent care credit (CDCC) remains intact under the TCJA. If a taxpayer paid expenses for the care of a qualifying individual to enable the taxpayer to work or actively look for work, the taxpayer may be able to claim a nonrefundable CDCC. The amount of the credit is limited to $3,000 for each qualifying person, and only two persons can be claimed.

A qualifying person is a qualifying child who is a dependent who is under age 13, or certain people who are not physically or mentally able to care for themselves, and who has lived with the taxpayer for more than half the year. The dependent must also be a qualifying child or a qualifying relative.

The credit is claimed on Form 2441. On line 2(b), the form asks the taxpayer to enter the qualifying person’s Social Security number; however, the instructions inform the taxpayer to use an ITIN or ATIN (adoption taxpayer identification number) if the qualifying person cannot get a Social Security number. Therefore, an illegal alien meeting the dependent tests can be a qualifying person. Incidentally, a care provider need only provide an ITIN to the taxpayer claiming the credit.

Example.

Wesley and Marie are illegal aliens residing and working in the U.S. since 2012. They arrived with their 1-year-old son, Yves. In 2013, they filed a Form W-7 and obtained ITINs for the whole family so they could properly report earned income. In 2017, Wesley and Marie calculated $50,000 in AGI. Because they work all day, they needed after school care for Yves, now attending first grade. They paid their friend Julie, who is also an illegal alien with an ITIN, $10,000 in qualifying childcare expenses. On Form 2441, line 2(b), Wesley and Marie will insert Yves’ ITIN. On line 1(c), they will insert Julie’s ITIN (even though Form 2441 states to insert a Social Security or employer identification number). The amount of the nonrefundable dependent and childcare credit will be $2,000 (20% of $10,000).

Student Loan Interest.

Although this is an above-the-line deduction and not a credit, a qualifying taxpayer could deduct interest paid on a qualified student loan on behalf of an illegal alien. The taxpayer cannot file as married filing separately and must have MAGI less than $165,000 if married filing jointly or $80,000 for others. The undocumented alien can be any person who was the taxpayer’s dependent when the loan was taken out; however, the dependent cannot have had gross income that was equal to or more than the exemption amount for that year ($4,050 for 2017).

Passing The Tests

Tax issues with respect to illegal aliens or undocumented immigrants can be complex. The TCJA significantly curtailed taxpayers’ ability to claim deductions and credits related to

undocumented aliens, but the surviving credits and deductions can still be significant. CPAs can take comfort when consulted by individuals who would like to claim an undocumented alien; however, to help such individuals navigate meeting dependency tests, CPAs should stress the importance of candor, especially regarding the taxpayer’s lifestyle, living conditions, and family relationships. Although the burden of proof will be born by the taxpayer, tax preparers must abide by due diligence requirements with respect to claiming the credits discussed above.

Authors: Joseph Foy, DPS, CPA is a former IRS Special Agent and an assistant professor of accounting at the school of business at SUNY Old Westbury, Long Island, N.Y.Frimette Kass-Shraibman, PhD, CPA is a professor of accounting at

Surprising Strategies to Avoid the Alternative Minimum Tax Under the New Tax Law

The dreaded alternative minimum tax (AMT) still exists after the Tax Cuts and Jobs Act (TCJA). The good news: the TCJA made the AMT rules more taxpayer-friendly for 2018-2025, and other TCJA changes reduce the odds that you’ll owe the AMT for those years. Even so, you may still benefit from making moves to avoid or minimize the tax. Here are some ideas after first covering the necessary background information.

AMT Basics

The AMT is a separate tax system with a family resemblance to the regular federal income tax system. The difference is the AMT system taxes certain types of income that are tax-free under the regular tax system and disallows some regular tax breaks.

AMT Rates

The maximum AMT rate is “only” 28% versus the 37% maximum regular tax rate for 2018-2025 under the TCJA. For 2018, the 28% AMT rate kicks in when AMT income exceeds $191,500 for married joint-filing couples and $95,750 for others.

If your AMT bill for the year exceeds your regular tax bill, you owe the higher AMT amount.

AMT Exemptions

In calculating your AMT income, you are allowed to subtract an inflation-adjusted AMT exemption. The exemption is phased out when your AMT income surpasses the applicable threshold. For 2018-2025, the TCJA increases the exemption amounts and greatly increases the phase-out thresholds.

For 2018, the exemptions are $109,400 for married joint-filing couples, $70,300 for unmarried individuals, and $54,700 if you use married filing separate status. The respective phase-out thresholds are $1 million, $500,000, and $500,000.

Your exemption is reduced by 25% of the excess of AMT

11

income over the applicable phase-out threshold. But under the liberalized rules for 2018-2025, only truly high-income folks will see their exemptions phased out while middle-income taxpayers will benefit from full exemptions.

AMT Risk Factors

Various interacting factors make it difficult to pinpoint exactly who will be hit by the AMT and who will escape. That said, here are the most common risk factors under prior law and how the TCJA changes affect them:

• Substantial income from whatever source. High incomecan cause your AMT exemption to be partially or completelyphased out, which increases the odds of owing the AMT.While this risk factor still exists, it has been substantiallydiminished for 2018-2025 by the TCJA’s changes to theAMT exemption rules.

• Large itemized deductions for state and local income andproperty taxes. Deductions for these taxes are disallowedunder the AMT rules. For 2018-2025, the TCJA limitsregular-tax itemized deductions for state and local taxes toonly $10,000, or $5,000 if you use married filing separatestatus. Because large itemized deductions for thesetaxes are not possible for 2018-2025, this risk factor issubstantially diminished for now.

• Several dependent kids and therefore quite a few personaland dependent exemption deductions. These deductionsare disallowed under the AMT rules. For 2018-2015, theTCJA eliminates personal and dependent exemptiondeductions, so this risk factor is gone for now.

• Exercise of in-the-money incentive stock options (ISOs).The so-called bargain element (the difference between themarket value of the shares on the exercise date and yourexercise price under the ISO) does not count as incomeunder the regular tax rules, but it does count as incomeunder the AMT rules. This risk factor still exists after theTCJA.• Significant miscellaneous itemized deductions (forthings like investment expenses, fees for tax advice and preparation, and unreimbursed employee business expenses) were disallowed under the AMT rules. For 2018-2025, the TCJA eliminates miscellaneous itemized deductions that were previously allowed for regular tax purposes but disallowed for AMT purposes. So this risk factor is gone for now.

• Interest from private activity bonds which is tax-free forregular tax purposes but taxable under the AMT rules. Thisrisk factor still exists after the TCJA.

• Depreciation write-offs for assets such as machinery,equipment, computers, furniture, and fixtures from yourown business or from investments in S corporations,LLCs, or partnerships. These assets must be depreciatedover longer periods under the AMT rules, which increasesthe likelihood that you’ll owe the AMT. Under the TCJA,

businesses can deduct the entire cost of many depreciable assets in Year 1 under both the regular tax rules and the AMT rules — for assets placed in service between 9/28/17 and 12/31/22. So this risk factor is greatly diminished for newly acquired assets, but it continues to exist for older assets that are still being depreciated under the prior-law rules.

Planning to avoid or minimize the AMT

The TCJA reduces the odds that you’ll owe the AMT for 2018-2025. And if you do still owe the AMT, you will probably owe less (maybe a lot less). Even so, you might still benefit from taking steps to avoid or minimize any AMT hit under the new law. Here are some suggestions.

Think twice before prepaying state and local taxes

If you are solidly in the AMT mode, the traditional regular-tax yearend strategy of prepaying state and local income and property taxes that are due early next year will not help you. Those taxes are not deductible under the AMT rules. So pay them next year when you have a chance of not being in the AMT mode.

Another reason for not prepaying is the fact that the TCJA limits itemized deductions for state and local income and property taxes to a combined total of $10,000 ($5,000 for those who use married filing separate status) for 2018-2025. So prepaying these taxes might push you over the threshold for non-deductibility, which won’t help your cause.

Spread out ISO exercises

Consider spreading out exercises of any in-the-money ISOs over several years. Exercising ISOs when there’s a big spread between current market value and the exercise price is one of the most common triggers for unexpected AMT bills.

Disdain private activity bonds

While the interest on municipal bonds is tax-free under the regular tax rules, interest on so-called private activity bonds is taxable under the AMT rules, which increases your exposure to the AMT. A common example of a private activity bond is one used to finance a stadium for a professional sports team.

Counterintuitive strategy: accelerate income into AMT year

If you are solidly in the AMT mode for this year, remember that the maximum AMT rate is “only” 28% while the maximum regular tax rate is 37%. So you might actually benefit from accelerating some additional income into this year when it will be taxed at 28% under the AMT rules instead of at a higher rate next year under the regular tax rules. You’ll pay more tax for the current year, but you’ll pay at a lower rate — which can generate permanent tax savings over the two-year period.

12

many factors, including the tax implications. The last thing you want is to be surprised by your tax bill when your goal is to have adequate income in retirement.

"An annuity is a tool. You have to use it wisely," said certified financial planner Mari Adam of Adam Financial Associates.

Qualified vs. non-qualified annuities

Although there are many types, annuities fall into one of two broad categories: qualified or non-qualified. And the payouts are taxed differently.

If you fund an annuity with pre-tax money, it's considered a "qualified" annuity.

Payments from qualified annuities are fully subject to income tax because you weren't taxed on your contributions when they went in or on the growth of your money as it accrued, just like in a 401(k) or traditional IRA.

Qualified annuities are usually funded with money from an IRA, 401(k) or other tax-deferred account.

If you buy an annuity with after-tax money, that's considered a non-qualified annuity.

You'll only owe income tax on a portion of your payments, because you've already been taxed on the principal you invested.

What part of your payments will be taxable is determined by a so-called "exclusion ratio," said Mark Luscombe, principal federal tax analyst of Wolters Kluwer Tax & Accounting US.

The ratio is based on the principal you invested, the earnings on your principal and the length of your annuity. Your investment return may be fixed or variable, depending on which type of annuity you chose.

If your non-qualified annuity payments are based on your life expectancy and you happen to live longer than expected, that will affect the taxes you pay, too. Say you start collecting non-qualified annuity payments at 65 and your life expectancy is 85. Your payments from age 65 to 85 will be partially taxablebased on your exclusion ratio. But if you end up living to 97,100% of your payments from years 86 to 97 could be subjectto tax, Luscombe noted.

There is one instance in which annuity payments could be tax free: if you bought an annuity within a Roth IRA or Roth 401(k). In that case, you use after-tax money to buy your annuity and, because it's a Roth, the earnings will grow tax free, as opposed to just tax deferred the way they are in most other annuities.

"Roths would qualify for a 100% exclusion if the timing and age requirements are met," Luscombe said.

How the AMT credit works

Part of your AMT liability can potentially generate an AMT credit. You can then use the credit to reduce your regular tax liability in future years — but only to the point where the regular tax liability equals the AMT liability for that year. You can carry an AMT credit forward for an unlimited number of years.

The AMT credit is generated only by AMT liabilities that are attributable to so-called deferral preferences (items that are recognized at different times for regular tax purposes and AMT purposes). AMT liabilities that are attributable to so-called exclusion preferences (items that are permanently treated differently under the regular tax and AMT rules, such as standard deductions) do not generate AMT credit. Exclusion preferences include:

1. Itemized deductions that are allowed for regular taxpurposes but disallowed under the AMT rules (such as stateand local taxes and miscellaneous itemized deductionsbefore the TCJA).

2. Deductions for home equity loan interest allowed forregular tax purposes before the TCJA, if the loan proceedswere not spent on your first or second residence.

3. Your standard deduction, if you claimed it instead ofitemizing.

4. Personal and dependent exemptions allowed before theTCJA.

5. Tax-exempt interest from private-activity bonds.

Most other AMT adjustments and preferences are deferral preferences that will potentially generate AMT credits. For instance, the bargain element from exercising an ISO is a deferral preference and so are AMT depreciation adjustments.

Because the TCJA reduces or eliminates exclusion preferences 1, 2, and 4, individuals who owe the AMT after the TCJA are probably more likely to generate AMT credits than under prior law. That’s a good thing!

Key Point: The year after you pay the AMT, you calculate any allowable AMT credit that was generated in the preceding on IRS Form 8801 (Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts). If you generated an AMT credit, include Form 8801 with your return for the later year and claim your rightful credit on that return.

Before Choosing an Annuity, Know the Tax Implications

Guaranteed payments.

That's the allure of many annuities. But "guaranteed" doesn't mean tax-free.

Annuities come in many flavors and can cost a lot to set up. So when figuring out if one is right for you, you have to consider

13

Other tax issues to consider

There are plenty of other tax considerations that come into play with annuities.

For instance, depending on where you live, your state may tax annuity income somewhat differently than the federal government.

"It would probably be safest to check with the law of a particular state to see if annuities are treated in that state the same as for federal purposes," Luscombe noted.

And don't forget potential tax penalties. With any annuity, check the rules for when you may start taking withdrawals or receiving regular payments.

Also consider the estate tax consequences. Say you're investing in a non-qualified annuity for the tax deferral on your investment gains, but you die before you start collecting payments. Your chosen heir will have to foot your tax bill, Adams said.

That's because, unlike with stocks or other investments, there is no "step-up in basis" for those who inherit annuities, Adam noted. A step-up simply means a person would owe no tax on any of the unrealized capital gains that accrued on an investment before they inherited it.

Since annuity products can be very complicated and expensive to set up, talk to a tax adviser about the tax implications before agreeing to buy one.

"It is also important to discuss the overall financial and investment implications of the annuity with someone other than the person selling the annuity," Luscombe said.

The Top 7 Ways the New Tax Law Could Affect Your Startup

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 into law. The Act was the biggest change in tax laws in more than 30 years and brought about many changes for individuals and companies. Overall, we believe that the changes will benefit new businesses by lowering tax rates, accelerating the depreciation of equipment and eliminating the corporate alternative minimum tax. Here are the top seven ways the new tax law could affect your startup:

1. Lower Taxes for C-Corporations: Most startups that arelooking to raise third-party capital to grow are C-corporations. Under the new tax law, the corporate tax rate will drop from35% to 21% starting this year (See Section 13001 of theact). Clearly, income-producing corporations will retainmore profits. For startups, which generally do not generateprofits in the early years of the business, this change willlikely be minimal but still beneficial.

2. Lower Taxes for Certain S-Corporations and LLCs:Startups that are S-Corporations or LLCs might qualify

for the 20% deduction on the income attributable to that entity as long as the business or service isn’t listed on the exclusions. Excluded businesses and services include consulting, health, law, athletics, financial services, brokerage services industries or businesses where the principal asset is the reputation of the employees. Excluded business can still take the 20% deduction if their taxable income is less than the threshold amount -- $157,500 for single filers and $315,000 for joint filers. The deduction is fully phased out when income exceeds $207,500 for single filers and $415,000 for joint filers for 2018 tax years. In addition, the 20% deduction is phased out if you have W-2 income above $157,500 or $315,000 for joint filers. Thus, excluded businesses owners cannot increase their wages to decrease the S-Corporation income to circumvent the threshold amounts. Nor can you have wage income from other sources that exceed the threshold and still avail yourself of the deduction.

3. Accelerated Depreciation of Equipment: Previously,startups had to depreciate the cost of equipment overthe asset’s useful life. Under the new tax law, 1 million inequipment can be fully deducted in the year it is purchased.This means you generally can expense twice the amount in2018 through 2022 than what you did in 2017. If you havesubstantial fixed asset cost and current tax liabilities, thisbenefit providessignificant tax savings. After 2022, the increased expensingphases out.

4. Elimination of Entertainment and TransportationExpense Deductions: Entertainment expenses, suchare sporting events, are no longer deductible. Althoughbusiness meals remain 50% deductible, employer-provided eating facilities are now subject to the limitation.Expenses for employer-provided transportation benefits,such as mass transit passes or providing transportation(related to commuting to/from your residence to work) aredisallowed. You should note that the bicycling commutingreimbursements exclusion is suspended under Section11047 of the Act.

5. Elimination of Corporate AMT: The alternative minimumtax was eliminated from corporate taxation. (The individualcomponent was drastically raised.) Previously, many unwary entrepreneurs were subjected to the AMT by exercisingincentive stock options (ISO) resulting in unrealized gains.Unrealized ISO gains and state income taxes among otheritems are “preference items” or additions to taxable incomeunder the AMT system. Going forward, the act raises theexemption amount by almost 30%, which will allow moreentrepreneurs to escape the AMT trap.

6. Repatriation of Overseas Profits: Repatriated profitswill be taxed at 8% for non-cash assets and 15.5% for cash.This is a deemed repatriation so you are taxed regardlessof whether you actually repatriate the funds. In addition,most companies will need to record income tax expense forprofits, which were permanently deferred historically.

14

7. Legal Entity Choice: Despite all these changes, it's justas important to recognize what will likely stay the same.Most startups that plan to raise third-party capital are likelyto continue to be Delaware C-Corporations as venturecapitalists haven’t indicated that they’ll no longer preferto invest in Delaware C-Corporations. While the Tax Cutsand Jobs Act of 2017 will increase the tax liability for someindividuals, overall the law will benefit most startups.

IRS Expects to Issue Expensing Regulations "By Late June Or Early July"

Taxpayers can expect the IRS to issue regulations implementing the 2017 tax law's full expensing provision in less than two months, according to Kathleen Reed, Branch 7 Chief in the IRS Office of Chief Counsel (Income Tax and Accounting).

Tax professionals will recall that the tax law amended Section 168(k) to permit businesses to immediately and fully write off purchases of qualified property and capital, effective for items bought and placed into service after Sept. 27, 2017. Beginning in 2023, the allowance winds down from 100 percent bonus depreciation—also known as full expensing—to 80 percent, and tapers by another 20 percentage points each following year.

Reed, speaking at the May meeting of the American Bar Association Section of Taxation in Washington, DC, said "A lot of rules are already under the existing regulations. We are just looking to see which ones have to be changed, but the package will be a complete package."

Reed added that old rules governing the code section will stay in place, as "they apply to prior years and are necessary for examinations," and she said the IRS "will consider" allowing taxpayers to rely on the proposed rules before they become final.

Reed said she is "anticipating" issuing the proposed rules by "late June or early July."

The IRS is still deciding whether taxpayers will be able to rely on the guidance prior to it becoming final, Reed said at a later panel.

The IRS is pretty far along in writing the regulations, Reed said, but is still considering some issues. Among items the IRS is discussing is whether there need to be rules to prevent related parties from buying used property from one another to take advantage of the depreciation rules. The IRS is also looking into issues surrounding depreciating property constructed by the taxpayer, she said.

Supreme Court Lets Million Dollar FBAR Penalty Stand

U.S. v. Bussell, (CA 9 10/25/2017) 120 AFTR 2d 2017-6379, cert denied 4/30/2018

The Supreme Court has declined to review a Ninth Circuit decision, affirming a district court, which found that a taxpayer willfully failed to file a Report of Foreign Bank and Foreign Accounts (FBAR) with regard to her foreign account. The Ninth Circuit rejected a variety of the taxpayer's arguments, including that the imposition of the penalty violated the U.S. Constitution's excessive fines clause and that it was barred by the relevant treaty provisions.

Background. FBAR. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing an FBAR with the Department of the Treasury.

The civil and criminal penalties for noncompliance with the FBAR filing requirements are significant. Civil penalties for a non-willful violation can range up to $10,000 per violation, and civil penalties for a willful violation can range up to the greater of $100,000 or 50% of the amount in the account at the time of the violation (these amounts are adjusted for inflation—for penalties assessed after Jan. 15, 2017, the amounts are $12,921 and $129,210, respectively). A "reasonable cause" exception exists for non-willful violations, but not for willful ones.

In U.S. v. Bajakajian, (S Ct 1998) 524 U.S. 321, the Supreme Court held that a punitive forfeiture violates the Excessive Fines Clause of the Eight Amendment if it is grossly disproportional to the gravity of a defendant's offense. Although the Court did not set a rigid set of factors to consider in conducting the proportionality inquiry, it did consider: (1) the nature and extent of the crime, (2) whether the violation was related to other illegal activities, (3) the other penalties that may be imposed for the violation, and (4) the extent of the harm caused.

Facts. In 2002, Letantia Bussell was found guilty of (1) violation of 18 U.S.C. §371 (dealing with conspiracy to commit an offense or to defraud the U.S.); (2) false statements, false oaths and concealed assets in bankruptcy, and aiding and abetting and causing an act to be done, in violation of 18 U.S.C. §152(1); and (3) attempt to evade or defeat tax, and aiding and abetting and causing an act to be done, in violation of Code Sec. 7201. The court imposed a $2,393,527 criminal judgment for restitution owing to multiple businesses. The criminal judgment was amended in 2005 and 2009, and ultimately Bussell was ordered to pay a special assessment of $300, a fine of $50,000, costs of prosecution of $55,626, and restitution to non-federal victims totaling $1,200,871.

In June 2013, IRS assessed a penalty of approximately $1.2 million penalty against Bussell for failing to disclose her financial interests in an overseas account on her 2006 tax return, which she was required to report in 2007. Bussell did not pay the penalty, and IRS filed suit.

District court decision. The district court found that Bussell

15

v. Bajakajian, (S Ct 1998) 524 U.S. 321) The Ninth Circuitfound that the assessment against Bussell was not grosslydisproportionate to the harm she caused because shedefrauded the government and reduced public revenues.(U.S. v. Mackby, (CA 9 2003) 339 F.3d 1013)

...Introduction of banking evidence at the district court violated an international treaty between the U.S. and Switzerland. The Ninth Circuit concluded that Bussell was not entitled to relief under this theory because she had not shown that the treaty she relied on created an enforceable right. (U.S. v. Mann, (CA 9 1987) 829 F.2d 849)

Supreme Court review. Bussell petitioned the Supreme Court to review the Ninth Circuit's decision. She argued (1) that the Eighth Amendment prohibition against excessive fines did not allow a forfeiture of half of an account's value (in this case, more than $1 million) merely because of a failure to report the account; and (2) that the treaty between the U.S. and Switzerland on dual taxation, which was restricted to disclosure of tax information, couldn't be used to obtain information for non-tax uses, such as the existence of a foreign account held in violation of FBAR.

On Apr. 30, 2018, the Supreme court refused to review the Ninth Circuit's decision.

Accordingly, that decision is now final.

Only 32% of Businesses Say They're Ready for Tax Reform Changes

The U.S. Tax Cuts and Jobs Act of 2017 is now in effect, but its implementation and impact on businesses is just starting to unfold. A survey of CFOs by financial recruitment firm Robert Half Finance & Accounting shows only about one-third of companies (32 percent) are very ready for the new demands, while 68 percent are somewhat prepared or not at all ready for the changes.

Key strategies businesses are using to stay on top of the legislation — which entails everything from a lower corporate tax rate to expensing certain capital investments — include conducting training (42 percent), upgrading financial systems (34 percent) and bringing in subject matter experts (33 percent). More than one in five CFOs (21 percent) said their companies are hiring full-time staff to prepare to meet the new requirements.

CFOs were asked: "How prepared is your company to handle tax accounting reform changes?" Their responses:

Very prepared 32%Somewhat prepared 56%Not very prepared 9%Not at all prepared 3%

100%

CFOs were also asked, "How is your company preparing to meet the demands of the new tax accounting reform changes?"

had willfully failed to file a FBAR, granting partial summary judgment to IRS, but reducing the fine. (U.S. v. Bussell, ( DC CA 12/8/2015) 117 AFTR 2d 2016-439) The court rejected all the various arguments offered by the taxpayer, including that the fine was excessive and violated treaty provisions.

The district court was not persuaded by the taxpayer's argument that the fine was excessive under the Eight Amendment because the offense was solely a reporting offense, not a serious crime. The court reasoned that while the taxpayer's offense, tax evasion, was not as serious as some crimes that ultimately trigger civil forfeiture actions, it clearly fit into the class of persons targeted by the Bank Secrecy Act, namely those evading taxes through the use of offshore bank accounts. Further, the district court found that the taxpayer had not carried her burden to show that the money at issue was derived from a lawful source, which would trigger stronger Eight Amendment protections.

After weighing the factors relevant to the an excessive fines inquiry, the district court concluded that IRS's assessment raised some Eighth Amendment concerns because the assessment exceeded the maximum penalty set out in the applicable criminal and civil statutes. The maximum authorized penalty for a willful criminal FBAR violation was a five-year sentence and a $250,000 fine. (31 U.S.C § 5322(a)) The taxpayer's FBAR penalty was $1,221,806, which was almost five times the maximum amount allowed in the criminal statute. The district court decreased the penalty imposed from $1,221,806 to $1,120,513, which represented the maximum amount permitted under the applicable civil statute.

The district court also rejected the taxpayer's vague assertion that IRS illegitimately obtained information concerning her Swiss Account from the Swiss government. She contended that, pursuant to the treaty between the U.S. and Switzerland, the U.S. could only receive information from the Swiss government pertaining to tax violations.

However, the district court concluded that the instant case was clearly a tax collection case, and it was unclear how IRS's conduct ran afoul of the treaty.

Bussell appealed the district court's decision.

Appellate court decision. The Ninth Circuit affirmed the district court, rejecting all the arguments offered by the taxpayer.

While she admitted that she willfully failed to disclose her financial interests in her overseas account on her 2006 tax return, she raised several arguments on appeal, see "Taxpayer was liable for a million dollar FBAR penalty."

Among those arguments, the taxpayer contended that:

...IRS's penalty against her violates the Excessive Fines Clause of the Constitution. The Ninth Circuit rejected Bussell's contention reasoning that generally, a punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant's offense. (U.S.

16

Their responses*:

Conducting training 42%Upgrading financial systems 4%Bringing in subject matter experts 33%Hiring full-time staff 21%Other 15%

*Multiple responses permitted.

Businesses looking to hire professionals to help prepare for the tax changes may find it difficult. More than nine in 10 CFOs (91 percent) reported at least some challenges finding skilled professionals.

"Companies need to move quickly to get the right people and teams in place, provide training, and upgrade systems to ensure a smooth transition to the new tax mandates," said Steve Saah, executive director of Robert Half Finance & Accounting. "Acting fast to make necessary hires takes on greater importance, given today's low unemployment rates and talent shortages."

Saah added, "Change not only gives businesses the opportunity to look under the hood to ensure they're in compliance, it also allows them to determine if there's room for improvement, additional savings or the ability to layer in staff to help."

Other key takeaways from the Robert Half Finance & Accounting research:

• The top four U.S. markets hiring full-time staff to ensurereadiness for tax reform are the San Francisco Bay Area,San Diego, St. Louis and Cleveland.

• The following four cities are the least prepared,according to CFOs in those areas: Minneapolis, DesMoines, Cleveland, and St. Louis.

• The top industries planning to bring on full-time staff include finance, insurance and real estate (32 percent),and business services (28 percent).

• Larger companies (1,000 employees or more) areslightly more prepared than smaller companies (20-249employees).

AICPA Asks IRS For Changes in Form 990

The American Institute of CPAs suggested more than 30 changes to the Internal Revenue Service for the Form 990, Return of Organization Exempt from Income Tax, and its instructions, some of them marked as urgent.

In a letter the AICPA indicated the importance and urgency of each of its recommendations. Eighteen of the 33 recommendations ranked “high” in terms of both importance and urgency.

The suggestions include:

• Delete the terms and associated definitions from theGlossary in the Instructions to the Form 990 and in allparts of the form and related schedules that have changedunder the tax law.The terms are “endowment,” “permanent(true) endowment,” “SFAS 116,” “SFAS 117,” “temporarilyrestricted endowment” and “FIN 48.”

• Update the Glossary to define the terms used in AccountingStandards Update (ASU) 2016-14, Presentation ofFinancial Statements of Not-for-Profit Entities, issued bythe Financial Accounting Standards Board as defined in theFASB Accounting Standards Codification Master Glossary.

• Update the trigger question for Schedule D to reflect thechanged classification of net assets under FASB ASC 958,while still recognizing that the focus of the question is onreporting for donor restricted and board designated orquasi-endowments.

• Align the trigger questions in Form 990, Part IV and Part Xso that they agree with the definition of “interested parties”in the Schedule L instructions.

• Update the net assets or fund balances portion of thebalance sheet to reflect ASU 2016-14.

• Update the question and instructions related to the Officeof Management and Budget/Uniform Guidance rules,and update the instructions to reflect the new single auditthreshold of $750,000.

• Update the instructions for Schedule I, Part II, Line 1so they are consistent with the instructions for the triggerquestion in Form 990, Part IV, Line 21.

The AICPA sent a separate letter to the IRS asking the agency to clarify its informal policy to not issue private letter rulings involving certain S corporation matters to ensure that the no-rule policy doesn’t become too broad. The AICPA noted the IRS is no longer issuing private letter rulings involving some S corporation matters, but the informal policy leaves S corps without a way to remedy various issues with the IRS.

“The IRS’s private letter ruling process serves a vital function for many taxpayers, especially S corporations,” wrote AICPA Tax Executive Committee chair Annette Nellen in the letter. “With the new informal no-rule policy, many S corporation taxpayers are left without an avenue to remedy various issues that are specifically unique to S corporations.”

The AICPA asked the IRS to ensure the no-rule policy doesn’t become overly broad; formally define and publish the parameters of the no-rule policy; and issue a revenue ruling or other authoritative pronouncement to offer more clarity for certain S corporation matters on which the IRS will no longer rule. Nellen suggested six parameters that should be included in the revenue ruling.

17

You Can’t Deduct Hobby-related Expenses Under the New Ttax Law—But Don’t Give Up Hope

If your expenses from the activity exceed your revenues, you have a net loss. You may think you can deduct that loss on your personal federal income tax return. Not so fast. The IRS likes to claim that money-losing sidelines are hobbies rather than businesses—because the federal income tax rules for hobbies are not in your favor.

Thanks to an unfavorable change included in the new Tax Cuts and Jobs Act (TCJA), the rules are even worse for 2018-2025.

But don’t give up hope. If you can show a profit motive for your activity, you can deduct the losses. And history shows that the IRS loses about as many court cases on this issue as it wins. Here’s what you need to know about the TCJA change for hobby-related deductions and what to do about it if you have a money-losing sideline activity.

Already-unfavorable tax rules for hobby-related deductions just got worse

If you operate an unincorporated for-profit business activity that generates a net tax loss for the year (deductible expenses in excess of revenue), you can generally deduct the full amount of the loss on your federal income tax return. That means the loss can be used to offset income from other sources and reduce your federal income tax bill accordingly. On the other hand, the tax results are not good if your money-losing sideline activity must be treated as a not-for-profit hobby.

Under prior law (before the TCJA), you could potentially deduct hobby-related expenses up to the amount of income from the hobby. However, you had to treat those expenses as miscellaneous itemized deduction items that could only be written off to the extent they exceeded 2% of adjusted gross income (AGI). And, if you were a victim of the dreaded alternative minimum tax (AMT) for the year, your otherwise-allowable hobby deductions were completely disallowed under the AMT rules.

TCJA Effect: For 2018–2025, the TCJA eliminates write-offs for miscellaneous itemized deduction items that under prior law were subject to the 2%-of-AGI deduction threshold. This change wipes out any deductions from hobby activities. So under the new law, you cannot deduct any hobby-related expenses, but you still must report 100% of any revenue from the hobby activity as income and pay tax on it. Yikes! So you can now expect IRS auditors to focus even more attention on folks with money-losing sideline activities. That means it’s now more important than ever to establish that a money-losing activity is actually a for-profit business that has simply not yet become profitable. Please keep reading.

Deciding if your activity is a business or a hobby

Now that you understand why hobby status is unfavorable and for-profit business status is helpful, the next step is

determining if your money-losing sideline activity should be classified as a hobby or a business.

There are two safe-harbor rules for determining if you have a for-profit business.

• An activity is presumed to be a for-profit business if itproduces positive taxable income (revenues in excessof deductions) for at least three out of every five years.Losses from the other years can be deducted because theyare considered to be business losses as opposed to hobbylosses.

• A horse racing, breeding, training, or showing activity ispresumed to be a for-profit business if it produces positivetaxable income in two out of every seven years.

Taxpayers who can plan ahead to qualify for these safe-harbor rules earn the right to deduct their losses in unprofitable years.

Intent to make profit

Even if you cannot qualify for one of the aforementioned safe-harbor rules, you may still be able to treat the activity as a for-profit business and rightfully deduct the losses. Basically, you must demonstrate an honest intent to make a profit. Factors that can prove (or disprove) such intent include:

• Conducting the activity in a business-like manner bykeeping good records and searching for profit-makingstrategies.

• Having expertise in the activity or hiring advisers who do.

• Spending enough time to justify the notion that the activityis a business and not just a hobby.

• Expectation of asset appreciation (this is why the IRS willalmost never claim that owning rental real estate is a hobbyeven when tax losses are incurred for many years).

• Success in other ventures, which indicates businessacumen.

• The history and magnitude of income and losses fromthe activity: occasional large profits hold more weight thanmore frequent small profits, and losses caused by unusualevents or bad luck are more justifiable than ongoing lossesthat only a hobbyist would be willing to accept.

• Your financial status: “rich” folks can afford to absorbongoing losses (which may indicate a hobby) while ordinaryfolks are usually trying to make a buck (which indicates abusiness).

• Elements of personal pleasure: breeding race horses ismore fun than digging post holes for fences, so the IRS isfar more likely to claim the former is a hobby if losses startshowing up on your tax returns.

18

your previous credit history will not automatically transfer. Credit history is not kept by the Social Security Administration. Instead, the three major credit bureaus, Experian, TransUnion and Equifax, keep their own records of your credit history. Therefore, to transfer your credit history you will need to notify each of the credit bureaus directly and provide evidence of your claim.

1. Contact your current lenders and inform them of yournewly assigned SSN. They should begin to report yourcredit under your new number.

2. Type a letter to the credit bureau, explaining that youhave a new SSN. Keep the letter simple and to the point.List all previous numbers you had credit under and anyprevious names you used. Request that your account belisted in your new credit report.

3.Print four copies of the letter, one for each of the threecredit bureaus and one for your own records. Sign the threecopies for the credit bureaus.

4. Address one envelope to each credit bureau, affixa stamp and write your return address. The three creditbureau addresses are as follows:

EquifaxP.O. Box 740241Atlanta, GA 30374

ExperianP.O. Box 2002Allen, TX 75013

TransUnionP.O. Box 1000Chester, PA 19022

5. Make three copies of the document you received from theSocial Security Administration informing you of your newlyassigned SSN. Attach one to each letter and put each letterin an envelope. Mail the letters to the credit bureaus.

6. Wait a month or two and request a free copy of yourcredit report through AnnualCreditReport.com from eachcredit bureau. Download and print this form and mail it torequest free credit report. Once you receive your creditreports, verify that your credit history has been transferredby each credit bureau. If it has not, call the credit bureau inquestion to sort out the problem.

You can also check your credit score for free at http://www.creditkarma.com/

Transfer Past Earnings to New SSN

If you worked with a SSN that wasn't yours, your can transfer your earnings onto your new SSN.

- Collect old W-2 forms (usually attached to your previous

Business status is good is for deducting losses. Hobby status is bad, especially after the TCJA. The good news is that, over the years, the Tax Court has concluded that a number of pleasurable but money-losing activities could be classified as for-profit businesses rather than hobbies, based on evaluating the factors listed earlier. So there is often reason for hope. That said, the hobby loss issue has always been a hot issue for the IRS, and the new tax law adds fuel to the fire. So it’s important for you to be on the right side of as many of the factors as possible. Your tax pro may be able to help you create documentation to prove that that you are, in fact, on the right side.

Question of the Month

What to Does A Taxpayer Do with An ITIN After Receiving SSN?

Notify IRS about your new SSN & rescind ITIN

Individuals who are not eligible to receive a Social Security Number (SSN) instead get an Individual Tax Payer Identification Number (ITIN).

An alien individual can't have both an ITIN and a SSN. Therefore, once you receive your SSN (e.g., after getting an EAD), you will have to rescind your ITIN.

After you receive your new SSN, you will have to send a letter to the IRS ITIN Unit requesting a rescind of your ITIN. The SSN will become the primary number and must be used for all future filing purposes. The IRS will void the ITIN. All prior tax information under the ITIN will be associated with the new SSN.

Send a letter to:Internal Revenue ServiceITIN OperationP.O. Box 149342Austin, TX 78714-9342

Enclose the copies of your ITIN and SSN.

You will then receive this letter from the IRS confirming that your ITIN was revoked and to use your new SSN for all tax purposes.

How to transfer your credit history to a newly assigned ssnIf you do not have credit, this does not apply to you - if you have bad credit, is it recommended to not transfer credit, and start fresh with your new ssn. Also this is for those who established credit with an itin (not with a fake ssn). It is a felony to use a ssn that is not yours, so if you have credit with a fake ssn, it is strongly recommended you do not transfer credit.

When you are assigned a new Social Security Number (SSN),

19

tax returns). If you dont have these, ask your employers to supply you with copies of the specific years you worked with them.

-Take your taxes and w-2 forms to the Social Security Officeand tell them you want to transfer your earnings to yournewly issued SSN. Does not matter if your W-2s list yourfake SSN or ITIN, as long as they contain your full name(not any fake names you were working under).

- They will make copies of the W-2 forms and start theprocess. You will get a letter in about a month of the update.

Notify Selective Service (males 18-25 yrs old only)

If you are a man ages 18 through 25 and living in the U.S., then you must register with Selective Service. It’s the law. According to law, a man must register with Selective Service within 30 days of his 18th birthday. Selective Service will accept late registrations but not after a man has reached age 26. You may be denied benefits or a job if you have not registered. You can register at any U.S. Post Office and do not need a social security number.

When you do obtain a social security number, let Selective Service know. Provide a copy of your new social security number card; being sure to include your complete name, date of birth, Selective Service registration number, and current mailing address; and mail to:

Selective Service SystemP.O. Box 94636Palatine, IL 60094-4636

source: http://www.sss.gov/default.htm

Do not forget to contact your bank and/or any other relevant institution (school, credit cards, memberships, etc.) about your new SSN.

Tax Practice Management

7 Ways to Create a Pleasant Work Environment for Your Employees

Working in a pleasant environment helps people feel positive and motivated. If employees enjoy their time at work, they will be less likely to take long breaks or go on sick leave. The benefits for business owners include increased productivity and reduced staff turnover, leading to lower recruitment and training costs. Here are some ways to create a pleasant work environment for your employees.

1. Décor

Create a bright, cheerful and inspirational atmosphere by decorating the workplace in light colors. Add artwork or murals

to the walls, if appropriate. Purchase good quality ergonomic chairs and desks so that your employees feel comfortable while they are working and the risk of repetitive strain injury is reduced.

2. Rest Area

If space allows, provide an area where your staff can relax during breaks. This area should be separate from the places where people work. Furnish the rest area with chairs, tables, and comfortable sofas. Allow your employees to eat lunch there, and add a rack of magazines for them to read.

3. Food and Drink

Provide a microwave oven, so that employees can heat up food they’ve brought into work. This is especially important if there is nowhere to buy hot food near your workplace. Although installing a drinks vending machine might appear to be a good option, the hot drinks from many vending machines taste awful. It’s therefore a better idea to equip your kitchen with a coffee maker, kettle, mugs, and a good selection of coffee, tea bags, and other drinks.

Invest in a small refrigerator and delegate the task of buying milk every day. Make sure that cleaning the kitchen and refrigerator is part of your cleaner’s responsibilities. Install a water cooler, so your employees can easily remain hydrated throughout the day.

4. Staff Meetings

Monthly meetings for the whole of your workforce can help each member of your team feel that he or she is involved in your business’s development. At these meetings, you could let everyone know about important new clients that your business has won or your plans to launch a new product or enter a new market. Invite your employees to ask questions or offer suggestions on how the business could move forward or improve its processes.

Although it wouldn’t be appropriate to disclose all your plans for the business or let your staff know about certain events or setbacks, staff meetings are important because they foster a sense of belonging to the organization. Employees who don’t know what’s happening can feel shut out, undervalued and demotivated.

5. Flexible Work Hours

Not everyone is suited naturally to the traditional work hours of 9:00 a.m. until 5:30 p.m. Some people are “early birds” while others are “night owls.” Employees may also have responsibilities that sometimes conflict with traditional work hours, such as picking up children from school.

If it is feasible for your business, consider introducing a flexible work hours scheme. One advantage of such a scheme is that your business is likely to be in operation for a longer period each day, perhaps from 6:30 a.m. until 9:00 p.m. This gives

20

• Combat pay exclusion. If someone serves in a combatzone, part or even all of their combat pay is tax-free. Thisalso applies to people working in an area outside a combatzone when the Department of Defense certifies that areais in direct support of military operations in a combat zone.There are limits to this exclusion for commissioned officers.

• Deadline extensions. Some members of the military,such as those who serve in a combat zone, can postponemost tax deadlines. Those who qualify can get automaticextensions of time to file and pay their taxes.

• Earned income tax credit. If those serving getnontaxable combat pay, they may choose to include it intheir taxable income to increase the amount of EITC. Thatmeans they could owe less tax or get a larger refund.

• Signing joint returns. Normally, both spouses must signa joint income tax return. If military service prevents that,one spouse may be able to sign for the other or get a powerof attorney.

• ROTC allowances. Some amounts paid to ROTCstudents in advanced training are not taxable. This appliesto allowances for education and subsistence. Activeduty ROTC pay is taxable. For instance, pay for summeradvanced camp is taxable.

Estate and Gift Tax

Post-TCJA Qualified Personal Residence Trust Planning

Article by Martin M. Shenkman, submitted by Frank LaRusso

The author recently had an email interchange with a capable practitioner about planning for a mutual client in the wake of the Tax Cuts and Jobs Act. The interchange demonstrated that even a bright professional could miss some of the major implications to planning, as well as the liability exposure to herself and her firm. It indicated that perhaps the myriad of technical articles on estate planning post-TCJA, while helpful, might not be properly communicating more fundamental points that will help. Tax professionals better serve their clients while protecting themselves. This article, loosely based on that series of emails with a colleague who shall remain anonymous, will try to fill this gap.

QPIT Basics

A qualified personal residence trust (QPRT) is a trust to which a person (called the settlor, donor, or grantor) transfers his personal residence. The grantor reserves the right to live in the house for a period of years, this retained interest reduces the current value of the gift for gift tax purposes. Furthermore, all post-transfer appreciation is removed from the estate.

your business several advantages over its competitors, such as the ability to respond quickly to clients outside normal work hours.

6. Social Events

Create a sense of community by organizing social events outside work hours. This could be a drink after work on Friday, a Christmas meal at a restaurant or a trip to the bowling alley. Social events allow co-workers to get to know each other better. This can lead to enhanced teamwork and cooperation. However, no one should feel under pressure to take part in social activities and some employees may not be able to attend due to other commitments.

7. Be Approachable

No matter how busy you are, schedule some time each week or each fortnight to walk around your office and chat with everyone. See how each person is and how things are going for them. Take an interest in them as human beings. Show appreciation for their hard work. Employees who feel valued and appreciated will want to remain with your business. While walking around the workplace, look for ways to show everyone that their contribution is valued.

Sometimes simply saying “thank you” is enough. On other occasions, you may decide to reward special efforts with such tokens of appreciation as gift cards or flowers. Staff members who enjoy working for your business will remain in their jobs for many years to come. If they feel valued and appreciated, they will be motivated to work hard and remain loyal to your organization. Take steps to improve the work environment for your employees and watch your business thrive.

Military Taxes

Special Tax Benefits for Armed Forces

Members of the military and their families are often eligible for certain tax breaks. For example, members of the armed forces don’t have to pay taxes on some types of income. Special rules could also lower the tax they owe or give them more time to file and pay taxes.

No matter what time of the year, it’s good for members of the military and their spouses to familiarize themselves with these benefits. Here are some things for these taxpayers to know about their taxes:

21

The following is an example illustrating why a QPRT might have been crated years ago, and how the TCJA undermines such a plan. In 2002, when the estate tax exemption was $2M, a 50-year old taxpayer transferred her personal residence valued at $2M, which alone would have her at the threshold of triggering an estate tax based on the law then in existence, to a QPRT. The QPRT was to last until 2022, the taxable gift on funding would have been about $540,000. Assuming the 50% estate tax rate then in existence, and a 4% growth in value of the house, the house would be estimated to be worth about $4.4M in 2022, and the estate tax savings realized approximately $1.9M. Under the TCJA, however, the estate tax savings would be zero, but the appreciation in the home would bne well beyond the Internal Revenue Code section 121 home sale exclusion, and none of it would qualify for an income tax basis step up because it is help by the QPRT. A formerly useful plan is now a tax negtative. This sis an issue that will concern many individuals with old QPRT’s. How should a tax professional advise such an individual?

With a federal estate tax exemption of more than $11M, the significant estate tax savings that were anticipated with the QPRT was created have disappeard. So why not just deed the house back to the elderly parent and receive a step up in basis upon death? While this is attractive on the surface, careful consideration of all issues involved will help all advisors more carefully evaluate the restructuring of many different types of old plans in light of the TCJA, not just QPRTs. If any estate is under the estate tax exemption, addressing basis inclusion could be beneficial, but it is not necessarily simple or risk free. Advisors should be cautious not to be pressured by individuals seeking a simple solution. Professionals should also be alert for “self-help” activities. If the property tax bill reflected a QPRT owning a house last year, but this year it reflects the name of the parent/transferor, might the individual have, on her own, solicited the help of a tax-unaware real estate attorney to simply deed a house back to her?

Might recission be feasible? In Craig Breakiron v. Lauren Breakiron Gudonis (No. 1:09-cv-10427, Aug. 10, 2010) after the term of a QPRT expired, the taxpayer desired to shift his interest in the property to another heir, b ut was concerned about possible gift tax consequences. He consulted an attorney, who incorrectly advised that he could sign a qualified disclaimer within nine months of the expiration of the QPRT’s term and transfer the property in that manner. The law actually requires that the disclaimer be made within nine months of the creation of the QPRT. Because of this incorrect advice, the disclaimer was not qualified, and the taxpayer incurred a gift tax liability. The taxpayer requested that the court permit him to rescind the disclaimer and void the transfer, because it was based on a mistake that frustrated the purpose of the transfer, the court permitted the rescission, and the taxpayer avoided gift tax. While this case presents an interesting avenue for fixing a plan gone awry, it is not likely to provide a basis to unravel prior planning absent unique circumstances.

The TCJA will have tax professionals reconsidering many existing estate plans. But caution should be exercised before taking a quick, simple and perhaps inexpensive approach to

attempting to improve a no-longer-optimal old plan, as there could be a myriad of trust and other legal considerations, asset protection issues, and income and estate tax implications to consider.

Martin M. Shenkman, JD, CPA/PFS, AEP, is an attorney at Shenkman Law in Fort Lee, NJ.

News from Capitol Hill

Taxpayer First Act Would Impact 1099 Filing

This month the U.S. House of Representatives passed H.R.5444 - Taxpayer First Act. While still early in the process for this bill to become a law, we want to make you aware of the potential impact this may have to your business as it relates to future 1099 filing.

Below is a snippet from the bill that specifically addresses e-file thresholds.

Title IV—Expanded Use Of Electronic Systems

Sec. 18401. Electronic Filing Of Returns.

(a) In General.—Section 6011(e)(2)(A) is amended by striking“250” and inserting “the applicable number of”.

(b) Applicable Number.—Section 6011(e) is amended byadding at the end the following new paragraph:

“(6) Applicable Number.—For purposes of paragraph (2)(A), the applicable number shall be determined in accordance with the following table:

“(A) in the case of calendar years before 2020, 250,

“(B) in the case of calendar year 2020, 100, and

“(C) in the case of calendar years after 2020, 10.”

This bill comes as no surprise. As taxpayer security continues to be the focus of federal agencies, regulations will be introduced to mandate more forms be filed electronically.

Tax Reform Phase 2: Pending Reality or Political Posturing?

Less than five months ago, Republican leaders put the finishing touches on the Tax Cuts and Jobs Act, the most comprehensive overhaul of the tax law in 31 years. The legislation bestowed nearly $1.5 trillion in tax cuts upon corporations, small business owners, and workers over the next decade, and represents what is, to date, the signature victory of President Trump's administration.

22

51 votes for passage as opposed to the standard 60. And with Republicans holding 52 seats at the time the Tax Cuts and Jobs Act arrived at the Senate floor, a party-line vote got it done. There was, quite predictably, not a single "yea" vote from the 48 Democratic Senators who were shut out of the drafting process, but it didn't matter.

Q: OK, so that's the good news of the budget reconciliation process. What's the bad news?

The downside of the process is that in order to use it, Congress must first pass a budget, and that budget must fix the maximum amount that the bill will add to the deficit over the next decade; in this case, the cap was set at the aforementioned $1.5 trillion over the next ten years. This, as you might imagine, creates the needs for some economic gymnastics: a LOT of tax cuts were promised by the GOP, but at the end of the day, those cuts could not exceed the $1.5 trillion ceiling, or else Republicans would have to abandon the budget reconciliation process and procure votes from eight Democratic Senators, which wasn't going to happen. As a result, concessions were necessary in order to hit the $1.5 trillion target, and the biggest one was this: while the very substantial corporate tax cuts in the Act were made permanent (for example, the corporate tax rate was reduced from 35% to 21%), the individual cuts were made Temporary, and are all slated to expire on December 31, 2025. That's right: the lower individual tax rates, the doubled standard deduction, the new tax break for owners of pass-through businesses....as of now, they all disappear when the clock strikes midnight on New Year's Eve, 2025.

Q: Wait a second...you're telling me that Kevin Brady wants to now make the individual cuts permanent, but when he just helped craft Tax Reform 1, he opted to make the corporate cuts permanent and the individual cuts temporary? That's not a good look. Why didn't the Republicans just make the individual cuts permanent as well? Or at the very least, the individual cuts permanent and the corporate cuts temporary?

A: While I'll concede that making the individual cuts temporary was not a good look, it was actually a stroke of genius by the GOP. First things first, the Republicans did not have the luxury of being able to make BOTH the corporate and individual cuts permanent; remember, the total cuts were not allowed to exceed $1.5 trillion over ten years, and the changes being proposed on both the corporate and individual sides -- if made permanent -- would have far exceeded that total.

So if you have to choose one to make temporary in order to hit your budget goals, while it was never going to be popular, setting the individual cuts to expire was politically savvy. Why? Think about it...say control of the House or Senate flips to blue this November, as does the White House in 2020 or 2024. As 2025 nears, if the corporate cuts, rather than the individual cuts, were set to expire, a Democratic-led Congress will have Zero problem allowing those cuts to die as scheduled. But that same Congress will have a much tougher time allowing individual cuts --- cuts that American workers had spent 8 years growing accustomed to --to suddenly disappear on their watch. Thus, by making the corporate cuts permanent

New Tax Act – More to Come

April 17: Ways and Means chairman Rep. Kevin Brady, R-Texas, holds a sample of a postcard-style tax filing duringa news conference in the House studio after a meeting of theGOP Conference on April 17, 2018. House Majority LeaderKevin McCarthy, R-Calif., right, and Speaker Paul Ryan,R-Wis., also appear

With mid-term elections just around the corner and rumblings of a potential "blue wave" growing louder, however, Republicans aren't resting on their laurels. Just last week, Kevin Brady, Chairman of the House Ways and Means Committee, told reporters that the House is itching to have a go at "Tax Reform Phase 2," with the aim of making the recently-enacted individual tax cuts permanent and the tax law, as a whole, more "family friendly."

Wait...I'm an individual! I'm part of a family! This sounds wonderful!

Well, I'm not getting particularly excited about Brady's promise, and neither should you, because unfortunately, it is nothing more than political posturing. Neither Brady nor anyone else in Congress, for that matter, really believes it will happen. Why not? Let's take a look with a little Q&A.

Q: First things first: I'm confused...if we just finished tax reform, why do we need to do it all over again?

A: Great question. As you may have noticed, the Tax Cuts and Jobs Act took only seven weeks to go from inception to enactment. Under normal circumstances, NOTHING happens that quickly on Capitol Hill; certainly not major tax reform that adds $1.5 trillion to the federal deficit. So why was this time different?

Republicans currently control the House, Senate, and White House. As a result, the stars were aligned for the GOP to use the streamlined "budget reconciliation process" to enact its vision of tax reform. The budget reconciliation process is a good news/bad news proposition. The good news is when a bill gets to the Senate pursuant to this process, it needs only

23

and the individual cuts temporary, the GOP places pressure on any Future Democratic-controlled Congress to extend the individual cuts, giving the GOP exactly what they wanted at the outset.

Q: That makes sense, but why wouldn't that future Democratic-controlled Congress simply extend the individual cuts but include in that legislation a provision that wipes out the corporate tax cuts that were just enacted as part of the Act?

A: Because it's not that easy. Remember, the only reason the Republicans were able to enact the Tax Cuts and Jobs Act with impunity is because they controlled the House, Senate, and White House. Fail to control any of those three, and the budget reconciliation process is not an option, meaning to pass a law that raises corporate taxes, a future Democratic-led Congress would need Republican buy-in, which won't be forthcoming. Stated in more simple terms, if a future Democratic Congress wants to extend the individual cuts as designed, the Republicans will jump on board. If they try to tie that extension to corporate tax increases, however, the Republicans will prevent passage of the bill, and then blame the Democrats when the individual cuts expire.

Q: Hold on...this seems silly. Republicans still control the House, Senate and White House. So for Tax Reform 2, why don't they just use the budget reconciliation process again? That way, they can circumvent the $1.5 trillion cap on the cuts by taking another bite of the apple with a new reconciliation bill, right?

A: Great point. But here's the thing: they can't do that, at least not right now. The Republican's get ONLY one bite of the apple each year with the reconciliation process; that's it, that's all. So if the GOP wants to go back to that well, they are going to have to hope they retain control of the House and Senate after the 2018 mid-term elections, and then earmark next year's budget reconciliation bill for a second round of tax reform. That's a big ask.

Q: But wait...if the Republicans can't use the budget reconciliation for this new "family friendly" Tax Reform 2, then that means they would need a bipartisan bill that can get 60 votes in the Senate. Would that really happen?

A: What do you think? Do you believe that with perhaps the most eagerly-anticipated mid-term elections in American history a mere six months away, the Democrats would rather:

1. Work together with Republicans to "fix" the previousversion of tax reform by providing permanent cuts toindividuals, or

2. Do nothing, and continue to recite the narrative thatthe Republican tax bill was nothing more than a giveawayto big corporations and their rich owners, with little left overfor the little guy?

Q: Yeah, I'm going to go ahead and choose option 2. So if Kevin Brady knows a new tax reform bill won't pass, why even

start the process?

A: Battle lines must be drawn. Going into the November elections, the GOP would like nothing more than to stage a vote purely for show, because the bill's inevitable failure will still bring success to the party. After all, the Republicans will say, "Look. We passed big tax cuts with no votes from a Democrat, and then we tried to pass even more tax cuts, but were stonewalled by the left once again. The Democrats really want you to pay higher taxes, don't they?"

Q: So this is all just empty rhetoric? But couldn't this backfire on the Republicans? Follow me here...doesn't Kevin Brady's stated desire to use another round of tax reform to make the tax law more "family friendly" help perpetuate the aforementioned Democrats' narrative that the first round of tax reform wasn't family friendly? Wouldn't the Democrats just say, "Why do you need to make the tax law more family friendly NOW when you just spent seven weeks preparing legislation that hands out $1.5 trillion in tax cuts? Why didn't you make it more family friendly then?"

A: That's exactly what they'll say, and not without reason. After all, when Brady's House Ways and Means Committee had its first crack at drafting the Tax Cuts and Jobs Act, of the $1.5 trillion in total tax cuts offered by the bill, $850 billion went straight to corporations, which the last time I checked, do not have families. And another $170 billion went to eliminate the estate tax, which would certainly help families, though not exactly the type of family that generally needs a whole lot of help. Yes, that means that when the House took pen to paper to draft its ideal vision of tax reform, over two-thirds of the total cuts went to big business and a handful of the wealthiest families in America.

Then think about this: Kevin Brady promised that as part of the "family friendly" theme to the next stage of tax reform, the House Ways and Means Committee would start by streamlining the many education incentives in the Code, consolidating the various deductions and credits currently available under the law into fewer incentives that focus on saving for college or vocational programs while also helping handle the cost of higher education. But dig a little deeper, and you'll find that when Brady and the House had their first chance at tax reform, they didn't care a whole heck of a lot about providing education incentives. In fact, during its first draft of the Tax Cuts and Jobs Act, the House declared war on education-related tax breaks. The bill proposed to eliminate the deduction for student loan interest. It would have made interest income on Series EE bonds used to pay tuition expenses fully taxable. It would have made tuition paid for by an employer on behalf of an employee, as well as tuition waivers provided by a university to a PhD candidate or family member of a university employee, fully taxable. And if all of that weren't enough, the House would have even gone so far as to eliminate the $250 annual deduction for educational supplies purchased by teachers.

The House's plan for huge corporate tax cuts, the elimination

24

and Josh Webskowski, EA.

Former Paterson Restaurant Owners Admit to $240,000 Tax Evasion

The former owners of a Paterson Italian restaurant admitted not paying more than $240,000 in taxes owed, authorities announced.

Elio Federico, 71, of Totowa, and his brother, Ralph Federico, 68, of Saddle Brook, previously owned E&V Restaurant on Chamberlain Avenue. Together they ran the restaurant for nearly 50 years, starting with pizza and sandwiches and expanding the menu over time.

The Federico brothers primarily used cash to run the restaurant and hid some of their income from the IRS, according to U.S. Attorney Craig Carpenito. They also would reprogram the cash register and failed to provide invoices to their accountant, Carpenito stated.

Elio and Ralph Federico admitted that they didn't pay income and employment taxes that they owed from 2011 through 2014, resulting in a tax loss to the United States of $241,219, according to Carpenito.

Tax evasion charges carry a maximum penalty of five years in prison and a $250,000 fine. Sentencing was scheduled for Sept. 4.

Baltimore Top Cop Suspended After Being Charged with Failing to File Taxes

Baltimore Mayor Catherine Pugh has placed Police Commissioner Darryl De Sousa on paid leave pending the resolution of three federal criminal tax charges against him, she announced.

Baltimore Police Commissioner Darryl DeSousa during a news conference on May 9, 2018, at Police Headquarters. He was charged on Thursday, May 10, 2018, by federal prosecutors with three misdemeanor counts of failing to file federal taxes.

“Upon review of the circumstances surrounding Commissioner De Sousa’s failure to file tax returns for successive years I have placed him on paid suspension effective immediately,” Pugh said at a news conference.

Deputy Commissioner Gary Tuggle, a former top-ranking Drug Enforcement Administration official tapped by De Sousa in March to oversee strategic and support services for the department, will serve as acting commissioner in De Sousa’s absence, officials said.

The decision to have De Sousa step back comes one day after a federal judge unsealed three misdemeanor tax charges against him, alleging he willfully failed to file federal taxes in 2013, 2014 or 2015. De Sousa, 53, later admitted guilt in a statement on Twitter, saying his “only explanation” for not

of the estate tax, and the decimation of education incentives was met with predictable public outrage, and the Senate, having learned from the House's mistakes, crafted a bill that reduced the corporate cuts, left the estate tax in place (though with a doubled exemption), and retained the many education incentives in the law. But the damage was done; the House had made its intentions known -- it was willing to strip nearly half-a-dozen education tax breaks from the law, and why? Because doing so would have raised $64 billion of tax revenue over the next ten years, allowing the GOP to cut $64 billion in taxes elsewhere as part of the budget reconciliation shell game. So to hear Brady come out now and say we need a second round of tax reform to help families pay for education certainly rings a bit hollow.

Q: Now I understand why you said Brady's promise was little more than political posturing. Given that: 1) the Republicans can no longer use the reconciliation process, 2) Democrats won't be willing to vote for any further tax cuts with mid-term elections around the corner, and 3) the House never really showed much interest in helping families with the first round of tax reform, any GOP talk of more tax cuts is being done to aid in the mid-term election efforts. Do I have that right?

A: You have it exactly right. While Brady may talk about wanting more tax cuts, he knows, as you now do, that it's not a political reality. The next six months will be rife with empty promises from both sides, and Kevin Brady's talk of more tax cuts is no different.

People in the Tax News

Phyllis Jo Kubey, ncpeFellowship Member Goes to Washington

Rep. Erik Paulsen (R-MN), a member of the House Ways and Means Committee, meets with Josh Webskowski, EA (MNSEA) during Fly-in Day. Josh is from Minnesota's Third Congressional District, which is represented by Congressman Paulsen. Pictured from left to right: Phyllis Jo Kubey, EA, CFP (NYSSEA), NAEA's 2018-2019 PAC Steering Committee Chair; Kathy Brown, EA (KYSEA), and Director serving on NAEA's 2018-2019 Board of Directors; Rep. Erik Paulsen;

25

filing federal or state taxes in those years was that he “failed to sufficiently prioritize (his) personal affairs.”

De Sousa, a 30-year veteran of the city police force, faces up to a year in prison and $75,000 in fines. His initial court appearance had not been scheduled.

Former Owner of Plastics Recycling Company Convicted of Tax Evasion

A jury convicted a former resident of Palm Beach, Florida yesterday, after an eight-day trial, of two counts of tax evasion, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and U.S. Attorney Jessie K. Liu for the District of Columbia.

According to the evidence introduced at trial, Michael Sang Han owned and operated Envion, a company that he claimed held the patents on technology used to convert plastics into fuel oil. Han fraudulently induced two individuals to invest in Envion, and then used the investors’ money to pay for his own personal expenses. He evaded paying income taxes on that money by filing false personal tax returns, which significantly underreported his income. In 2010 and 2011, Han directed investor money to be deposited into his personal bank account, spent it, and then lied to and gave incomplete information to his bookkeepers and tax preparers in order to hide the fact that he was using investors’ money to pay his personal expenses.

Han used over $14 million in investor funds to finance his lavish personal lifestyle and spent investor funds on personal expenditures such as private jets, real estate, high-end renovations and interior decorations, and expensive cars such as BMWs, a Range Rover, and a Ferrari. Additionally, Han used millions of dollars of investor funds to replace money he had previously misappropriated from Envion. Han’s evasion resulted in more than $4 million of tax due to the IRS.

U.S. District Judge James E. Boasberg scheduled sentencing for August 1, 2018, at 10:00 am. Han faces a statutory maximum sentence of 5 years in prison on each tax evasion count. He also faces a period of supervised release, restitution, and monetary penalties.

Principal Deputy Assistant Attorney General Zuckerman and U.S. Attorney Liu thanked special agents of IRS Criminal Investigation and the Federal Bureau of Investigation, who conducted the investigation, and Tax Division Trial Attorney Sarah Ranney and Assistant U.S. Attorneys Derrick Williams and Denise Simmonds, who prosecuted the case, and Paralegal Specialist Brittany Phillips for her valuable assistance during the trial.

A Canton Tax Preparer Indicted Last Year Has Been Acquitted of All Federal Tax Fraud Charges.

Sergio Gardea, 44, runs SGO Accounting and Tax Services

with offices in Canton and Akron. He was accused of helping to file false tax returns for local clients from Guatemala, Honduras and Mexico.

Federal prosecutors filed 30 counts against Gardea but dropped nine of the charges during a two-week trial before U.S. District Judge John Adams in Akron.

The jury acquitted Gardea of all counts.

Hudson man indicted for claiming false tax credits

“I am extremely grateful to my attorney, Mr. David M. Garvin, for his tenacity and brilliance. After almost five years of investigation by the IRS, Mr. Garvin proved my innocence,” Gardea wrote in an emailed statement.

Gardea wrote that Garvin, a criminal tax attorney and CPA with offices in Miami, Fla., “worked hard. During the home stretch he worked long hours for over 40 days without a day off. I am indebted to him for my liberty.”

Gardea, an accountant, did taxes mainly for Spanish-speaking workers and undocumented immigrants who worked on farms or in farm-related factories in Stark County. He typically charged $50 or $75 per return. Most of the clients were low income and seeking a tax return, according to Garvin.

The case largely hinged on 15 tax returns filed between 2013 and 2015 that wrongly claimed child tax credits for dependents living outside the U.S.

Gardea maintained his innocence and insisted he asked the proper questions and accurately prepared returns based the answers his clients provided.

Garvin said the defense was able to show tax filers were unreliable and often couldn’t remember signing paperwork attesting they were honest and properly qualified for the tax credit. He said Gardea was doing his job properly and asking the right questions. When the IRS sent in an undercover agent seeking a return, Gardea prepared the return without the child tax credit because the undercover client didn’t qualify.

“I truly believe justice was served today,” Garvin said. “I think it’s a great, great day for all tax preparers.”

Garvin credited Adams for his handling of the case and jurors for enduring a two-week trial with often tedious tax testimony.

Gardea thanked his “family, especially my wife and daughters, my friends and the community for their unwavering support.”

Taxpayers Personal Information Found in Dumpster

The personal information of roughly two dozen people was found in an open dumpster in Lancaster County.

26

An anonymous tip a few days ago directed 8 On Your Side consumer reporter Brian Roche to the dumpster behind a Liberty Tax Service office on Willow Street Pike that just closed last week. Among the items he found were folders with W-2 forms attached, tax documents and tax work sheets withpersonal information that included Social Security numbersand bank account numbers.

News 8 turned the documents over to the West Lampeter Township police.

Three days later, News 8 was tipped off that even more material had been put in the dumpster, and there was when we looked. We found a file that had the personal information of about two dozen people, as well as a computer.

A spokeswoman at Liberty Tax Service's corporate headquarters in Virginia told us company officials are distressed about what was found and have opened an internal investigation. Officials with Liberty Tax Service said anyone whose information may have been compromised will be offered free identity theft protection for one year.

The state has no laws regarding the disposal of taxpayer information, but the federal government does. According to the IRS, tax preparers can be fined and even face federal prison time if convicted of recklessly handling tax information.

News 8 will continue to investigate how and why the information ended up in the dumpster.

Private Eye Who Attempted to Access Trump's Tax Returns Is Sentenced

Last December, Jordan Hamlett, of Sunset, Louisiana, pleaded guilty to false representation of a Social Security number. The Social Security number in question belonged to President Donald Trump. This week, Hamlett finally learned the consequences of his actions: He's going to jail.

As part of the plea, Hamlett admitted that, in the fall of 2016, just before the presidential elections, he initiated an online Free Application for Federal Student Aid ("FAFSA") by using Trump’s identifying information, including his Social Security number and his date of birth. Once Hamlett had opened the application, he attempted to access the President's federal income tax information at least six times through the Internal Revenue Service (IRS) Data Retrieval Tool (DRT). As part of those efforts, he used a made-up email address (djtrumpicusmaximus@gmail.com) while falsely declaring that the President’s Social Security number was, in fact, his own.

Months later, the DRT was made unavailable on student financial aid websites, fafsa.gov and StudentLoans.gov. At the time, the IRS noted that it was working to resolve a security issue but "the online data tool will be unavailable for several weeks."

The DRT is a free service which allows students to automatically

transfer tax data from a taxpayer's federal tax return directly to a FAFSA form, making applying for financial aid faster and easier. The DRT had been available to families since the 2009-10 school year. You can read how the tool works here.

When the DRT was initially taken down in March of 2017, the IRS characterized it "as a precautionary step following concerns that information from the tool could potentially be misused by identity thieves." The IRS subsequently clarified that "[i]dentity thieves may have used personal information obtained outside the tax system to access the FAFSA form in an attempt to secure tax information through the DRT." In April of 2017, then IRS Commissioner Koskinen testified during a Senate Finance Committee hearing that potentially 100,000 taxpayers were affected by the DRT access attempt.

The DRT has since been made available to use with the 2018-19 FAFSA form. The Department of Education has noted that "additional security and privacy protections have been added to address concerns that data from the tool could be used by identity thieves to file fraudulent tax returns." The DRT is not usable for the 2017–18 FAFSA form.

It was alleged - though not publicly addressed by authorities - that Hamlett's activities tipped the IRS off to the problemswith the DRT. In 2017, the Treasury Inspector General forTax Administration noted in a hearing that it had "detectedan attempted access to the AGI of a prominent individual."Emails to TIGTA and IRS inquiring about the validity of thoseaccusations were not returned.

Hamlett, a private investigator, had initially argued that he was a "white hat hacker" - more or less a tech geek who breaks into computer systems to expose vulnerabilities. In court filings, Hamlett alleged that he had attempted to warn the IRS about security issues with the FAFSA service but could not reach a real person by phone.

Prosecutors, however, tried to paint Hamlett as a criminal hoping to benefit from a potential payday in seizing the tax documents that everyone seems to want to get their hands on. Breaking with tradition, Trump refused to make his returns public, initially claiming that the returns were under audit. The President later doubled-down with spokesperson Kellyanne Conway declaring that "The White House response is that he’s not going to release his tax returns."

Since that time, Trump's federal income tax returns have remained private. When Koskinen was asked whether he had seen Trump's tax returns, he said that he had not because he was not allowed to - even as the then IRS Commissioner. Safeguards are in place to keep federal employees from browsing, inspecting or making disclosures about taxpayer records (read more here).

With interest in the President's returns still high, Hamlett was indicted after allegedly admitting to federal agents that he had attempted to accept the returns. According to court documents, Hamlett agreed that the idea to access the returns through the federal aid website was "genius." He sounded, according

27

will be responsible for seeing cases all the way through, coordinating with other offices within the IRS as necessary. Milestones and measurements will be set in place to ensure that the IRS is returning to its quality service mission, and will be held accountable if it fails to do so.”

House Ways & Means Committee chair Kevin Brady

Begun in reform, the ideas for IRS redesign originated when Ways and Means Chairman Brady put out the tax reform blueprint, according to Liz Askey, national IRS practice and procedure leader at Top 5 Firm Grant Thornton: “Ultimately, the proposals got removed from the tax reform legislation as it moved through the reconciliation process. Although it was removed from the final Tax Cuts and Jobs Act, there is momentum for making changes at the IRS. It’s been 20 years since the 1998 Restructuring and Reform Act.”

The creation of an enhanced IRS Appeals would be welcome to practitioners, according to Alexander Reid of law firm Morgan Lewis. “This would have a salutary effect on IRS Examinations by creating an incentive for exam agents to improve the quality of their work in order for the audit results to withstand review by IRS Appeals,” he said. “Tax practitioners would welcome such a development as it could reduce the frequency of improper readings of precedential guidance by exam agents and the persistence of illogical positions that are never adjudicated by a higher authority. It would also be helpful for Appeals to serve as a safety valve to reduce instances in which the IRS may refuse to settle a case that it believes it can win, despite the bad precedent that may result. This is particularly so when the facts or law have been underdeveloped by the taxpayer due to constrained resources. Strengthening the autonomy and independence of Appeals would go a long way toward counteracting negative biases in the current system and increasing justice for all taxpayers.”

For lower-income taxpayers, the legislation would bring a number of material improvements, Reid indicated.

“First, they will no longer be targeted by private debt collectors who may be motivated by their self-interest to engage in unfair collection practices that under-represented taxpayers are helpless to defend against,” he said. “Second, taxpayers on the wrong end of a collection matter would have access to IRS Appeals for the first time, which is a lower-cost forum for sorting out their legal woes than courts. Third, IRS Appeals is akin to a court of equity as opposed to a court of law — their officials are able to take a broader view of the taxpayer’s situation and consider more information about the situation when deciding cases than are judges in other forums. This can only improve the fairness and equitable treatment. And last, making the Volunteer Income Tax Assistance program permanent is a great way to help those who find the tax system so bewildering and impenetrable that they make imprudent choices, like failing to file personal income tax returns, even when they are due a refund.”

“This would make Appeals more accessible,” observed Grant

to testimony from the agents, "proud" of having concocted the scheme, though he did not indicate at the time what his motivation for attempting to access the tax returns might be.

Many of the related court documents are under seal, so we may never know why Hamlett attempted to access the records. We do know that Hamlett will pay for the attempt. On Wednesday, U.S. District Judge John deGravelles sentenced him to 18 months in prison, plus two years of supervised release. He was also ordered to pay $14,794.96 in restitution to the U.S. Department of Education and a $100 special assessment.

"The protection of confidential taxpayer information is among the most important responsibilities of the Internal Revenue Service and my agency," said J. Russell George, the Treasury Inspector General for Tax Administration about the matter. "Mr. Hamlett’s sentencing should serve as a reminder to those who attempt to steal sensitive taxpayer information that they will be held accountable."

IRS News

Reshaping the IRS

By Roger Russell

The IRS Redesign, a bipartisan effort two years in the making, is meant to dramatically redesign the structure of the Internal Revenue Service to make it a “taxpayer-first” agency, according to Ways and Means Chairman Kevin Brady.

The legislation, which was working its way through Congress as we went to press, codifies the requirement of an independent administrative appeals function by establishing within the IRS “the Internal Revenue Service Independent Office of Appeals,” to be headed by a “chief of Appeals.”

Among other things, it would also require the IRS to submit to Congress a comprehensive plan to improve its customer service strategy, based on best practices from the private sector; require the IRS to maintain the Free File Program; ensure that taxpayers have access to the same information as the IRS during the dispute resolution process; require the IRS to submit to Congress a plan to redesign the structure of the agency to improve efficiency; enhance cybersecurity; ensure that the IRS sends notice to the actual taxpayer when conducting an audit before contacting friends, neighbors and clients; restructure IRS enforcement tools to ensure taxpayers do not have their assets seized without proper, timely and fair notice; and change the head position at the agency from a commissioner to an administrator.

“IRS departments will be reorganized to better support the needs of today’s taxpayers, with a focus on robust customer service,” Brady said. “For instance, in the case of identity theft, a centralized point of contact will be established that

28

Thornton’s Askey.

“Currently, the IRS is required to have an independent Appeals function, but there hasn’t been a statutory right to appeal. There’s been a feeling that the Appeals office has moved away from its core function of resolving taxpayers’ issues efficiently and effectively, and this makes sure that the protections that were there in the past are formalized.”

“It creates a qualified right to appeal, and ensures that taxpayers are given notice of the right to appeal if their case is denied,” she explained.

For Richard Levine, counsel at Withers Bergman, there is a question of where the IRS will find competent people to staff the new Appeals process: “Will they take people out of Treasury who are writing new regulations? There are only so many competent people who can understand the law in private practice, let alone at the IRS. Where are you going to find them, even if you have the money to hire at the government pay scale, to interpret complicated provisions of tax law?”

The limits on forfeiture are a good thing, Levine indicated. “There was the feeling that the use of forfeiture had gone a little too far, and that it was too easy for government agencies to seize private property,” he said.

More than a title change.

The change from “commissioner” to “administrator” was welcomed by Beanna Whitlock, a San Antonio-based preparer and educator, and former director of IRS National Public Liaison: “The IRS needs someone who is not necessarily an expert in tax law, but who has the ability to manage an agency of thousands of people. We need someone to take people into a vision in terms of service to America’s taxpayers.”

The suggested changes in the law would impact how practitioners handle IRS examinations from the outset, according to Reid. “It would also likely create a growth opportunity for practitioners that specialize in representing taxpayers before IRS Appeals.”

“The most noteworthy implications of the bill are what it implies, but does not say, which is that Congress expects the IRS to become far more efficient and productive with its resources,” Levine explained. “The bill would have the IRS focus on taxpayer service, not just enforcement and collections, which is expensive. In addition, the bill would have the IRS make substantial and costly investments in technology, improving the user interface, enhanced free filing, and stronger data privacy, all the while requiring the IRS to continue performing all of its existing functions at the same or higher level of quality. Yet the bill does not appropriate funds to enable the IRS to do all of this. It is difficult to imagine that the IRS can achieve the level of productivity gains to enable it to set aside sufficient funds to make the investments in technology and taxpayer services contemplated in the bill.”

New Tool Provides More Information About Exempt Organizations

The IRS launched a new tool on IRS.gov that gives taxpayers fast and easy access to information about exempt organizations. The new Tax Exempt Organization Search replaces the EO Select Check tool.

Here are some things taxpayers will find when they use the new TEOS tool:

Images of an organization’s forms 990, 990-EZ, 990-PF and 990-T filed with the IRS. Initially, only 990 series forms filed inJanuary and February 2018 will be available. New filings willbe added monthly.

More information about exempt organizations than was previously available using EO Select Check.

A simplified search process.

TEOS is mobile friendly, which provides access to the search tool using smartphones or tablets.

Users can access favorable determination letters. These are issued by the IRS when an organization applied for and met the requirements for tax-exempt status. At first, a limited number of determination letters will be available. Eventually, determination letters issued since January 2014 will also be available.

Taxpayers can also use TEOS to find information previously available on EO Select Check. This includes whether an organization:

Is eligible to receive tax-deductible contributions.

Has had its tax-exempt status revoked because it failed to file required forms or notices for three consecutive years.

Filed a Form 990-N annual electronic notice with the IRS; this applies to small organizations only.

Publicly available data from electronically-filed 990 forms is still available through Amazon Web Services.

IRS Relief Allows Certain Small Employers to Claim Section 45R Health Care Credit

Notice 2018-27, 2018-20 IRB; IR 2018-108, 4/27/2018

In a Notice and accompanying News Release, IRS has provided relief for small employers that properly claimed a credit under Code Sec. 45R for all or part of the 2016 tax year, or that properly claimed the credit for all or part of a later tax year, but are unable to offer employees a qualified health plan (QHP) through a Small Business Health Options Program (SHOP) Exchange for all or part of the remainder of the credit period

29

(as defined in Code Sec. 45R(e)(2)) because the employer's principal business address is in a county in which no QHP through a SHOP Exchange is available. Such employers may calculate the credit for such subsequent portion of the credit period by treating health insurance coverage provided for that portion of the credit period as qualifying for the credit if that coverage would have qualified for the credit under the pre-2014 Code Sec. 45R rules.

IRS noted that it has previously issued guidance providing transition relief under Code Sec. 45R for certain small employers with a principal business address in a county in which no QHPs were offered through a SHOP Exchange for 2014, 2015, and 2016 (Notice 2014-6, 2014-2 I.R.B. 279; Notice 2015-08, 2015-1 I.R.B. 589; and Notice 2016-75, 2016-51 I.R.B. 832), and that nothing in Notice 2018-27 is intended to modify or otherwise affect that relief.

Background. Under Code Sec. 45R which was added by the Patient Protection and Affordable Care Act (ACA, P.L. 111-148), effective for tax years beginning after Dec. 31,2009, a tax credit is offered to certain small employers thatprovide health insurance to their employees (“eligible smallemployers,” or ESEs).

For tax years beginning after Dec. 31, 2013, the credit is available only with respect to premiums paid by a small employer for a QHP offered by the employer to its employees through a SHOP Exchange, and is available only for a 2-consecutive-tax-year period. Additionally, for tax yearsbeginning after Dec. 31, 2013, the maximum credit rate isincreased to 50% from 35% for ESEs (and to 35% from 25%for tax-exempt ESEs). (Code Sec. 45R(b))

Issue. IRS have been advised by the Department of Health and Human Services (HHS) that for calendar years 2014, 2015, and 2016, in certain counties, SHOP Exchanges would not have QHPs available for employers to offer to employees.

Under HHS regs governing eligibility for SHOP Exchanges, an employer may either (1) offer coverage to all of its eligible employees through the SHOP whose service area includes the employer's principal business address, or (2) offer coverage to each eligible employee through the SHOP whose service area includes that employee's primary worksite. Under either approach, an employer may offer SHOP coverage to employees whose primary worksite is at its principal business address only if that address is located within the service area of the SHOP. As a result, absent IRS relief, an otherwise qualifying ESE with its principal business address in a county without any QHPs available would be denied the opportunity to claim the Code Sec. 45R credit.

To permit otherwise ESEs with principal business addresses in counties in which no QHP was available through a SHOP Exchange for 2014, 2015, and 2016 to claim the credit, IRS provided relief under which those employers were permitted to calculate the credit by treating health insurance coverage provided for the plan year beginning in 2014, 2015, or 2016, as applicable, as qualifying for the credit, provided that the

coverage would have qualified for the credit under the rules applicable before Jan. 1, 2014.

HHS has advised IRS that, for calendar years 2017 and 2018, SHOP Exchanges in an increasing number of counties across the U.S. do not have any QHPs available for otherwise qualifying ESEs to offer to employees. However, given the number of years for which small employers may already have been eligible for the credit and the period of time since the enactment of Code Sec. 45R, IRS has determined that a more limited type of relief (see below) is appropriate for otherwise qualifying ESEs in counties with no SHOP Exchange coverage available after 2016.

Relief for 2017 and later years. Notice 2018-27 provides relief for an ESE that properly claimed or claims the credit for all or part of a tax year beginning after Dec. 31, 2015, but that for all or part of the remainder of the credit period has a principal business address in a county in which a QHP through a SHOP Exchange is not available.

To properly claim the credit, the employer must offer coverage through a SHOP Exchange or coverage meeting the requirements for relief under Notice 2016-75 (see "Relief provided for certain WI..."), if applicable, and must comply with all other applicable guidance. Except as provided below, such an employer may calculate the credit for the remainder of the credit period by treating health insurance coverage provided for the plan year(s) in which a QHP is not available through a SHOP Exchange as qualifying for the credit, provided that the coverage would have qualified for the credit under the Code Sec. 45R rules applicable before Jan. 1, 2014.

This relief does not alter the credit period under Code Sec. 45R; that is, even if a plan year to which the relief applies extends into a third tax year, the employer may not claim the credit for a third tax year.

To see whether a particular county had coverage available through a SHOP Exchange for 2017, see www.irs.gov/newsroom/small-business-health-care-tax-credit-questions-and-answers-who-gets-the-tax-credit.

To see whether a particular county has coverage available through a SHOP Exchange for 2018 and beyond, employers may refer to the See Plans and Prices Tool on www.healthcare.gov/small-business, accessed by selecting “Get Coverage” and then “See Plans and Prices”. Employers in states operating a State-based SHOP may visit their State-based SHOP’s website directly, or use the See Plans and Prices Tool on www.healthcare.gov/small-business to be redirected to their State-based SHOP to see whether a particular county has coverage available for 2018 and beyond. (Notice 2018-27, Section III)

Affordable Care Act (ACA) Section 1332 waivers. Section 1332 of the ACA permits a state to waive certain ACA provisions, including the requirement to operate a SHOP Exchange, as part of an application for a "State Innovation Waiver" to pursue innovative strategies for providing their

30

because it is obsolete. The waiver of the eligibility rule in Rev Proc 2015-13, Section 5.01(1)(d), continues to apply to this change;

...Rev Proc 2017-30, Section 6.18, relating to the revocation of the partial disposition election under the remodel-refresh safe harbor described in Rev Proc 2015-56, is obsolete and is removed in its entirety;

...Rev Proc 2017-30, Section 11.10, relating to a change to the remodel-refresh safe harbor described in Rev Proc 2015-56, is modified to remove a paragraph relating to the temporary waiver of the eligibility rules in Rev Proc 2015-13, Sections 5.01(1)(d) and (f), because they are obsolete;

...Because of the amendments made to Code Sec. 263A, Code Sec. 448, and Code Sec. 471 by §13102 of the Tax Cut and Jobs Act (TCJA, P.L. 115-97, 12/22/2017), IRS expects to issue a revenue procedure providing procedures for making changes implementing §13102 of TCJA. Accordingly, the following sections are modified:

(a) Rev Proc 2017-30, Section 12.01, relating to certainuniform capitalization (UNICAP) methods used byresellers and reseller-producers, is modified to providethat a small reseller, as defined in Rev Proc 2018-31,Section 12.01(3)(b), is not permitted to make a changein method of accounting described in Rev Proc 2018-31,Section 12.01(1)(a)(i), for any tax year beginning afterDec. 31, 2017; and

(b) Rev Proc 2017-30, Section 15.03, relating to taxpayers changing to overall cash receipts and disbursements(cash) method, and Rev Proc 2017-30, Section 21.03(now Rev Proc 2018-31, Section 22.03), relating to thesmall taxpayer exception from requirement to accountfor inventories under Code Sec. 471, are modified toprovide that these changes do not apply for any tax yearbeginning after Dec. 31, 2017;

...Because of the amendments made to Code Sec. 118 by §13312 of the TCJA, Rev Proc 2017-30, Section 15.14,relating to nonshareholder contributions to capital, ismodified to provide that the change described in Section15.14(1)(a)(ii) does not apply to contributions made afterDec. 22, 2017 (the date of enactment of TCJA);

...Pursuant to Notice 2018-35, 2018-18 IRB 520, Rev Proc 2017-30, Section 16.07, relating to changes for advance payments, is modified to provide that the eligibility rule in Rev Proc 2015-13, 2015-5 IRB 419, Section 5.01(1)(f), does not apply to a taxpayer that changes to an accounting method provided under Rev Proc 2018-31, Section 16.07(1)(a)(i), for the taxpayer's first or second tax year ending on or after May 9, 2018;

...Because of the amendments made to Code Sec. 451 by §13221 of the TCJA, Rev Proc 2017-30, Section 16.07 isalso modified to provide that a taxpayer is not permittedto make a change in an accounting method described in

residents with access to high quality, affordable health insurance while retaining the basic protections of the ACA. To fund their reforms, states may receive the aggregate amount of subsidies, including the credit, that would have otherwise gone to the state’s residents.

On Dec. 30, 2016, Hawaii’s application for a 5-year State Innovation Waiver was approved. As a result, Hawaii is not required to operate a SHOP Exchange for 2017-2021 and employers in Hawaii may not claim the credit for plan years beginning during this 5-year period. (Notice 2018-27, Section IV)

IRS issues updated list of automatic accounting changes

Rev Proc 2018-31, 2018-22 IRB

In a Revenue Procedure, IRS has issued an updated list of accounting method changes to which IRS's automatic change procedures apply.

Background. Under Code Sec. 446(e), taxpayers must obtain IRS's consent before changing a method of accounting for federal income tax purposes. In most cases, a taxpayer that wishes to change its accounting method must apply and secure the prior consent of IRS. For some accounting method changes, IRS provides an automatic procedure for obtaining its consent to the change. Automatic consent procedures are only available for certain kinds of changes. In general, a taxpayer uses Form 3115 (Application for Change in Accounting Method) for an accounting method change.

In April 2017, IRS updated its list of accounting method changes to which IRS automatic procedures applied (Rev Proc 2017-30, 2017-18 IRB 1131, see "Updated list of automatic accounting changes is issued by IRS" (4/27/2017)).

New list of automatic changes. Rev Proc 2018-31 contains an updated list of accounting method changes to which IRS automatic procedures apply.

Specifically, Rev Proc 2018-31 states that it updates the List of Automatic Changes to which the automatic change procedures in Rev Proc 2015-13, 2015-5 IRB 419, as clarified and modified by Rev Proc 2015-33, 2015-24 IRB 1067, and as modified by Rev Proc 2017-59, 2017-48 IRB 543, and by Rev Proc 2016-1, 2016-1 IRB 1, Section 17.02.

Rev Proc 2018-31 sets out several of the updates that it contains as "significant changes" to the List of Automatic Changes in Rev Proc 2017-30. Many of these changes are modifications to reflect material that has become obsolete. The significant changes include:

...Rev Proc 2017-30, Section 6.11, relating to a change in the depreciation of leasehold improvements, is modified to remove a paragraph relating to the temporary waiver of the eligibility rule in Rev Proc 2015-13, Section 5.01(1)(f),

31

injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance, possession of which is unlawful under this subchapter,“ and provides examples of items that constitute drug paraphernalia.

Under 21 USC 841(a), it is unlawful for any person to knowingly or intentionally "distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance."

Issue. The issue raised in the CCA is whether IRS may administratively seize and sell Gas Chromatographer Mass Spectrometers and Liquid Chromatographer Mass Spectrometers (collectively, Spectrometers) used by taxpayers involved in the marijuana industry to measure cannabinoids in marijuana. As a result of the past use of such equipment, there may be marijuana residue remaining on the equipment seized by IRS, and the concern is whether such an administrative sale would violate the above federal drug laws.

Conclusion. The CCA concludes that the Spectrometers are not drug paraphernalia under 21 U.S.C. § 863, so there are generally no restrictions on their seizure and sale. That statute, which makes it unlawful to sell drug paraphernalia, generally defines drug paraphernalia as “any equipment, product, or material of any kind which is primarily intended or designed [emphasis added] for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance, possession of which is unlawful under this subchapter.“

The CCA cited a Supreme Court opinion, Posters 'N' Things, Ltd. v. U.S., (1994) 511 U.S. 513, to interpret the phrases "primary intended for use" and "primarily designed for use. The Court noted that these phrases establish "objective standards for determining what constitutes drug paraphernalia." With regard to the “designed for use” prong, the Court stated that the standard referred to the design of the manufacturer, not the intent of the retailer or customer. Similarly, the Court concluded that the term “primarily intended for use” refers generally to an item's likely use rather than the defendant’s state of mind.

Following the Suprme Court's logic, the CCA concludes that the Spectrometers aren't equipment primarily intended or designed for use in manufacturing, etc. a controlled substance. While they can be used by those in the drug trade, they are also used in drug detection, and many other areas including airport inspections, fire investigations, explosives investigations, environmental analysis, and identification of foreign material collected from outer space. In addition, the Spectrometers aren't listed in 21 USC 863(d), nor are they similar to items listed there.

The CCA also opined that an administrative sale by IRS of Spectrometers that might contain traces of marijuana residue "would likely not" violate 21 USC 841(a). Nonetheless, to avoid any possibility of a criminal violation, the CCA stated that the Spectrometers should be subject to a deep cleaning

Rev Proc 2018-31, Section 16.07(1)(a)(ii), for any tax year beginning after Dec. 31, 2017;

...Rev Proc 2017-30, Section 21.15 (now Rev Proc 2018-31, Section 22.15), relating to sales-based vendor chargebacks, is modified to remove a paragraph relating to the temporary waiver of the eligibility rule in Rev Proc 2015-13, Section 5.01(1)(f), because it is obsolete;

...Rev Proc 2017-30, Section 23.01 (now Rev Proc 2018-31, Section 24.01), relating to certain taxpayers that have elected the mark-to-market accounting method under Code Sec. 475(e) or Code Sec. 475(f), is modified to provide that the waiver of the eligibility rule in Rev Proc 2015-13, Section 5.01(1)(f), no longer applies to this change. The waiver of the eligibility rule in Rev Proc 2015-13, Section 5.01(1)(d), continues to apply to this change; and

...Rev Proc 2017-30, Section 23.02 (now Rev Proc 2018-31, Section 24.02), relating to a taxpayer changing its accounting method for securities or commodities from the mark-to-market method of accounting described in Code Sec. 475 to a realization method of accounting, is modified to provide that the waiver of the eligibility rule in Rev Proc 2015-13, Section 5.01(1)(f), no longer applies to this change. The waiver of the eligibility rule in Rev Proc 2015-13, Section 5.01(1)(d), continues to apply to this change.

Certain Equipment Used in Marijuana Industry Can Be Seized and Sold by IRS

Chief Counsel Advice 201820018

In Chief Counsel Advice (CCA), IRS has determined that certain equipment used by taxpayers in the marijuana industry could be administratively seized and sold under Code Sec. 6331 and Code Sec. 6335. The CCA concluded that the equipment wasn't drug paraphernalia and so its sale wouldn't violate statutory prohibitions on selling same. The CCA also opined that mere traces of marijuana residue likely wouldn't suggest an intent to distribute, but encouraged that all precautions be taken to clean the equipment prior to sale.

Background—levy and distraint. IRS has power to collect taxes by levy and distraint, meaning that it may seize any property (unless specifically exempted) of a delinquent taxpayer (whether held by the taxpayer or someone else), sell it, and apply the proceeds to pay the unpaid taxes. (Code Sec. 6331) The property seized may be real, personal, tangible, or intangible. (Code Sec. 6331(a))

Code Sec. 6335 sets out rules and conditions relating to the sale of seized property.

Background—drug laws. Under 21 USC 863(a)(1), it unlawful for any person to sell or offer for sale "drug paraphernalia." 21 USC 863(d) generally defines drug paraphernalia as “any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing,

32

prior to sale to reduce all trace residues, which would also increase bid prices at a public IRS sale. The CCA noted that, in deciding whether to seize and sell equipment such as Spectrometers, IRS should take the costs of cleaning the equipment into consideration.

IRS Announces 2019 ACA Premium Credit Indexing Adjustments

Rev Proc 2018-34, 2018-23 IRB

In a Revenue Procedure, IRS has provided indexing adjustments that are to be used in applying various Affordable Care Act (ACA, or Obamacare) provisions under Code Sec. 36B (the premium tax credit) for 2019. Included in the adjustments are: the 2019 Applicable Percentage Table in Code Sec. 36B(b)(3)(A)(i), which is used to calculate an individual's premium tax credit; and updates to the required contribution percentage in Code Sec. 36B(c)(2)(C)(i)(II), which is used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage under Code Sec. 36B for plan years beginning after 2016.

Background. Under Code Sec. 36B(a), certain taxpayers are allowed a refundable premium tax credit to help afford health insurance purchased through an Exchange. A taxpayer's premium tax credit with respect to any coverage month is the lesser of: (a) the premiums for the plan or plans in which the taxpayer or one or more members of the taxpayer's family enroll and (b) the excess of the premiums for the applicable second lowest cost silver plan covering the taxpayer's family over the taxpayer's “contribution amount.” (Code Sec. 36B(b)(2))

A taxpayer's contribution amount is the product of the taxpayer's household income and an “applicable percentage” that increases as the taxpayer's household income increases, determined under rules specified in Code Sec. 36B(b)(3)(A)(i).Code Sec. 36B(b)(3)(A)(ii) provides that, for tax years beginning in 2015 and thereafter, the percentages in the table under Code Sec. 36B(b)(3)(A)(i) must be adjusted to reflect the excess of the rate of premium growth for the preceding calendar year over the rate of income growth for the preceding calendar year. The applicable percentage within an income category increases on a sliding scale in a linear manner from the initial to final percentages (see below).

Code Sec. 36B(c)(2)(B) provides that a coverage month does not include any month with respect to an individual if for such month the individual is eligible for minimum essential coverage other than eligibility for coverage in the individual market described in Code Sec. 5000A(f)(1)(C). Under Code Sec. 36B(c)(2)(C), an individual is not treated as eligible for employer-sponsored minimum essential coverage if the required contribution with respect to the plan exceeds 9.5% of the taxpayer's household income (Code Sec. 36B required contribution percentage). For plan years beginning in 2015 and thereafter, the 9.5% is updated in the same manner that the applicable percentage is adjusted under Code Sec. 36B(b)(3)(A)(ii).

Code Sec. 36B(b)(3)(A)(ii)(II) provides that, except as provided in Code Sec. 36B(b)(3)(A)(ii)(III), an additional adjustment must be made for years after 2018 to reflect the rates of premium growth relative to the growth in the consumer price index. Code Sec. 36B(b)(3)(A)(ii)(III), the “failsafe” provision, provides that the post-2018 inflation adjustment will apply for a calendar year only if the aggregate amount of Code Sec. 36B credits and cost-sharing reductions under Sec. 1402 of the Patient Protection and Affordable Care Act (PL 111-148, 3/23/2010) for the preceding calendar year exceeds an amount equal to 0.504% of the Gross domestic product for the preceding calendar year.

2019 adjusted items. For tax years beginning in 2019, the Applicable Percentage Table for purposes of Code Sec. 36B(b)(3)(A)(i) (and the accompanying reg, Reg. § 1.36B-3(g)) is:

Where household income as a percentage of the Federal poverty line is:

•Less than 133%, then the initial percentage is 2.08% andthe final percentage is 2.08%;

•At least 133% but less than 150%, 3.11% and 4.15%;

•At least 150% but less than 200%, 4.15% and 6.54%;

•At least 200% but less than 250%, 6.54% and 8.36%;

•At least 250% but less than 300%, 8.36% and 9.86%; and

•At least 300% but not more than 400%, 9.86% and 9.86%.

For plan years beginning in 2019, the Code Sec. 36B required contribution percentage for purposes of Code Sec. 36B(c)(2)(C)(i)(II) and Reg. § 1.36B-2(c)(3)(v)(C) is 9.86% (up from 9.56% for 2018).

And, IRS has determined that the failsafe exception described in Code Sec. 36B(b)(3)(A)(ii)(III) applies for 2019 and thus no additional adjustment under Code Sec. 36B(b)(3)(A)(ii)(II) is required for 2019.

Rev Proc 2018-34 uses the methodology in Rev Proc 2014-37, 2014-33 IRB 363, to index the Applicable Percentage Table and the Code Sec. 36B required contribution percentage for 2019.

In prior years, when IRS announced ACA premium credit indexing adjustments for the following calendar year, it also announced the required contribution percentage under Code Sec. 5000A, the Code provision that provides for the "individual mandate." However, the "individual mandate" has been repealed by the Tax Cuts and Jobs Act (P.L. 115-97), effective for months beginning after Dec. 31, 2018, so there is no required contribution percentage under Code Sec. 5000A for 2019.

33

Facts. Taxpayer adopted the Plan pursuant to Statute to provide certain benefits for police officers employed by Taxpayer who are disabled due to an accident or to another cause in the line-of-duty.

Under the Plan, a police officer disabled in the line-of-duty will receive a monthly disability benefit equal to 50% of his or her final average compensation for the period of disability once unused annual or sick leave has been paid to the disabled police officer, as reduced by any amounts paid as State workers compensation benefits. The actuarial equivalent value of the disability benefit will not be less than the participant’s retirement value, or accumulated value of the employee and employer’s contribution account, at the date of disability. A participant receiving a disability benefit will not be entitled to any other benefits, including death benefits, provided under the Plan unless the disability ends prior to death and the participant’s retirement value has not been fully paid as a disability benefit.

If a police officer dies in the line-of-duty, or if death is caused by injuries received in the line-of-duty, a monthly benefit equal to 50% of his or her final average compensation at the time of death will be paid to any surviving spouse, or upon his or her remarriage or death, to the minor children. This amount is reduced for amounts paid as State workers compensation benefits.

To the extent that the police officer’s retirement value at the date of death exceeds the amount required to provide a monthly benefit equal to 50% of his or her final average compensation at the time of death, as reduced by any amounts paid as State workers compensation benefits, the excess shall be paid to the participant’s surviving spouse or minor children as described above.

Under State law, the parties may specifically provide in a domestic relations order that the former spouse will receive a share of a disability benefit, and the Taxpayer will follow that direction.

IRS's conclusions. The PLR concluded that benefits paid to a police officer under the Plan for injuries incurred in the line-of-duty will not be gross income to the recipient under Code Sec. 104(a)(1) to the extent that the benefits do not exceed 50% of the officer’s final average compensation. Any portion of the benefit that exceeds that amount will be gross income to the recipient under Code Sec. 72.

And, the PLR similarly held that benefits paid under the Plan to a survivor of a police officer that dies in the line-of-duty, or if death is caused by injuries received in the line-of-duty, will not be gross income to the recipient under Code Sec. 104(a)(1) to the extent that the benefits do not exceed 50% of theemployee’s final average compensation, with any excessincludable under Code Sec. 72.

In so holding, IRS reasoned that the described benefits are paid under the Statute and the Plan where the disability is the result of an accident or other cause which occurred as a result

Payments Under Disability and Survivor Benefit Plan Qualify as Workers' Comp

PLR 201819004

In a private letter ruling (PLR), IRS has determined that benefits paid to a police officer under a Plan for injuries incurred in the line-of-duty, and benefits paid under the Plan to a survivor of a police officer that dies in the line-of-duty or as a result of injuries sustained in the line-of-duty, will not be gross income to the recipient under Code Sec. 104(a)(1) to the extent that the benefits do not exceed 50% of the officer’s final average compensation. However, IRS ruled that the exclusion doesn't extend to disability and line-of-duty death benefits paid under the Plan to former spouses of police officers pursuant to eligible domestic relations orders.

Background. Under Code Sec. 104(a)(1), gross income does not include amounts received under workmen's compensation acts as compensation for personal injuries or sickness. This exclusion also applies to statutes in the nature of workmen's compensation acts which provide compensation to employees for personal injuries or sickness incurred in the course of employment. Code Sec. 104(a)(1) also applies to compensation which is paid under a workmen’s compensation act to the survivor or survivors of a deceased employee. (Reg. § 1.104-1(b))

The exclusion doesn't apply to a retirement pension or annuity to the extent that it is determined by reference to the employee's age or length of service or the employee's prior contributions, even though the employee's retirement is occasioned by an occupational injury or sickness, or to the extent that it is in excess of the amount provided in the applicable workmen’s compensation act or acts. (Reg. § 1.104-1(b))

In Rev Rul 80-44, 1980-1 C.B. 34, a statute in the nature of a workmen's compensation act provided for an allowance of the greater of (A) 60% of the individual's average final compensation, or (B) the amount to which the individual would be entitled under the normal, years of service, retirement plan. The ruling concluded that the benefits under the statute were excludable under Code Sec. 104(a)(1) to the extent that they did not exceed 60% of the final average compensation. The ruling also held that benefits of the surviving spouse which are a continuation of the employee’s benefits are excludable under Code Sec. 104(a)(1) in the same percentage as the employee's benefits were excludable.

Rev Rul 80-84, 1980-1 C.B. 35, provided that benefits received by beneficiaries of deceased employees under the employer's retirement plan, where the employee on account of whose death the benefits were paid was retired under the service-connected disability provisions of the employer's plan, were excludable from gross income under Code Sec. 104(a)(1). The ruling also stated that a statute authorizing benefits for employees' survivors may qualify as a statute in the nature of a workmen's compensation act if it requires as a prerequisite to payment a determination that the cause of the employee's death was service-related.

34

of the employee’s work in the line-of-duty, or where death is caused by injuries received in the line-of-duty, and are thus in the nature of workmen’s compensation. To the extent the retirement value exceeds the actuarial equivalent value of the disability benefit or death benefit, the excess would be includable as taxable gross income under Code Sec. 72.

However, IRS held that disability benefits and line-of-duty death benefits paid under the Plan to former spouses of police officers pursuant to eligible domestic relations orders are not excludable from the taxable income of former spouses under Code Sec. 104(a)(1). IRS reasoned that exclusions from gross income are strictly construed, and that neither the Code nor regs provide an exclusion for amounts paid to former spouses under domestic relations orders.

In Response to Court Order, IRS Issues Justification for 2015 Healthcare Regs

T.D. 9744, 05/03/2018

In response to a court order, IRS, along with the Employee Benefits Security Administration and the Department of Health and Human Services (collectively, the Departments), has issued a "notice of clarification" regarding their reasoning and justification for adopting 2015 regs implementing provisions under the Affordable Care Act (ACA or Obamacare). Those regs apply a methodology to determine appropriate payments by group health plans and health insurance issuers for out-of-network emergency services.

Background. The Affordable Care Act added ERISA § 715(a)(1) and Code Sec. 9815(a)(1) to incorporate the provisions ofpart A of title XXVII of the Public Health Service Act (PHSA)into ERISA and the Code, respectively, and make themapplicable to group health plans and health insurance issuersproviding health insurance coverage in connection with grouphealth plans. The incorporated PHSA sections are 2701through 2728 (i.e., the market reform provisions), includingPHSA § 2719A's ban on imposing higher cost-sharing on out-of-network emergency services.

Under 2015 regs (Reg § 54.9815-2719A(b)(3)(i), see "Affordable Care Act regs finalize an array of issues covered in previous guidance") implementing PHSA § 2719A, a non-grandfathered plan is allowed to provide benefits for out-of-network emergency services in an amount at least equal to the greatest of the following three amounts (adjusted for in-network cost sharing):

1. the median amount negotiated with in-networkproviders for the emergency service;

2. the amount for the emergency service calculated usingthe same method the plan generally uses to determinepayments for out-of-network services (such as the usual,customary, and reasonable (UCR) amount); or

3. the amount that would be paid under Medicare for theemergency service.

A plan must disclose how it calculates the amount under the minimum payment standards, including the method the plan generally uses to determine payments for out-of-network services (e.g., the UCR amount).

Previously, the American College of Emergency Physicians (ACEP) filed a compliant in district court objecting to item (2), above, citing concerns about the level of payment for out-of-network services, and the need for a transparent database to determine the amount of out-of-network amounts.

The district court in American College Of Emergency Physicians v. Thomas E. Price, M.D., (2017, DC Dist Col) 264 F Supp 3d 89, 2017 WL 3836045 did not vacate the 2015 regs, but ordered that ACEP's concerns be remanded to the Departments so that they can more adequately address the comments and proposals.

Departments' response. In response to the court's order, the Departments have now issued a "notice of clarification" to provide a more thorough explanation of the Departments' decision not to adopt recommendations by ACEP and certain other commentators regarding the 2015 regs.

The Departments indicated that the regs provide a reasonable and transparent methodology to determine appropriate payments to non-grandfathered health plans and health insurance issuers offering coverage for out-of-network emergency services.

The regs three prongs work together to establish a floor on the payment amount for out-of-network emergency services, and each state generally retains authority to set higher amounts for health insurance issued in the state, the Departments said.

The Departments emphasized that the three prongs of the regs were sufficiently transparent, and that ACEP's proposal that the regs require the development of a database or utilization of a publicly available database to set UCR amounts would require the Departments to extend the scope of its authority under PHSA § 2719A to intrude on state authority and health plan discretion.

Furthermore, even if the Departments were prepared to extend their authority as requested, the establishment and maintenance of a database or the assessment, validation, and monitoring of a publicly available database would be costly and time consuming, the Departments said.

IRS Modifies Safe Harbors on Treatment of Loss Corporation's Built-In Gain and Loss After Ownership Change

Notice 2018-30, 2018-21 IRB

In a Notice, IRS has modified the "338 approach" and "1374 approach" previously set out in Notice 2003-65, 2003-2 CB 747, for determining recognized built-in gains or losses on assets owned by a loss corporation at the time of an ownership

35

by comparing the loss corporation's actual items of income, gain, deduction, and loss with those that would have resulted if a Code Sec. 338 election had been made with respect to a hypothetical purchase of all the outstanding stock of the loss corporation on the change date. As a result, built-in gain assets may be treated as generating RBIG even if they are not disposed of at a gain during the 5-year recognition period, and deductions for liabilities, in particular contingent liabilities, that exist on the change date may be treated as RBIL. To identify those items that would have resulted had a Code Sec. 338 election been made with respect to a hypothetical stock purchase, the loss corporation is treated as using the accounting methods that the loss corporation actually uses.

Under the 338 approach, certain assets generate RBIG or RBIL even if not disposed of during the recognition period. Specifically, the 338 approach treats as RBIG or RBIL (as the case may be) the difference between the loss corporation's actual allowable cost recovery deduction with respect to an asset and the hypothetical cost recovery deduction that would have been allowable with respect to the asset had an election under Code Sec. 338 been made for a purchase of the loss corporation's stock.

In general, the 1374 approach incorporates the rules of Code Sec. 1374(d), under which built-in gain and loss are computed for purposes of the S corporation tax on net recognized-built in gain. Thus, NUBIG or NUBIL is calculated by determining how much would be realized if immediately before the ownership change the loss corporation sold all of its assets, including goodwill, at FMV to a third party that assumed all of its liabilities. This amount is (a) decreased by the loss corporation's aggregate adjusted basis in all of its assets; (b) decreased by the sum of any deductible liabilities of the loss corporation that would be included in the amount realized on the hypothetical sale; (c) increased or decreased by the corporation's Code Sec. 481 adjustments that would be taken into account on the hypothetical sale, and (d) increased by any RBIL that would not be allowed as a deduction under Code Sec. 382, Code Sec. 383, or Code Sec. 384 on the hypothetical sale.

The amount of gain or loss treated as RBIG or RBIL on the sale or exchange of an asset can't exceed the unrealized built-in gain or loss on that asset on the change date. In cases other than sales and exchanges, the 1374 approach generally relies on the accrual method of accounting to identify income or deduction items as RBIG or RBIL. However, for purposes of determining whether an item is RBIL, Code Sec. 461(h)(2)(C) and Reg. § 1.461-4(g), which have to do with liabilitiesfor which payment is economic performance, don't apply.Other special rules are provided for installment sales, incomegenerated by built-in gain assets, depreciation on built-inloss assets, debt discharge income (which differs from thetreatment earlier described in Notice 87-79, 1987-1 CB 388)and bad debt deductions.

Background on recent legislation. The Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017) amended Code Sec. 168(k) to extend and modify the additional first-year (bonus)

change under Code Sec. 382(h). Under the new Notice, the hypothetical cost recovery deductions that would have been allowable had an election under Code Sec. 338 been made, or had the asset been purchased at fair market value (FMV), are determined without regard to the additional first-year depreciation deduction in Code Sec. 168(k), effective for any ownership changes that occur after May 8, 2018.

Background on corporate ownership changes. Following certain corporate ownership changes (generally involving more-than-50% increases in 5% shareholders' ownership), Code Sec. 382 limits the amount of pre-change losses of a loss corporation (i.e., one entitled to use a net operating loss (NOL) carryover or having an NOL for the tax year in which the ownership change occurs) that can be carried forward and used in any one tax year to offset post-change income. Generally speaking, this per-year limitation is the FMV of the pre-change corporation multiplied by a specified interest rate.

Code Sec. 382(h) reflects the policy that losses that offset recognized built-in gain (RBIG) should not be subject to the Code Sec. 382 limitation just because the gain is recognized after an ownership change. This is because the gain, if recognized before the ownership change, would have been offset without limitation by the loss corporation's net operating losses. Conversely, recognized built-in loss (RBIL) isn't allowed to escape the limitation just because it is recognized after an ownership change since the loss, if recognized before the ownership change, would have been subject to the Code Sec. 382 limitation. These rules apply during a 5-year recognition period following the ownership change date.

Whether RBIG escapes the limitation or RBIL is subject to it depends on whether, at the time of the ownership change, the corporation had overall net unrealized built-in gain (NUBIG) or net unrealized built-in loss (NUBIL), i.e., on whether the aggregate value of the corporation's assets exceeded or was less than their aggregate adjusted bases. The rule exempting RBIG from the limitation can only apply if NUBIG exists, while the rule subjecting RBIL to the limitation only exists if there is NUBIL.

In determining NUBIG and NUBIL, certain items of income and expense that are realized after the ownership change, but that relate to the pre-change period, are taken into account. Under a de minimis rule, if a corporation's NUBIG or NUBIL doesn't exceed the lesser of $10 million or 15% of its assets' FMV, NUBIG or NUBIL is treated as zero.

In Notice 2003-65, 2003-2 CB 747, IRS issued guidance on how to apply Code Sec. 382(h)by providing two alternative approaches (the "1374 approach" and the "338 approach") that taxpayers could use and rely on as safe harbors until final or temporary regs were issued. Taxpayers may use either of the two approaches (but not elements of both) for each ownership change. (See IRS provides safe harbors for treatment of loss corporation's built-in gain and loss after ownership change (09/25/2003) for more details.)

In general, the 338 approach identifies items of RBIG and RBIL

36

depreciation deduction for qualified property (as defined in Code Sec. 168(k)(2)) acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2027.

The additional first-year depreciation deduction allowed under Code Sec. 168(k) is equal to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023, and thereafter is phased down 20 percentage points each year for property placed in service through Dec. 31, 2026. In addition, prior to the TCJA, for qualified property to be eligible for additional first-year depreciation, the original use of the property had to commence with the taxpayer. The TCJA removed this requirement, thus allowing certain used property to qualify for the additional first-year depreciation deduction.

Safe harbor modified.Notice 2018-30 provides that under the 338 approach in Notice 2003-65 (as modified), in determining RBIG or RBIL, the hypothetical cost recovery deductions that would have been allowable had an election under Code Sec. 338 been made are determined without regard to Code Sec. 168(k).

Notice 2018-30 also provides that under the 1374 approach in Notice 2003-65 (as modified), in computing the amount of cost recovery deductions that are not attributable to an asset's built-in loss on the change date, the hypothetical cost recovery deductions that would have been allowable had the loss corporation purchased the asset for its FMV on the change date are determined without regard to Code Sec. 168(k).

IRS has determined that the hypothetical cost recovery deduction using the additional first-year depreciation allowed under Code Sec. 168(k) does not provide a reasonable estimate of the income or expense produced by a built-in gain or loss asset during the recognition period. Thus, the use of this additional first-year depreciation would invalidate the assumption that underlies the section 338 approach. Under Notice 2003-65 (before modified) the amendments to Code Sec. 168(k) would have had collateral consequences in connection with the 338 approach. The additional first-year depreciation would increase RBIG and reduce RBIL in the first year of the recognition period.

Moreover, in some situations, total RBIG would increase and total RBIL would either increase or decrease over the 5-year recognition period. IRS has determined that these changes in amounts of RBIG and RBIL are not appropriate. Neither the TCJA itself or its legislative history indicate that the amendments to Code Sec. 168(k) were intended to reflect an estimate of income or expense generated by an asset during any particular time.

The concerns underlying the 338 approach apply equally to one portion of the 1374 approach. Under Notice 2003-65 (before modified), the 1374 approach generally incorporates the rules of Code Sec. 1374(d) and Reg § 1.1374-3, Reg § 1.1374-4, and Reg § 1.1374-7 in identifying RBIG and RBIL. The 1374 approach relies on the accrual accounting method in determining whether certain items of income or deduction

are RBIG or RBIL respectively. However, in accordance with Code Sec. 382(h)(2)(B), the 1374 approach treats any allowable deduction for depreciation, amortization, or depletion (collectively, "amortization") of a built-in loss asset as RBIL, except to the extent the loss corporation establishes that the amount is not attributable to the excess of an asset's adjusted basis over its FMV on the change date, regardless of whether the amount accrued for tax purposes before the change date. In determining the amount of amortization deduction that is not attributable to an asset's built-in loss on the change date, one of the method is essentially the same as the 338 approach for determining RBIL. Accordingly, IRS has determined that a hypothetical amortization deduction using the additional first-year depreciation allowed under Code Sec. 168(k) does not provide a reasonable estimate of RBIL for purposes of Code Sec. 382(h)(2)(B) under the 1374 approach.

IRS OKs Late ADS Depreciation Election to Utilize NOL Generated by Alimony Payment

PLR 201818011

Although taxpayers generally benefit by using the fastest depreciation method available, there are times where a slower depreciation method is preferable. For example, one taxpayer was advised to elect to use the slower alternative depreciation system (ADS) to get the best tax mileage out of a large alimony deduction. This deduction would generate a net operating loss (NOL), but only if the ADS election was made by affiliated entities he owns. Although the entities did not timely make the necessary election for the tax year at issue, IRS, in a private ruling, granted the taxpayer’s entities an extension of time to remedy the error.

In general, for divorce or separation instruments executed before Jan. 1, 2019, payments of alimony or separate maintenance made under a divorce or separation instrument are taxable to the payee spouse in the year received (Code Sec. 71(a); Reg § 1.71-1(b)(5)), and are deductible by the payor spouse in the year paid, as a deduction from gross income. (Code Sec. 62(a)(10), Code Sec. 215(a))

Note that for any divorce or separation instrument that's:

1. executed after Dec. 31, 2018, or

2. executed on or before Dec. 31, 2018, and modifiedafter Dec. 31, 2018, if the modification expressly providesfor the following treatment,

the deduction for the payment of alimony won't apply (Code Sec. 215, Code Sec. 62(a)(10)), and the inclusion in gross income for the receipt of alimony payments won't apply. (Code Sec. 71(a))

In general, for tax years beginning before 2018, an NOL may be carried back two years and forward 20 years. (Code Sec. 172(b)(1)(A)) For NOLs arising in tax years ending after 2017, the general 2-year NOL carryback is repealed.

37

Taxpayer is a calendar-year individual who wholly owns a number of affiliated entities that either file either a Form 1065, U.S. Income Tax Return for a Partnership, or Form 1120S, U.S. Income Tax Return for an S Corporation, as applicable, on a calendar year basis and use an accrual method of accounting. The affiliated entities are in an unidentified trade or business.

The affiliated entities used the GDS to depreciate all property placed in service in Tax Year A and reported income to their shareholder/partner, Taxpayer, on Schedule K-1 (1120S/1065), Shareholder’s/Partner’s Share of Income, Deductions, Credits, etc. Taxpayer claimed the depreciation deductions on his Tax Year A Form 1040.

Taxpayer paid an undisclosed amount of alimony during Tax Year A and deducted the alimony payments on his Form 1040. He reported a net loss on the return but was precluded from carrying back or carrying over the net loss as an NOL to the extent the net loss was attributable to the alimony deduction. Taxpayer could have preserved the benefit of the deduction for alimony on his return if the affiliated entities had minimized the depreciation deductions flowing through to Taxpayer and eliminated his net loss. Specifically, the affiliated entities could have elected to depreciate all property placed in service in Tax Year A using ADS on all property placed in service in that year, instead of GDS.

Taxpayer was not advised by the affiliated entities’ in-house tax preparers or his tax return preparer, and he did not know independently, that he could preserve the benefit of the deduction for alimony on the Tax Year A return by having the affiliated entities make the ADS election for all property placed in service by the affiliated entities during that tax year.

Rev Proc Explains Deductibility and Reliance Issues Relating to Charitable Contributions

Rev Proc 2018-32, 2018-23 IRB

IRS has issued a Revenue Procedure that modifies, supersedes, and consolidates certain previously issued guidance in order to provide more easily accessible guidance to grantors and contributors to tax-exempt organizations on certain deductibility and reliance issues.

Background. Contributions to or for the use of an organization described as eligible for charitable contributions in Code Sec. 170(c) may be deductible, with certain limitations, by contributors for federal income tax purposes. It is the responsibility of an organization receiving contributions to ensure that its character, purposes, activities, and method of operation satisfy the qualification requirements of Code Sec. 170(c) at the time of the contribution in order for grantors and contributors to have the assurance that their contributions will be deductible when made.

A determination letter or ruling on tax-exempt status is based solely on the facts, attestations, and representations contained in the administrative record, including the application for

In computing a noncorporate taxpayer's NOL ordinary nonbusiness deductions (such as alimony) are allowed only to the extent of nonbusiness income, i.e., gross income not derived from the taxpayer’s trade or business (that is, ordinary nonbusiness income plus any excess of nonbusiness capital gains over nonbusiness capital losses). (Code Sec. 172(d)(4), Reg § 1.172-3(a)(3)(i))

An excess of nonbusiness income over nonbusiness deductions will reduce an NOL.

Expenses from a taxpayer's profit-oriented activities are ordinarily deductible under either Code Sec. 162 (business expenses) or Code Sec. 212 (expenses of property held for production of income), but Code Sec. 172(d)(4) differentiates between business expenses and income-producing expenses. The characterization of partnership income (loss) as business or nonbusiness income (deduction) is made at the partnership level. Thus, for example, where a partner was in the real estate business and the partnership wasn't, the partner's portion of the partnership's loss was a nonbusiness deduction. (Campbell, William v. U.S., (1987, CA5) 59 AFTR 2d 87-917, affg on this issue (1984, DC TX) 54 AFTR 2d 84-5090)

In general, the depreciation allowance for tangible property used in a trade or business is computed using the general depreciation system (GDS, also called MACRS) in Code Sec. 168(a). However, the taxpayer may elect under Code Sec. 168(g)(7) to depreciate property otherwise eligible for GDS using the alternative depreciation system (ADS). In general, ADS, which uses straight-line depreciation, produces a smaller deduction in an assets early year than does GDS.

Code Sec. 168(g)(7) permits a taxpayer to elect for any class of property for any tax year to use the ADS for determining depreciation for all property in that class placed in service during that tax year. However, in the case of nonresidential real property, the election is made separately with respect to each property. Once made, an election to use ADS is irrevocable.

Under Reg. § 301.9100-7T(a)(1)), the election under Code Sec. 168(g)(7) must be made for the tax year in which the property is placed in service. Reg. § 301.9100-7T(a)(2)(i) further provides that this election must be made by the due date (including extensions) of the tax return for the tax year for which the election is to be effective. And Reg. § 301.9100-7T(a)(3)(i) provides that election under Code Sec. 168(g)(7) is made by attaching a statement to the tax return for the tax year for which the election is to be effective.

IRS has discretion to grant a reasonable extension of time to make a regulatory election. (Reg. § 301.9100-1) Requests for extensions of time for regulatory elections that don't meet the requirements of Reg. § 301.9100-2 (automatic extensions) will be granted when the taxpayer provides evidence to establish to IRS's satisfaction that the taxpayer acted reasonably and in good faith and granting relief will not prejudice the interests of the government. (Reg. § 301.9100-3)

38

"IRS databases."

When an organization's tax-exempt status has been automatically revoked under Code Sec. 6033(j) for failure to file certain information returns or submit notices for three consecutive years, the name of such organization is removed from the tax-exempt organization search (i.e., Pub. 78 data) and added to the Auto-Revocation List. An organization whose tax-exempt status was automatically revoked under Code Sec. 6033(j) that subsequently applies for and receives reinstatement of tax-exempt status will appear on the tax-exempt organization search but its name will remain on the Auto-Revocation List. (Rev Proc 2018-32, Section 3)

Prior guidance. IRS has issued several Revenue Procedures to further describe the extent to which grantors and contributors may rely on IRS’s identification of an organization’s tax-exempt and foundation status and to provide safe harbors with regard to the effect of grants and contributions on an organization’s foundation status, including:

1. Rev Proc 81-6, 1981-1 CB 620, which provides a safeharbor to all grantors and contributors to determine if theywere entitled to rely on the classification of an organizationas a public charity, and would be deemed not to haveknowledge of, be responsible for, or be aware of a substantial and material change in an organization’s source of supportthat gave rise to the revocation of a determination letter orruling classifying the organization as a public charity.

2. Rev Proc 81-7, 1981-1 CB 621, which provides asafe harbor to grantors and contributors as to the grantsand contributions that will be considered "unusual grants"under Reg. §1.170A-9(f)(6)(ii) and Reg. §1.509(a)-3(c)(3),the receipt of which will not result in a grantee organizationlosing its classification as a public charity and becoming aprivate foundation

3. Rev Proc 89-23, 1989-1 CB 844, which provides anadditional safe harbor to private foundation grantors andcontributors for determining if they were entitled to rely onthe classification of an organization, and would be deemednot to have knowledge of, or be responsible for, or awareof, a substantial and material change in an organization’ssource of support that gave rise to the revocation of adetermination letter or ruling classifying the organization asa public charity.

4. Rev Proc 2011-33, 2011-25 IRB 887, which, as anupdate to earlier revenue procedures, set out the extentto which grantors and contributors may rely on the listingof an organization in Publication 78, Cumulative List ofOrganizations Described in § 170(c), for purposes ofdeducting contributions under Code Sec. 170 and makinggrants under Code Sec. 4942, Code Sec. 4945, and CodeSec. 4966.

New Guidance. To simplify compliance for grantors and contributors, IRS has combined the safe harbors described above and replaced them with a single revenue procedure on

exemption. Any such letter or ruling ceases to apply in the event of a material change inconsistent with the exemption, or if there was an omission or misstatement of material information such that the organization ceases to qualify as an organization under Code Sec. 170(c). In this situation, contributions made after the organization ceases to qualify are deductible only if certain requirements are met.

Reg. § 1.170A-9(f)(5)(ii) provides that a grantor or contributor may generally rely on the continued validity of a determination letter or ruling described above until IRS makes a public announcement of the entity’s change in status, unless the grantor or contribution was responsible for or aware of the act resulting in loss of classification. Similarly, under Reg. § 1.509(a)-7, once an organization has received a favorable determination letter or ruling, the treatment of contributions and grants, and the status of grantors and contributors to such organization, generally will not be affected by a subsequent revocation of the organization's classification as a public charity until the date on which the IRS publicly announces the change of status, unless the grantor or contributor had prior knowledge of the revocation or was in part responsible for or aware of the act or failure to act which gave rise to the revocation.

Declaratory relief under Code Sec. 7428. Code Sec. 7428 creates a remedy in the form of access to declaratory judgment procedures, in part, for cases involving a determination by IRS with respect to the continuing qualification of an organization as one described in Code Sec. 170(c)(2) or Code Sec. 501(c)(3), or to the continuing classification of an organization under Code Sec. 509(a). The remedy is available in these cases if IRS determines that revocation of tax-exempt status under Code Sec. 501(c)(3), status under Code Sec. 170(c)(2), or foundation status under Code Sec. 509(a) is appropriate, the organization has exhausted its administrative remedies, and IRS has issued a final adverse determination letter to the organization. Under Code Sec. 7428(b)(4), no action may be brought under Code Sec. 7428 with respect to any automatic revocation of status described in Code Sec. 6033(j)(1) (see below).

IRS lists and databases. IRS maintains and updates two different publicly available compilations of information on organizations eligible to receive tax-deductible contributions under Code Sec. 170. The first compilation lists organizations that are eligible to receive tax-deductible charitable contributions—i.e., information that was previously maintained in IRS Publication 78, Cumulative List of Organizations Described in §170(c). The searchable database of these eligible organizations is referred to as the "tax-exempt organization search."

The second is an extract of certain information concerning tax-exempt organizations (i.e., EOs) from IRS's electronic Business Master File (BMF) (the EO BMF Extract). The EO BMF extract generally contains more information that the eligible organization lists and includes information on most tax-exempt organizations, and not just those eligible to receive tax-deductible contributions. The tax-exempt organization search and EO BMF Extract are referred to collectively as the

39

deductibility and reliance issues for grantors and contributors.

Reliance on IRS databases for tax-exempt status. In general, under the new Revenue Procedure, if (i) an organization listed in or covered by the IRS databases ceases to qualify as an organization to which contributions are deductible under Code Sec. 170 and (ii) IRS revokes a determination letter or ruling, grantors and contributors to that organization may rely on the determination letter or ruling information provided in the IRS databases until the date of a public announcement stating that the organization ceases to qualify. The public announcement may be made via the IRB, on the portion of IRS's website that relates to exempt organizations, or by such other means designated to put the public on notice of the change in the organization’s status. (Rev Proc 2018-32, Section 4.01) However, if such an organization ceases to qualify as a result of tax-exempt status under Code Sec. 6033(j), grants and contributions made to the organization by persons unaware of the change in status generally will be considered deductible if made on or before the date its name is posted on the Auto-Revocation List. (Rev Proc 2018-32, Section 4.02)

The above timeframes may be extended under Code Sec. 7805(b)(8) in certain circumstances. (Rev Proc 2018-32, Section 4.03) IRS also noted that the rules in the previous paragraph don't preclude it from disallowing contributions made after an organization ceases to qualify under Code Sec. 170(c) if the grantor or contributor knew of the revocation before the public announcement or posting, knew revocation was imminent, or was partially responsible for or aware of the activities or deficiencies giving rise to the loss of qualification. (Rev Proc 2018-32, Section 4.04) Certain other limitations apply. (Rev Proc 2018-32, Section 6)

If an organization's tax-exempt status was previously revoked but later reinstated, grantors and contributors may rely on the organization's subsequent listing in the IRS databases for contributions or grants made after that date, provided that the reinstatement date listed is after the date that the revocation was announced. (Rev Proc 2018-32, Section 4.05) If the organization's tax-exempt status was automatically revoked under Code Sec. 6033(j) and the organization's name appears on the Auto-Revocation list, grantors and contributors may generally rely on the organization's subsequent listing in the IRS databases, provided that the re-posting date is later than the Auto-Revocation list posting date. (Rev Proc 2018-32, Section 4.06)

IRS also noted that the general reliance rules above don't apply in the case of suspensions under Code Sec. 501(p) (relating to suspensions of tax-exempt status of organizations designated as terrorist organizations). (Rev Proc 2018-32, Section 2.04)

Reliance on IRS databases for public charity status. In general, if (i) an organization listed in or covered by the databases as a public charity ceases to qualify as a public charity and (ii) IRS revokes a determination letter or ruling classifying the organization as a public charity, grantors and contributors to that organization may generally rely on the

classification information provided in the IRS databases for contribution and grant purposes until the date of a public announcement stating that the organization ceases to qualify as a public charity. Grantors and contributors may also rely on any classification in the IRS databases of an organization as a Type I, Type II, or Type III functionally or non-functionally integrated supporting organization. Private foundations and sponsoring organizations of donor-advised funds may rely on an organization’s public charity status (or supporting organization type), to the extent set forth in the IRS databases for grant making purposes under Code Sec. 4942, Code Sec. 4945, and Code Sec. 4966, until the date of a public announcement stating that the organization ceases to qualify as a public charity. (Rev Proc 2018-32, Section 5.01)

However, the rules in the previous paragraph don't apply if the grantor or contributor had knowledge of the revocation of the determination letter or ruling classifying the organization as a public charity prior to the announcement or posting, or was in part responsible for, or was aware of, the act or failure to act that gave rise to the revocation of the determination letter or ruling classifying it as a public charity. (Rev Proc 2018-32, Section 5.02) Certain other limitations apply. (Rev Proc 2018-32, Section 6)

Safe harbor—grantors and contributors. Grantors and contributors will not be considered responsible for, or aware of, an act that results in the loss of classification due to a change in financial support if the aggregate of grants or contributions received from such grantor or contributor for the tax year of the recipient organization in which the grant or contribution is received is 25% or less of the aggregate support received by the recipient organization for the four tax years immediately preceding such tax year. If a grant or contribution is made during the first four and one-half months of the recipient organization’s tax year, the computation period may consist of the four tax years immediately preceding such tax year or the four taxable years immediately preceding the prior tax year.

However, the safe harbor in the previous paragraph does not apply in certain situations, including if the grantor or contributor is in a position of authority with respect to the recipient organization, or g has actual knowledge of the loss of classification of public charity status or after the date of a public announcement that the organization ceases to qualify as a public charity. (Rev Proc 2018-32, Section 7.02)

Safe harbor—unusual grants. For purposes of Reg. § 1.170A-9(f)(6)(ii) and Reg. § 1.509(a)-3(c)(3), a grant or contribution that possesses certain characteristics will be considered an unusual grant. These include:

• . . . the grant or contribution would, by reason of itssize, adversely affect the status of the organization absentits treatment as an unusual grant;

• . . . the grant or contribution is not made by a personwho created the organization, by a substantial contributorto the organization prior to the contribution date, or by aperson who is in a position of authority with respect to the

40

organization;

• . . . the grant or contribution is in the form of cash,readily marketable securities, or assets that directly furtherthe exempt purpose of the organization;

• . . . the organization has received a final determinationletter or ruling classifying it as an organization described inCode Sec. 170(b)(1)(A)(vi) and Code Sec. 509(a)(1) or inCode Sec. 509(a)(2) and is actively engaged in a programof activities in furtherance of its exempt purpose;

• . . . the grantor or contributor has not imposedmaterial restrictions or conditions upon the organization inconnection with the grant or contribution; and

• . . . the terms and amount of the grant or contributionare expressly limited to underwriting no more than oneyear’s operating expenses, if the grant or contribution isintended to underwrite operating expenses, and the grantor contribution is not used to finance capital items.

A potential recipient organization may request a determination letter under Rev Proc 2018-5, and any successor revenue procedure, concerning whether a proposed grant or contribution that does or does not satisfy the above requirements will constitute an unusual grant. (Rev Proc 2018-32, Section 7.03)

Reliance on EO BMF Extract Information from other sources. A grantor or contributor may rely on information about an organization from the EO BMF Extract that is obtained from a third party, so long as: (1) the third party provides a report to the grantor or contributor that includes: (a) the organization’s name, EIN, foundation status under Code Sec. 509(a)(1), Code Sec. 509(a)(2), or Code Sec. 509(a)(3) (including supporting organization type, if applicable), and whether contributions to the organization are deductible; (b) a statement that the information is from the most current update of the EO BMF Extract and the revision date of the EO BMF Extract containing the information; and (c) the date and time the information was provided to the grantor or contributor; and (2) the grantor or contributor retains a paper or electronic copy of the report. (Rev Proc 2018-32, Section 8)

Relationship with Code Sec. 7428. Certain contributions are deemed valid under Code Sec. 7428(c) during declaratory judgment proceedings involving the revocation of a determination that the organization is described in Code Sec. 170(c)(2). Under this provision, the organization continues to be treated as an organization described in Code Sec. 170(c)(2) with respect to contributions from individuals (up to amaximum of $1,000 in the aggregate during the period duringwhich statutory protection applies) and from other charitableorganizations described in Code Sec. 170(c)(2) that are exempt from tax under Code Sec. 501(a) (other than organizationswith respect to which there is pending a proceeding to revokethe determination under Code Sec. 170(c)(2)) (without limit).

Statutory protection for such contributions, if declaratory judgment is sought on the revocation, would begin on the date

of the public announcement of the revocation or removal of the organization’s name from the IRS databases, whichever is earlier, and end on the date on which a decision in the Tax Court becomes final or a judgment of the U.S. district court for the District of Columbia or the U.S. Court of Federal Claims is entered that the organization is not described in Code Sec. 170(c)(2). This reliance, however, is not extended to any individual who was responsible, in whole or in part, for the activities (or failures to act) on the part of the organization that were the basis for the revocation. (Rev Proc 2018-32, Section 9)

IRS noted, however, that an organization that's designated as a terrorist organization may not challenge the suspension of tax-exempt status or the denial of deductions in an administrative or judicial proceeding (including proceedings under Code Sec. 7428). (Rev Proc 2018-32, Section 2.04)

After Taxpayer discovered the problem, he was advised by another tax professional regarding potential remedies for the failure to make the ADS election. This professional advised Taxpayer to file a request for relief under Reg. § 301.9100-3.

IRS OK’d an extension of time under Reg. § 301.9100-1 and Reg. § 301.9100-3 to make the Code Sec. 168(g)(7) election to use the ADS method of depreciation for property placed in service in the tax year in question. IRS concluded that the conditions enumerated in these regs were satisfied.

As a result, IRS granted the affiliated entities 60 calendar days from the date of the ruling to make the Code Sec. 168(g)(7) election for all property placed in service by the affiliatedentities during the relevant tax year. This election must bemade by the affiliated entities filing either an amended Form1065, U.S. Income Tax Return for a Partnership or Form1120S, U.S. Income Tax Return for an S Corporation, asapplicable, for the Tax Year A, with a statement indicatingthat the affiliated entities are electing to make the Code Sec.168(g)(7) election to use the ADS method of depreciation forall property placed in service during that tax year.

IRS Issues New Strategic Plan; Five-year Plan's Goal to Help Taxpayers

The Internal Revenue Service released a new five-year Strategic Plan outlining goals to improve taxpayer service and tax administration.

The Fiscal Year 2018-2022 IRS Strategic Plan will serve as a roadmap to help guide the agency’s programs and operations. The plan will also help meet the changing needs of taxpayers and members of the tax community.

“Providing service to taxpayers is a vital part of the IRS mission, and the new Strategic Plan lays out a vision of ways to help improve our tax system,” said IRS Acting Commissioner David Kautter. "The plan is part of an ongoing effort by the IRS to work with the tax community and find ways to improve our work for taxpayers and for the nation."

41

she is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a high deductible plan, unless the other coverage is permitted insurance (e.g., for worker's compensation, a specified disease or illness, or providing a fixed payment for hospitalization).

General purpose health accounts (flexible spending accounts (FSAs)) and health reimbursement arrangements (HRAs) constitute “other coverage” that will generally preclude HSA eligibility. However, exceptions apply for, among other things, limited purpose FSAs and HRAs (those providing only certain benefits, e.g., dental and vision) and FSAs and HRAs imposing high annual deductibles.

HSA distributions not used to pay for qualifying medical expenses generally are included in income and subject to a 10% penalty tax.

Annual contribution limitation for 2019. For calendar year 2019, the limitation on deductions under Code Sec. 223(b)(2)(A) for an individual with self-only coverage under an HDHPis $3,500 (up from $3,450 for 2018). For calendar year 2019,the limitation on deductions under Code Sec. 223(b)(2)(B) foran individual with family coverage under an HDHP is $7,000(up from $6,900 for 2018).

HDHP for 2019. For calendar year 2019, an HDHP is defined under Code Sec. 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,350 (same as for 2018) for self-only coverage or $2,700 (same as for 2018) for family coverage, and with respect to which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,750 (up from $6,650 for 2018) for self-only coverage or $13,500 (up from $13,300 for 2018) for family coverage.

Automatic Consent to Accounting Method Change for New FASB & IASB Financial Accounting Standards

Rev Proc 2018-29, 2018-21 IRB

In a Revenue Procedure, IRS has provided a new automatic change in accounting method for taxpayers to use to conform with new financial accounting standards issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (New Standards). Under the New Standards, which concern the recognition of revenue from contracts with customers, an entity must recognize revenue, for financial statement purposes, for goods and services promised to customers in an amount that reflects what the entity expects to receive in exchange for those goods and services.

Background on changing accounting methods. Code Sec. 446(a) and Reg § 1.446-1(a)(1) provide that taxable income is computed under the method of accounting the taxpayer regularly uses to compute income in keeping the taxpayer's books. Reg § 1.446-1(a)(4) requires a taxpayer to maintain

The strategic plan, developed with input from external partners as well as IRS employees, focuses on six goals that will help improve customer service:

Empower and enable all taxpayers to meet their tax obligations – For taxpayers to understand and meet their filing, reportingand payment obligations, the IRS will continue to add andenhance tools and other support services.

Protect the integrity of the tax system by encouraging compliance through administering and enforcing the tax code – As part of the agency’s efforts to close the tax gap, the IRSwill pursue innovative approaches to understand, detect andresolve potential tax noncompliance.

Collaborate with external partners proactively to improve tax administration – The IRS will engage partners to improve service and outreach to taxpayers, enhance collaboration and share best practices.

Cultivate a well-equipped, diverse, flexible and engaged workforce – The IRS strives for a work culture that values innovation, welcomes multiple perspectives and celebrates diversity.

Advance data access, usability and analytics to inform decision-making and improve operational outcomes – The IRS will continue to use data to drive decisions and make the most effective use of its resources.

Drive increased agility, efficiency, effectiveness and security in IRS operations – Modern IT systems and technology are essential for excellent customer service and enforcement capabilities. Strong data systems are critical to safeguarding taxpayer data from multiple threats.

As the IRS works to makes these improvements, it will enforce the tax code fairly and uphold taxpayer rights. Under the Taxpayer Bill of Rights, every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS.

IRS Issues Inflation-adjusted Health Savings Account Figures for 2019

Rev Proc 2018-30, 2018-21 IRB

A new revenue procedure provides the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2019 for health savings accounts (HSAs).

HSA basics.

Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers as well as other persons (e.g., family members) also may contribute on behalf of an eligible individual. Employer contributions generally are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from income. In general, a person is an “eligible individual” if he or

42

Rev Proc 2018-29 provides procedures for taxpayers changing their method of accounting for the recognition of income for federal income tax purposes to a method for recognizing revenues described in the New Standards. In particular, Rev Proc 2018-29 modifies Rev Proc 2017-30 (which provides a list of automatic accounting method changes) to provide procedures under Code Sec. 446 and Reg § 1.446-1(e) to obtain automatic IRS consent to change to an otherwise permissible accounting method that uses the New Standards to identify performance obligations, allocate transaction price to performance obligations, and/or consider performance obligations satisfied, if such method change is made for the tax year in which the taxpayer adopts the New Standards.

The accounting method change in Rev Proc 2018-29 may only be made in the taxpayer's first, second, or third tax year ending on or after May 10, 2018.

In response to comments, Rev Proc 2018-29 allows for more book-tax conformity and allows taxpayers to easily file accounting method change requests associated with adopting the New Standards. Specifically, Rev Proc 2018-29's new automatic accounting method change procedures apply rules similar to the small business exception in the proposed Revenue Procedure in Notice 2017-17 to more taxpayers, and provides taxpayers the option of implementing the accounting method change on either a cut-off basis or with a Code Sec. 481(a) adjustment. IRS intends to provide additional guidance on these issues if needed to improve the procedures contained in Rev Proc 2018-29 once IRS and taxpayers obtain more experience with the interaction of the New Standards with federal income tax accounting methods.

The accounting method change in Rev Proc 2018-29 applies to a taxpayer that wants to change its method of accounting for the recognition of income for federal income tax purposes to a method under the New Standards for: (i) identifying performance obligations, (ii) allocating transaction price to performance obligations, and/or (iii) considering performance obligations satisfied. It does not apply to:

...a change in the manner in which the taxpayer identifies contracts or determines the transaction price, including the inclusion and exclusion of variable consideration in the transaction price, under the New Standards;

...a change in method of accounting for recognizing income that is made in a year that is different from the year that the taxpayer adopts the New Standards;

...a change in method of accounting that does not comply with Code Sec. 451 or other guidance;

...any change in method of accounting that qualifies under another automatic change described in the List of Automatic Changes provided Rev Proc 2017-30 (or any successor), even if it is otherwise described in Rev Proc 2018-29; or

...any change in the method of accounting for income from a long-term contract, unless the long-term contract

accounting records that include the taxpayer's regular books of account and other records and data necessary to support the entries on the taxpayer's books of account and on the taxpayer's return. A taxpayer using an accrual method of accounting accrues income when the right to receive income is fixed and the amount can be determined with reasonable accuracy (the all events test). (Reg § 1.451-1(a))

In most cases, a taxpayer that wishes to change its method of accounting must apply for and secure the prior consent of IRS. (Code Sec. 446(e)) However, for some accounting method changes, IRS provides an automatic procedure for obtaining its consent to the change. In April 2017, IRS updated its list of accounting method changes to which IRS automatic procedures applied (Rev Proc 2017-30, 2017-18 IRB 1131), and it issued an updated list in May 2018 (Rev Proc 2018-31, 2018-22 IRB).

When a taxpayer changes its accounting method, Code Sec. 481(a) adjustments are generally required to be made to prevent items from being duplicated or omitted. (Reg. § 1.446-1(e)(3)(i)) However, in limited circumstances, a "cut-off" method can be used instead, where only the items arising on or after the beginning of the year of change are accounted for under the new accounting method.

Background on new financial accounting standards. On May 28, 2014, FASB and IASB jointly announced new financial accounting standards for revenue recognition, titled "Revenue from Contracts with Customers (Topic 606)."

The new standards are effective for publicly-traded entities, certain not-for-profit entities, and certain employee benefit plans for annual reporting periods beginning after Dec. 15, 2017. For all other entities, the new standards are effective for annual reporting periods beginning after Dec. 15, 2018. Early adoption is allowed for reporting periods beginning after Dec. 15, 2016. Since the joint announcement, FASB and IASB have revised the New Standards and provided guidance on how to implement the New Standards in certain situations.

Under the New Standards, an entity will recognize revenue for promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services based on the following five sequential steps: (i) identify the contracts with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue as the entity satisfies a performanceobligation.

In Notice 2017-17, 2017-15 IRB 1074, IRS issued a proposed Revenue Procedure that would set out how a taxpayer may request automatic consent to change an accounting method for recognizing income when the change is made for the same tax year as the taxpayer adopts the New Standards. IRS also requested comments on the proposed guidance. (See "Proposed rules on accounting method changes relating to revenue recognition standards (3/30/2017).")

43

is excepted from required use of the percentage-of-completion method by Code Sec. 460(e)(1).

Rev Proc 2018-29 states that it is not intended to provide guidance for taxpayers changing their accounting method to comply with Code Sec. 451, as amended by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017). Effective for tax years beginning after Dec. 31, 2017, Code Sec. 451(b), as amended by TCJA, generally provides that for an accrual method taxpayer, the all events test with respect to any item of gross income (or portion thereof) will not be treated as met any later than when such item (or portion thereof) is taken into account as revenue in the taxpayer's applicable financial statement, or such other financial statement as IRS specifies. Code Sec. 451(b), as amended by TCJA, is inapplicable to certain taxpayers, such as taxpayers that do not have an applicable financial statement or other financial statement specified by IRS. Code Sec. 451(c), as amended by TCJA, provides an elective method of accounting for an accrual method taxpayer that receives an advance payment during the tax year.

Rev Proc 2018-29 requests comments on future guidance that may be necessary as taxpayers begin to comply with the New Standards. IRS also request comments on future guidance to help taxpayers comply with Code Sec. 451, as amended by the TCJA.

Effective date. Except as otherwise provided below, Rev Proc 2018-29 is effective for a taxpayer's first, second, or third tax year ending on or after May 10, 2018.

If before May 10, 2018, a taxpayer properly filed a Form 3115 under the non-automatic change procedures requesting IRS's consent for a change in accounting method described in Rev Proc 2018-29, and the Form 3115 is pending with the national office on May 10, 2018, the taxpayer may choose to make the change in accounting method under the automatic change procedures in Rev Proc 2015-13 if the taxpayer is otherwise eligible to use Rev Proc 2018-29 and the automatic change procedures in Rev Proc 2015-13. The taxpayer must notify the national office contact person for the Form 3115 of the taxpayer’s intent to make the change in accounting method under the automatic change procedures in Rev Proc 2015-13 before the later of (a) June 11, 2018, or (b) the issuance of a letter ruling granting or denying consent for the change.

A taxpayer converting a Form 3115 to the automatic change procedures in Rev Proc 2015-13 for a change in accounting method described in Rev Proc 2018-29 must resubmit a Form 3115 that conforms to the automatic change procedures, with a copy of the national office letter sent acknowledging the taxpayer’s request to convert attached, by the earlier of (a) the 30th calendar day after the date of the national office’s letter acknowledging the taxpayer’s request to convert, or (b) the date the taxpayer is required to file the original Form 3115 under Rev Proc 2015-13, Section 6.03(1)(a)(i)(A).

For purposes of the eligibility rules in Rev Proc 2015-13, Section 5, the timely resubmitted Form 3115 will be considered

filed as of the date the taxpayer originally filed the converted Form 3115 under the non-automatic change procedures in Rev Proc 2015-13.

Tax Pros in Trouble

Tax Prepper Accused of Pumping Up Clients' Returns and Keeping the Money

A tax preparer has been charged with overstating or falsifying some clients' information to give them larger returns than they were entitled, and pocketing the extra for himself.

Federal prosecutors believe the federal government lost about $290,000 from the alleged scheme involving 19 clients of tax prepper David Patterson, 37.

He owned D&D Tax Service LLC in Woodbridge Township's Keasbey section, according to the U.S. Attorney's Office in New Jersey. He also did business in Jersey City.

Patterson is accused of preparing 53 falsified tax returns between 2010 and 2015. Without their knowledge, he would fudge their income, charitable contributions, business expenses and other information, resulting in an extra-large return, prosecutors said.

"Patterson then diverted a portion of the tax refunds to bank accounts he controlled without his clients' knowledge or consent," according to the prosecutors.

He was indicted on 16 counts of aiding and abetting in the filing of false tax returns on Thursday.

The maximum penalty on each charge is three years and a $250,000 fine.

West St. Paul Tax Pro Filed Returns For Unknowing Kids

The Dakota County Attorney's Office has charged tax professional Melissa Marie Johnson with three tax-related felonies. Johnson was charged with one felony count of knowingly preparing tax returns that were fraudulent or false, one count of identity theft, and one count of theft by swindle.

According to the complaint, police received calls from two people claiming that Johnson, a tax preparer working in West St. Paul in 2017, filed income tax returns without their knowledge and put the refund money onto prepaid American Express cards under her control.

The Minnesota Department of Revenue began auditing returns prepared by Johnson for tax year 2016. Authorities say the found fraud where Johnson filed returns in the names of unknowing victims, including some children, and put the

44

agent reportedly caught her in the fraud after approaching Williams-Combs there and asking about implications on a refund of claiming false business expenses.

“It depends on what you want to do,” Williams-Combs responded, captured on an undercover audio recording used as evidence in the case and cited by news outlets. “I wouldn't go too high.”

A grand jury indicted Williams-Combs in connection with a series of fraudulent returns over at least five years for at least five people, news outlets said, adding that the total loss to the government exceeded $50,000. Sentencing is July 6, reports said.

Norwalk, Conn.:

Bookkeeper Eddie Chan, 58, has been sentenced to five years of probation for filing false returns.

According to court documents and statements in court, Chan was employed as a bookkeeper for a private art firm in New York City, and between 2013 and 2015 withdrew funds from the firm’s business accounts without authorization from his employer; Chan used the money for personal expenses.

He failed to declare $271,166 in misappropriated funds on his federal income tax returns for 2013 and 2014, resulting in a loss of $78,214 to the IRS.

Chan, who in October pleaded guilty to one count of making a false statement on a federal return, admitted that he stole additional funds from his former employer and borrowed thousands of dollars from other individuals, much of which he used to gamble on horseracing.

Chan was ordered to pay some $500,000 in restitution to his former employer and to cooperate with the IRS to pay outstanding taxes, interest and penalties.

Riviera Beach, Fla.:

Corry Pearson, 28, has been sentenced to 124 months in prison for operating a fraudulent prep business and submitting fraudulent returns using the stolen personal ID information of others.

Last October, a federal jury convicted Pearson of 18 criminal charges, including conspiracy to commit wire fraud, wire fraud, aggravated ID theft and money laundering. Evidence established that from 2011 through 2013 Pearson and his accomplices filed at least 770 fraudulent returns in the names of various people. They filed many of these returns using two prep businesses in West Palm Beach, Fla., that they controlled: Tax King and NPN Multiservices. The conspirators also filed other returns to make it appear the taxpayers had filed the returns themselves.

In some cases, the conspirators filed federal income tax returns in the names of people who were victims of ID theft. The

refunds onto AmEx cards she controlled.

According to the complaint, investigators found fraudulently issued AmEx cards during the execution of a search warrant in Johnson's home.

Authorities say Johnson told police that she would make up names and Social Security numbers, or use the names and Social Security numbers of dependents from other returns, to get refunds and increase the incentive bonuses she received from the tax preparation company she worked for.

Johnson admitted to filing fraudulent returns, tracking refunds, and withdrawing funds from the fraudulently obtained AmEx cards, according to the complaint. Each tax-related felony charge carries a maximum penalty of five years in prison, a $10,000 fine, or both.

The theft by swindle and identity theft charges carry a maximum penalty of 10 years in prison, a $20,000 fine, or both.

Although the department does not certify tax preparers, state law requires tax professionals who prepare income tax returns to follow standards of ethics and conduct.

When a tax professional does not comply with these standards, they may be subject to penalties or criminal prosecution and may be barred from representing clients before the department.

Tax Fraud Blotter: In-laws’ outlaw

Spokane, Wash.:

Jin Chul “Jacob” Cha, 41, of Tustin, Calif., has been sentenced to 51 months of prison to be followed by three years of court supervision after pleading guilty to conspiracy to defraud the government and to commit wire fraud.

According to case information, Cha was a member of a conspiracy involving Gen-X Energy Group, a renewable energy company formerly in Washington. Between 2012 and 2015, he and co-conspirators falsely claimed the production of more than 9.4 million marketable renewable energy credits, which they then sold for more than $6 million and filed false claims for $2,506,094 in federal excise credit refunds. Much of the renewable fuel claimed to be produced at the Gen-X facilities was either not produced or was re-processed multiple times.

Restitution will be set at a later date.

Omaha, Neb.:

Preparer Sharon Williams-Combs has been convicted of 14 counts of aiding and assisting in the preparation of false returns, according to published reports.

Williams-Combs worked at a Jackson Hewitt kiosk in a local Walmart, according to federal prosecutors. An undercover IRS

45

Services and Glick & Associates. The firms purported to provide accounting, tax, investment and financial services.

During the scheme, Glick furnished forged checks and other phony documents to financial institutions and he lied to clients about the use and safety of their investments. He also misappropriated client funds to pay hundreds of thousands of dollars to two business associates and to make Ponzi-type payments to clients.

Most of the money belonged to elderly clients, including Glick’s mother- and father-in-law and two individuals in nursing homes. He used some of the stolen funds to pay personal and business expenses, including the purchase of a Mercedes-Benz automobile and payment of his mortgage.

Norwalk, Conn.:

Landscaper Candido Valadares, a.k.a. Candide Valadares, 57, has been sentenced to two months in prison, followed by a year of supervised release, for filing false returns.

According to court documents and statements in court, Valadares, who pleaded guilty in November to one count of filing a false return, operates Candide’s Landscaping and Water Gardens and Candide Contractor & Natural Pools, as well as providing snow-removal services to his clients during winter. Investigation revealed that Valadares deposited receipts from his businesses into both his business and personal bank accounts and substantially underreported employee wages by paying certain employees out of his personal accounts.

Valadares used a preparer for his yearly returns; the preparer took figures from certain P&Ls from Valadares or his bookkeeper to prepare the returns, though Valadares knew that the P&Ls didn’t reflect all revenues deposited in his accounts and substantially underreported payroll.

His federal returns for 2009, 2010 and 2011 tax years underreported $488,182 in gross receipts, underreported his business payroll by some $350,000 and resulted in a loss of $165,763.52 to the U.S. Treasury.

Valadares is required to pay $165,763.52 in restitution and to cooperate with the IRS to pay any additional civil penalties and interest accrued on his unpaid taxes.

Reno, Nev.:

Attorney Delmar Hardy has been sentenced to 25 months in prison for filing false federal income tax returns.

He was convicted in September of filing false individual returns for 2008, 2009 and 2010. According to court documents and evidence, Hardy falsified his 2008 through 2010 returns by not reporting more than $400,000 in cash income that his law practice received. His practice of not reporting cash dated back to at least 1999, which resulted in a total tax loss of more than $250,000.

conspirators also listed stolen IDs as preparers on fraudulent returns, making it appear that the fraud had been perpetrated by people who were actually victims of the ID theft.

The returns claimed $5,173,274 in fraudulent refunds. Pearson also engaged in financial transactions with the proceeds to disguise his control over the proceeds.

Pearson’s co-defendant, Stephane Cindy Anor, 28, of West Palm Beach, previously pled guilty to one count of conspiracy to commit wire fraud and was sentenced to 36 months in prison. Anor worked as a preparer at Tax King.

In a related case, Irene Wilson, 52, of Riviera Beach, previously pled guilty to conspiracy to defraud the U.S. by a false claim and was sentenced to three years of probation. Wilson helped Pearson file a fraudulent return and disguise his control of those proceeds.

A restitution hearing has been scheduled for July 13.

Troy, Mich.:

Mythi Nguyen, co-owner of a nail salon wholesale business in Madison Heights, Mich., has pleaded guilty to filing a false return.

According to court documents, Nguyen co-owned Y&B Nail Supply and from 2009 through 2011 underreported more than $1.1 million in business gross receipts, which caused a total tax loss of $272,680.72.

Sentencing is Sept. 13, when she faces a maximum of three years in prison, as well as a period of supervised release, restitution and monetary penalties.

Orland Park, Ill.:

Investment advisor Daniel Glick, 65, of Chicago, has been sentenced to 151 months in prison and been ordered to pay $5.2 million restitution for stealing $5.2 million from several clients, including his elderly in-laws.

Glick, who pleaded guilty earlier this year to one count of wire fraud, owned three local accounting and financial services firms: Financial Management Strategies, Glick Accounting

46

He was also ordered to serve a year of supervised release and pay a $10,000 fine.

Buffalo Tax Preparer Pleads Guilty a Second Time to Filing Fraudulent Tax Returns

The New York State Department of Taxation and Finance today announced the guilty plea of a Buffalo tax preparer for preparing and filing fraudulent income tax returns.

Dorothea Fleming, 54, of 78 Sanford Street, pleaded guilty to 4th degree criminal tax fraud, a felony, in an appearance before Erie County Court Judge John L. Michalski. She admitted that she fraudulently inflated wages on returns she filed to increase the earned income tax credit paid to the taxpayer.

Fleming, who was employed as a tax preparer at Pro-File Tax and Insurance Coalition, formerly known as Capital Tax Service, also agreed to pay New York State $10,618. She could face a sentence of up to seven years in prison at her sentencing on July 31.

Fleming previously pleaded guilty on October 22, 2014 to two misdemeanor counts of offering a false instrument for filing. After violating the terms of her sentence in that case, she was resentenced on March 4, 2016. She then ignored that sentence’s prohibition against preparing returns for one year.

“This tax preparer had every opportunity to do the right thing, but it appears that she purposely decided to again violate the law,” said Acting Commissioner Nonie Manion. “I thank the Erie County District Attorney’s Office for its diligence in prosecuting this case.”

New York is one of just four states that regulate the tax preparer industry. Taxpayers who use the services of paid tax preparers are entitled to protection from unfair treatment.

Shelby Township Tax Preparer Admits to Fraud

A tax preparer admitted to providing 40 fraudulent tax returns for clients resulting in a loss to the federal government of more than $150,000.

Robert Stillwell, 56, of Shelby Township, pleaded guilty to aiding in the preparation of false tax returns in front of Judge Judith Levy U.S. District Court in Detroit and faces a maximum of three years in prison when he is sentenced Sept. 11, according to the U.S. Attorney Matthew Schneider.

Stillwell prepared a tax return for a client who provided only a W-2 form yet Stillwell included a Schedule C-EZ, “profit from business,” form indicating the client was a self-employed barber with a net profit as well as a bogus form 8863 for an education credit, officials said in a news release. The maneuvers resulted in a loss of $4,092 to the IRS.

In addition, from offices in Oak Park, Stillwell prepared an additional 39 fraudulent returns for various clients for tax years

2011 through 2014, resulting in a tax loss to the government of $152,956, officials said.

As part of the plea, Stillwell agreed to pay restitution of $152,956 to the IRS, officials said. The judge also could fine him up to $100,000.

The case was investigated by agents of the Internal Revenue Service, Criminal Investigation division.

Special Agent in Charge Muriel stated, “Year round, IRS ... is committed to protecting the hardworking public from unscrupulous tax preparers; but to be more effective, we need the public’s help to identify and bring those bad actors to justice,” said IRS Special Agent in Charge Manny Muriel. “It is also important to remind people to choose their return preparer wisely, as the taxpayer is ultimately responsible for the content of the return.”

North Carolina Return Preparer Sentenced to Prison for Filing False Tax Refund Claims

A Wilson, North Carolina tax return preparer was sentenced today to 24 months in prison for filing a false claim for refund with the Internal Revenue Service (IRS), announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and U.S. Attorney Robert J. Higdon, Jr. for the Eastern District of North Carolina.

According to documents and information provided to the court, in early 2015 Tawanda Denise Pitt, managed Integritax, a tax preparation business in Wilson, North Carolina. Pitt falsified taxpayer client returns by claiming phony dependents and education credits and reporting fake businesses in order to seek refunds to which her clients were not entitled. Pitt also admitted that she trained other preparers to file fraudulent returns. She caused a tax loss between $550,000 and $1.5 million; the total tax loss resulting from false education credits alone exceeded $780,000.

In addition to the term of imprisonment, U.S. District Court Judge Malcolm J. Howard ordered Pitt to serve three years of supervised release and to pay $203,106 in restitution to the IRS.

Principal Deputy Assistant Attorney General Zuckerman and U.S. Attorney Higdon thanked agents of IRS Criminal Investigation, who conducted the investigation, and Assistant U.S. Attorney Adam F. Hulbig and Trial Attorney Terri-Lei O’Malley of the Tax Division, who are prosecuted the case.

Use Resources and Toolsfor Tax Professionals

On Our WebsitencpeFellowship.com

47

$25,500 in a return period.

IRC § 6695(e) – Failure to file correct information returns. The penalty is $50 for each failure to comply with IRC § 6060. The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a return period.

IRC § 6695(f) – Negotiation of check. The penalty is $510 for a tax return preparer who endorses or negotiates any check made in respect of taxes imposed by Title 26 which is issued to a taxpayer.

IRC § 6695(g) – Failure to be diligent in determining eligibility for earned income credit. The penalty is $510 for each failure to comply with the EIC due diligence requirements imposed in regulations.

IRC § 6700 – Promoting abusive tax shelters

The penalty is for a promoter of an abusive tax shelter and is generally equal to $1,000 for each organization or sale of an abusive plan or arrangement (or, if lesser, 100 percent of the income derived from the activity).

IRC § 6701 – Penalties for aiding and abetting understatement of tax liability. The penalty is $1000 ($10,000 if the conduct relates to a corporation’s tax return) for aiding and abetting in an understatement of a tax liability. Any person subject to the penalty shall be penalized only once for documents relating to the same taxpayer for a single tax period or event.

IRC § 6713 – Disclosure or use of information by preparers of returns.

The penalty is $250 for each unauthorized disclosure or use of information furnished for, or in connection with, the preparation of a return. The maximum penalty on any person shall not exceed $10,000 in a calendar year.

IRC § 7206 – Fraud and false statements.

Guilty of a felony and, upon conviction, a fine of not more than $100,000 ($500,000 in the case of a corporation), imprisonment of not more than three years, or both (together with the costs of prosecution).

IRC § 7207 – Fraudulent returns, statements, or other documents.

Guilty of a misdemeanor and, upon conviction, a fine of not more than $10,000 ($50,000 in the case of a corporation), imprisonment of not more than one year, or both.

IRC § 7216 – Disclosure or use of information by preparers of returns.

Guilty of a misdemeanor for knowingly or recklessly disclosing information furnished in connection with a tax return or using

Ragin Cagin

Summary of Preparer Penalties under Title 26

The Internal Revenue Service has a wide variety of penalties to apply to Tax Professionals. They include:

IRC § 6694 – Understatement of taxpayer’s liability by tax return preparer.

IRC § 6694(a) – Understatement due to unreasonable positions. The penalty is the greater of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.

IRC § 6694(b) – Understatement due to willful or reckless conduct. The penalty is the greater of $5,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.

IRC § 6695 – Other assessable penalties with respect to the preparation of tax returns for other persons.

IRC § 6695(a) – Failure to furnish copy to taxpayer. The penalty is $50 for each failure to comply with IRC § 6107 regarding furnishing a copy of a return or claim to a taxpayer. The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a calendar year.

IRC § 6695(b) – Failure to sign return. The penalty is $50 for each failure to sign a return or claim for refund as required by regulations. The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a calendar year.

IRC § 6695(c) – Failure to furnish identifying number. The penalty is $50 for each failure to comply with IRC § 6109(a)(4) regarding furnishing an identifying number on a returnor claim. The maximum penalty imposed on any tax returnpreparer shall not exceed $25,500 in a calendar year.

IRC § 6695(d) – Failure to retain copy or list. The penalty is $50 for each failure to comply with IRC § 6107(b) regarding retaining a copy or list of a return or claim. The maximum penalty imposed on any tax return preparer shall not exceed

48

believes that either the property belongs to them, or they have a superior claim to the property that the IRS is not recognizing.

Anyone who receives an IRS bill titled, Final Notice of Intent to Levy and Notice of Your Right to A Hearing, should immediately contact the IRS. By doing so, a taxpayer may be able to make arrangements to pay the liability, instead of having the IRS proceed with the levy.

It’s also important that those who receive a levy for their employees, vendors, customers or other third parties comply with the levy. Failure to do so may subject the party receiving the levy to personal liability. For more information, see the What is a Levy? page on IRS.gov.

To file an administrative wrongful levy claim, send a letter to the IRS Advisory Group for the area where the levy was made. For a list of Advisory Group offices, see Publication 4235, Collection Advisory Group Numbers and Addresses, available on IRS.gov. For more information on wrongful levy claims, including details on what information to include in the letter, see newly-revised Publication 4528, Making an Administrative Wrongful Levy Claim Under Internal Revenue Code Section 6343(b), also available on IRS.gov.

If, following a claim, the IRS determines it has wrongfully levied property, it will return one of the following:

• the property,

• an amount of money equal to the amount of moneylevied upon, or

• an amount of money equal to the money received fromthe sale of the property.

Anyone whose wrongful levy claim is denied by the IRS has the right to appeal through the agency’s Collection Appeals Program. For more information about these appeal rights, see Publication 1660, Collection Appeal Rights.

IRS Issues Revised Levy Exemption Table Reflecting TCJA

Publication 1494 (05/2018)

IRS has issued a May 2018 version of Publication 1494 (Table for Figuring Amount Exempt from Levy on Wages, Salary or Other Income), that takes into account changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017).

Background—before the TCJA. For tax years that began before Jan. 1, 2018, except as otherwise provided in the case of a continuous levy under Code Sec. 6331(h), for levies issued on wages, salary or other income, the amount exempt from levy was determined by adding the standard deduction amount to the dollar amount of the taxpayer's personal exemptions, and dividing that amount by the number of pay periods in the year (e.g., 52 for employees paid weekly). (Former Code Sec.

such information for any purpose other than preparing or assisting in the preparation of such return. Upon conviction, a fine of not more than $1,000, imprisonment for not more than 1 year, or both (together with the costs of prosecution).

IRC § 7407 – Action to enjoin tax return preparers.

A federal district court may enjoin a tax return preparer from engaging in certain proscribed conduct, or in extreme cases, from continuing to act as a tax return preparer altogether.

IRC § 7408 – Action to enjoin specified conduct related to tax shelters and reportable transactions

A federal district court may enjoin a person from engaging in certain proscribed conduct (including any action, or failure to take action, which is in violation of Circular 230). Knowledge is the key to stay penalty free.

Jerry

Taxpayer Advocacy

New Law Gives Individuals and Businesses More Time to Challenge a Wrongful IRS Levy; Newly-revised Publication Can Help

Individuals and businesses have additional time to file an administrative claim or to bring a civil action for wrongful levy or seizure, according to the Internal Revenue Service.

An IRS levy permits the legal seizure and sale of property including wages, money in bank or other financial accounts, vehicles, real estate and other personal assets to satisfy a tax debt.

The Tax Cuts and Jobs Act of 2017, the tax reform law enacted in December, extended the time limit for filing an administrative claim and for bringing a suit for wrongful levy from nine months to two years. If an administrative claim for return of the property is made within the two-year period, the two-year period for bringing suit is extended for 12 months from the date of filing of the claim or for six months from the disallowance of the claim, whichever is shorter. The change in law applies to levies made after Dec. 22, 2017, and on or before that date, if the previous nine-month period hadn’t yet expired.

The timeframes apply when the IRS has already sold the property it levied. As under prior law, there is no time limit for the administrative claim if the IRS still has the property it levied. Also, as under prior law, taxpayers may not file a wrongful levy claim or bring a wrongful levy suit as the law only applies to those other than the taxpayer. Usually, wrongful levy claims involve situations where an individual or business

49

deduction amount of $230.77 ($12,000 divided by 52) plus $239.43 for the three dependents ($4,150 divided by 52 equals $79.81, multiplied by three equals $239.43). $230.77 plus $239.43 equals $470.20. That same individual would only have had $364.42 exempt from levy using the previous 2018 levy exemption table (three exemptions including one for the individual).

IRS Publication 1494 is also used to recompute the exempt amount on levies issued in earlier years for which the taxpayer has given his employer a new statement of exemptions and filing status in 2018.

Taxpayer Bill of Rights Doesn't Provide General Access to IRS Office of Appeals

Facebook Inc. et al, (DC CA 5/14/2018) 121 AFTR 2d ¶2018-752

A California district court has dismissed, with prejudice, a case brought by Facebook in which Facebook argued that 2015 legislation, the Taxpayer Bill of Rights, requires IRS to refer Facebook's dispute with IRS regarding its tax liability to the IRS Office of Appeals (IRS Appeals). The Court held both that Facebook lacked standing and that Facebook's claim under the Administrative Procedure Act (APA) was improper because IRS's decision not to refer Facebook's tax case to IRS Appeals was not reviewable under the APA.

Background—standing. The first question in every case brought in federal court is whether the court has jurisdiction, which includes the issue of standing. To obtain standing, a plaintiff must show that it suffered an injury in fact that is fairly traceable to the defendant's conduct and capable of being redressed by favorable decision from the court.

Standing contains three elements: (1) plaintiffs must have suffered an injury in fact—an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical; (2) there must be a causal connection between the injury and the conduct complained of—i.e., the injury has to be fairly traceable to the challenged action of the defendant; and (3) it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision. (Lujan v. Defs. of Wildlife, (Sup Ct 1992) 504 U.S. 555)

Background—sovereign immunity and the APA. In general, a taxpayer may begin a suit against the U.S. only if there has been a specific waiver of sovereign immunity. One such waiver is in the APA, 5 USC 702, which establishes a broad presumption of judicial review of final agency (including IRS) action, with exceptions (i) where statutes preclude judicial review, and (ii) where “agency action is committed to agency discretion by law.”

For a claim to proceed under the APA, the challenged agency action (if not made reviewable by statute) must be a final agency action for which there is no other adequate remedy in a court. (5 USC 704)

6334(d), prior to amendment by TCJA Sec. 11041(d))

Rev Proc 2017-58, 2017-45 IRB, which was issued before the enactment of the TCJA, provided the inflation-adjusted amounts for the personal exemption deduction and the standard deduction for 2018. Those amounts were:

• . . . personal exemption – $4,150; and

• . . . standard deduction – (1) $6,500 for single or marriedfiling separately; (2) $13,000 for married filing jointly andsurviving spouses; and (3) $9,550 for head of household.

IRS had issued a previous version of the 2018 publication back in December, taking into account these inflation-adjusted amounts in Rev Proc 2017-58, 2017-45 IRB.

Background—changes made by the TCJA. The TCJA reduced to zero the deduction for personal exemptions for tax years that began after Dec. 31, 2017 and before Jan. 1, 2026. (Code Sec. 151(d)(5)(A), as amended by TCJA Sec. 11041(a)(2))

The TCJA also increased the standard deduction for 2018 to $24,000 for joint filers and surviving spouses, $18,000 for heads of household, and $12,000 for singles and marrieds filing separately. (Code Sec. 63(c)(2)(A) and Code Sec. 63(c)(7)(A) , both as amended by TCJA Sec. 11021(a))

And, the TCJA amended Code Sec. 6334(d) by providing that, for any year for which the personal exemption amount is zero, former Code Sec. 6334(d), as described above prior to amendment by the TCJA, would be applied by treating $4,150 (as adjusted by post-2018 inflation) as the personal exemption amount. (Code Sec. 6334(d)(4), as amended by TCJA Sec. 11041(d))

A spokesperson for IRS said during the February 1 payroll industry telephone conference call that employees may ask to have their 2018 levy exemption amount recalculated after the new version of IRS Publication 1494 was issued. He also said that Form 668-W (Notice of Levy on Wages, Salary, and Other Income) will be revised at a later date.

New wage levy exemption tables issued. The May 2018 version of the publication takes into account tax law changes made by TCJA, as described above.

The publication includes a table that shows the amount of wages, salaries, and other income that is exempt from a federal tax levy. The amount exempt from levy varies based on the individual's filing status and how frequently the individual is paid. The calculation is now based on the number of dependents that an individual may claim (previously, the number of exemptions).

Illustration: The following example shows how the new table takes into account the tax law changes in the TCJA. Let's say a single taxpayer is paid weekly and claims three dependents. Using the new table, $470.20 of the taxpayer's income would be exempt from levy. This amount includes a standard

50

provided Facebook an explanation of why IRS Counsel concluded that providing Facebook access to IRS Appeals was not in the interest of sound tax administration.

Facebook then brought the current suit in district court. It made two claims under the APA. First, Facebook alleged that IRS's issuing Rev Proc 2016-22 was arbitrary, capricious and an abuse of discretion. Second, Facebook alleged that IRS's denying Facebook access to IRS Appeals for its tax case was arbitrary, capricious and an abuse of discretion.

Court holds that Facebook didn't have standing. Citing a series of reasons, the court concluded that Facebook had no legally enforceable right to take its tax case to IRS Appeals, that therefore IRS did not invade a legally protected interest by refusing to refer Facebook's case to IRS Appeals, and that Facebook consequently lacked standing.

…Facebook did not have an enforceable right to take tax cases to IRS Appeals before the enactment of the TBOR. The '98 RRA imposed a statutory requirement for IRS to create and maintain an independent Office of Appeals. The RRA also granted taxpayers an enforceable right to take certain matters to IRS Appeals, such as certain matters relating to liens and levies. (Code Sec. 6320(b)(1), Code Sec. 6330(b)(1)) But that did not mean that Facebook had a right to take its tax case to IRS Appeals. Courts have held that taxpayers in Facebook's situation do not have an enforceable right to take their tax cases to IRS Appeals. (New Hope Services, (CA 7 2002) 89 AFTR 2d 2002-1736; Swanson, (1996) 106 TC 76) Facebook did not cite anything in the RRA or any pre-TBOR law that compelled a contrary conclusion.

Facebook argued that various IRS publications and procedural rules established that taxpayers had an enforceable right to take their case to IRS Appeals. Without listing or discussing the specific publications or procedural rules, the court said that publications and procedural rules are not binding and do not have the force of law.

Facebook then argued that Code Sec. 7123(a) supported its argument. Under Code Sec. 7123(a), a taxpayer may request early referral of one or more unresolved issues from IRS's Examination Division to IRS Appeals. Facebook argued that it would make no sense for Congress to establish a right to take early issues to IRS Appeals but not a right to take the rest of the issues to IRS Appeals. But, the court said, Code Sec. 7123(a) did not give taxpayers a right to early referral to IRS Appeals, but rather it instructed IRS to "prescribe procedures by which any taxpayer may request early referral" to IRS Appeals. IRS prescribed procedures by which a taxpayer can request early referral. (Rev Proc 99-28, 1999-2 CB 109) But the procedures also provide that IRS Examination has the right to approve or deny the request, and the taxpayer has no right to appeal. The court said that Facebook cited nothing establishing that Code Sec. 7123(a) granted taxpayers an enforceable right to compel an early referral of issues to IRS Appeals.

…The TBOR did not grant Facebook any new rights. The court said that the TBOR did not grant new enforceable rights. To

Background—IRS Appeals. The Internal Revenue Service Restructuring and Reform Act of '98 (RRA) granted taxpayers statutory rights to take certain matters to IRS Appeals. IRS provides that IRS Appeals is an independent office within IRS whose mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of IRS.

The RRA granted taxpayers whose property is subject to an IRS lien under Code Sec. 6321 a statutory right to a hearing before IRS Appeals. (Code Sec. 6320(b)(1)) Similarly, under certain circumstances, the RRA granted taxpayers the right to a hearing before IRS Appeals before IRS levies the taxpayer's property or right to property. (Code Sec. 6330(b)(1)) The RRA also instructed IRS to establish procedures that allow a taxpayer to appeal IRS rejections of proposed offer-in-compromise or installment agreements under Code Sec. 6159 or Code Sec. 7122 to IRS Appeals. (Code Sec. 7122(e))

Rev Proc 87-24, 1987-1 CB 720, before it was superseded by Rev Proc 2016-22 (see below), provided that IRS's Director of Tax Litigation had the discretion to determine whether a tax case (or particular issues within a case) "should not be considered by Appeals."

In 2015, after noting that it "ha[d] found examples of IRS employees showing disregard for the rights and protections afforded taxpayers under the Code, and that such disregard may be a result of lack of emphasis on the importance of such rights," Congress enacted the Taxpayer Bill of Rights (TBOR) as part of the Protecting Americans from Tax Hikes (PATH) Act. It contained Code Sec. 7803(a)(3)(E), which provided, "In discharging his duties, the Commissioner shall ensure that employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title, including...the right to appeal a decision of the Internal Revenue Service in an independent forum."

In 2016, IRS issued Rev Proc 2016-22, 2016-15 IRB 577, which updated and superseded Rev Proc 87-24, provided that it was "not intended to materially modify the current practice of referring docketed cases to Appeals for settlement currently utilized in the vast majority of cases," and also provided "Counsel will not refer to Appeals any docketed case or issue that has been designated for litigation by Counsel. In limited circumstances, a docketed case or issue that has not been designated for litigation will not be referred to Appeals if Division Counsel or a higher level Counsel official determines that referral is not in the interest of sound tax administration."

Facts. IRS audited Facebook and found a deficiency.

Facebook filed a petition in the Tax Court, seeking a redetermination of the tax deficiency that IRS had determined. IRS then sent a letter to Facebook stating that it “will refuse to transfer Facebook's tax case to IRS Appeals,” pursuant to Rev Proc 2016-22, and stating that referral to IRS Appeals “is not in the interest of sound tax administration.” IRS never

51

which rights or obligations have been determined, or from which legal consequences will flow. It said that Rev Proc 2016-22 is an internal procedural rule that does not create or determine any rights, obligations, or legal consequences. A Revenue Procedure is not considered as a rule which confers rights upon taxpayers but rather is a mere internal procedural guide and is not mandatory. "It is well established that general statements of policy and rules governing internal agency operations or 'housekeeping' matters, which do not have the force and effect of law, are not binding on the agency issuing them and do not create substantive rights in the public."

IRS's decision not to refer Facebook's tax case to IRS Appeals similarly was not a final agency action. Facebook retained its right to challenge IRS's tax-deficiency determination before the Tax Court (or to try to negotiate a settlement with IRS Counsel), and it was Facebook's and IRS's litigation (and/or negotiation) going forward that would ultimately determine the parties' rights, obligations, and legal consequences.

Foreign Taxes

How Do US Taxes Compare Internationally?

Total US tax revenue equaled 26 percent of gross domestic product (GDP), well below the 34 percent average for developed countries.

US taxes are low relative to those in other developed countries.

In 2015, US taxes at all levels of government represented 26 percent of GDP, compared with an average of 34 percent of GDP for the 34 member countries of the Organisation for Economic Co-operation and Development (OECD).

Among OECD countries, only Korea, Chile, Mexico, and Ireland collected less than the United States as a percentage of GDP. In many European countries, taxes exceeded 40 percent of GDP. But those countries generally provide more extensive government services than the United States does.

the contrary, the statutory text explicitly states that the rights listed in the TBOR were all "taxpayer rights afforded by other provisions of [Title 26]" (Code Sec. 7803(a)(3))—meaning, no right was a new right created by the TBOR itself. If a right did not exist before the enactment of the TBOR, the TBOR did not create it as a new right.

Instead, what the statutory TBOR did was to impose an affirmative obligation on IRS to "ensure that employees of the Internal Revenue Service are familiar with and act in accord with" preexisting taxpayer rights established in other provisions of the Code. In other words, the TBOR directed IRS to, for example, better manage and train IRS employees to ensure that IRS employees know what rights taxpayers have and act in a way that respects those rights.

…Facebook failed to establish that the "independent forum" must be IRS Appeals. Even assuming that the TBOR granted taxpayers new enforceable rights, Facebook did not establish that "the right to appeal a decision of the Internal Revenue Service in an independent forum," Code Sec. 7803(a)(3)(E), necessarily confers a right to take its tax case to IRS Appeals, as opposed to other independent forums such as the Tax Court.

The court said that when Congress intends to grant a right of access to IRS Appeals, it says "the Internal Revenue Service Office of Appeals." See, e.g., Code Sec. 6320(b)(1), Code Sec. 6330(b)(1), Code Sec. 7122(e)(2). Congress could have chosen to similarly codify a right to appeal to IRS Appeals in the TBOR. It did not. Instead, it used the term "independent forum" - which includes other forums such as Tax Court. "The Tax Court and the Board of Tax Appeals, which it succeeded, was created to afford a taxpayer an independent forum where he could be heard speedily, equitably and impartially on a tax assessment which he thought had been improperly levied or assessed." And the PATH Act that enacted the TBOR also amended the Tax Court's establishing statute to clarify that the Tax Court is an independent forum. (PATH Act, tit. IV, subtit. B, pt. 3, § 441, 129 Stat. at 3126; "The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government.")

Court also holds that Facebook's case was not reviewable under the APA. The court said that: a) IRS's issuance of Rev Proc 2016-22 was not reviewable because it was not a final agency action, as required by the APA; and b) IRS's decision not to refer Facebook's tax case to IRS Appeals was not reviewable because it was not a final agency action.

The court said that, to constitute a “final agency action,” two conditions must be met: “first, the action must mark the consummation of the agency's decision making process…it must not be of a merely tentative or interlocutory nature. And second, the action must be one by which rights or obligations have been determined, or from which legal consequences will flow."

The court said that IRS's issuance of Rev Proc 2016-22 was not a final agency action because it was not an action by

52

Composition of Tax Revenue

Income and Profits Taxes:Taxes on personal income and business profits made up 49 percent of US tax revenue in 2015, a higher percentage than in most other OECD countries, where such taxes averaged 34 percent of the total (figure 2). Australia, Denmark, and New Zealand topped the United States in this category, generating over half of their total revenue from such taxes. In the United States, personal income taxes alone generated 40 percent of total tax revenue compared with 24 percent on average within the OECD.

Total Tax Revenue

Social Security Contributions: The United States collects relatively less revenue dedicated to retirement, disability, and other social security programs—24 percent of total tax revenue—than the 26 percent OECD average. Some countries were well above that average: the Slovak and Czech Republics, Slovenia and Japan all collected 40 percent or more of their revenue from that source.

Property Taxes: Property taxes provided almost twice as large a share of US tax revenue—10 percent in 2015—than the OECD average of 6 percent. Almost all revenue from taxes on property in the United States is collected by state and local governments.

Goods and Services Taxes: The United States relies less on taxes on goods and services (including both general consumption taxes and taxes on specific goods and services)

than any other OECD country, collecting 17 percent of tax revenue this way compared with 32 percent for the OECD. The value-added tax (VAT)—a type of general consumption tax collected in stages—is the main source of consumption tax revenue, employed worldwide in 160 countries including all 34 OECD member countries except the United States. Most consumption tax revenue in the United States is collected by state and local governments.

State News of Note

Disaster Victims in Alabama Qualify for Tax Relief

IRS has announced on its website that victims of severe storms and tornadoes in counties of Alabama that are designated as federal disaster areas qualifying for individual assistance have more time to make tax payments and file returns. Certain other time-sensitive acts also are postponed. This article summarizes the relief that’s available and includes up-to-date disaster area designations and extended filing and deposit dates for all areas affected by storms, floods and other disasters in 2018 (and those in 2017, with extended dates going into 2018).

Only taxpayers considered to be affected taxpayers are eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts. Affected taxpayers are

53

Effective for disasters declared in tax years beginning after Dec. 31, 2007, the term ‘‘federally declared disaster” replaced the previously used ‘presidential disaster area” term (see Code Sec. 1033(h)(3), as amended by Sec. 706(d)(1), Div. C, PL 110-343, 10/03/2008). The new term is substantially the same as the definition of ‘‘presidentially declared disaster” under former law. (TD 9443, 01/4/2009, see Weekly Alert 01/22/2009, #1)

Alabama: The following are federal disaster areas qualifying for individual assistance on account of severe storms and tornadoes beginning on March 19, 2018: Calhoun, Cullman, and Etowah counties.

For these Alabama counties, the onset date of the disaster was March 19, 2018 and the extended date is July 31, 2018. The deposit delayed date was Apr. 3, 2018.

American Samoa: Following the President’s declaration that a major disaster exists in the Territory of American Samoa, IRS has announced that taxpayers who reside or have a business in the disaster area will qualify for tax relief on account of Tropical Storm Gita, which took place beginning on Feb. 7, 2018.

For the Territory of American Samoa, the onset date of the disaster was Feb. 7, 2018 and the extended date is June 29, 2018 (which includes 2017 individual income tax returns normally due on Apr. 17, 2018). The deposit delayed date was Feb. 22, 2018.

California: The following are federal disaster areas qualifying for individual assistance on account of wildfires that took place beginning on Oct. 8, 2017: Butte, Lake, Mendocino, Napa, Nevada, Orange, Solano, Sonoma, and Yuba counties.

For these California counties, the onset date of the disaster was Oct. 8, 2017 and the extended date was Jan. 31, 2018 (which includes 2016 income tax returns for which taxpayers obtained a valid extension to file by Oct. 16, 2017; the quarterly estimated income tax payments originally due on Jan. 16, 2018; the quarterly payroll and excise tax returns normally due on Oct. 31, 2017; and returns of tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2017). The deposit delayed date was Oct. 23, 2017. (IR 2017-172)

California: The following are federal disaster areas qualifying for individual assistance on account of wildfires that took place beginning on Dec. 4, 2017: Los Angeles, San Diego, Santa Barbara, and Ventura counties.

For these California counties, the onset date of the disaster was Dec. 4, 2017 and the extended date is Apr. 30, 2018 (which includes the 2017 individual income tax returns normally due on Apr. 17, 2018 and the fourth quarter estimated tax payment normally due on Jan. 16, 2018). The deposit delayed date was Dec. 19, 2017.

Florida: Following the President’s declaration that a major

those listed in Reg § 301.7508A-1(d)(1) and thus include:

... any individual whose principal residence, and any business entity whose principal place of business, is located in the counties designated as disaster areas;

... any individual who is a relief worker assisting in a covered disaster area, regardless of whether he is affiliated with recognized government or philanthropic organizations;

... any individual whose principal residence, and any business entity whose principal place of business, is not located in a covered disaster area, but whose records necessary to meet a filing or payment deadline are maintained in a covered disaster area;

... any estate or trust that has tax records necessary to meet a filing or payment deadline in a covered disaster area; and

... any spouse of an affected taxpayer, solely with regard to a joint return of the husband and wife.

IRS gives affected taxpayers until the extended date (specified by county, below) to file most tax returns (including individual, estate, trust, partnership, C corporation, and S corporation income tax returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date falling on or after the onset date of the disaster (specified by county, below), and on or before the extended date.

IRS also gives affected taxpayers until the extended date to perform other time-sensitive actions described in Reg § 301.7508A-1(c)(1) and Rev Proc 2007-56, 2007-34 IRB 388, that are due to be performed on or after the onset date of the disaster, and on or before the extended date. This relief also includes the filing of Form 5500 series returns, in the way described in Rev Proc 2007-56, Sec. 8. Additionally, the relief described in Rev Proc 2007-56, Sec. 17, relating to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after the onset date of the disaster, and on or before the deposit delayed date(specified by county, below), provided the taxpayer made these deposits by the deposit delayed date.

Affected areas and dates for storms, floods and other disasters occurring in 2018 (or in 2017, with extended dates going into 2018) that are federal disaster areas qualifying for individual assistance, as published on IRS’s website, are carried below.

54

disaster exists in the state of Florida, IRS has announced that affected taxpayers in the Seminole Tribe of Florida and associated lands, in addition to all 67 counties of Florida, will receive tax relief on account of Hurricane Irma, which took place beginning on Sept. 4, 2017.

For these Florida counties, the onset date of the disaster was Sept. 4, 2017 and the extended date was Jan. 31, 2018 (which includes 2016 income tax returns for which taxpayers obtained a valid extension to file by Oct. 16, 2017; the quarterly estimated income tax payments originally due on Sept. 15, 2017 and Jan. 16, 2018; the quarterly payroll and excise tax returns normally due on Oct. 31, 2017; and returns of tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2017). The deposit delayed date was Sept. 19, 2017.

Georgia: Following the President’s declaration that a major disaster exists in the state of Georgia, IRS announced that affected taxpayers in the entire state (all 159 counties) will receive tax relief on account of Hurricane Irma, which took place beginning on Sept. 7, 2017.

For the entire state of Georgia, the onset date of the disaster was Sept. 7, 2017 and the extended date was Jan. 31, 2018 (which includes 2016 income tax returns for which taxpayers obtained a valid extension to file by Oct. 16, 2017; the quarterly estimated income tax payments originally due on Sept. 15, 2017 and Jan. 16, 2018; and the quarterly payroll and excise tax returns normally due on Oct. 31, 2017; and the tax-exempt organizations that operate on a calendar- year basis and had an automatic extension due to run out on Nov. 15, 2017). The deposit delayed date was Sept. 22, 2017. (IR 2017-156)

Louisiana: The following are federal disaster areas qualifying for individual assistance on account of Tropical Storm Harvey that took place beginning on Aug. 27, 2017: Acadia, Allen, Assumption, Beauregard, Calcasieu, Cameron, DeSoto, Iberia, Jefferson Davis, Lafayette, Lafourche, Natchitoches, Plaquemines, Rapides, Red River, Sabine, St. Charles, St. Mary, Vermilion and Vernon parishes.

For these Louisiana parishes, the onset date of the disaster was Aug. 27, 2017, and the extended date was Jan. 31, 2018 (which includes 2016 income tax returns for which taxpayers obtained a valid extension to file by Oct. 16, 2017; the quarterly estimated income tax payments due on Sept. 15, 2017 and Jan. 16, 2018; and the quarterly payroll and excise tax returns normally due on Oct. 31, 2017). The deposit delayed date was Sept. 11, 2017.

Puerto Rico: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Irma that took place beginning on Sept. 5, 2017: Adjuntas, Aguas Buenas, Barranquitas, Bayamon, Camuy, Carolina, Cataño, Ciales, Comerio, Culebra Canovanas, Dorado, Fajardo, Guaynabo, Gurabo, Hatillo, Jayuya, Juncos, Las Piedras, Lóiza Luquillo, Naguabo, Orocovis, Patillas, Quebradillas, Salinas, San Juan, Toa Baja, Utuado, Vega Baja, Vieques, and Yauco municipalities.

For these Puerto Rico municipalities, the onset date of the disaster was Sept. 5, 2017, and the extended date was Jan. 31, 2018 (which includes 2016 income tax returns for which taxpayers obtained a valid extension to file by Oct. 16, 2017; the quarterly estimated income tax payments originally due on Sept. 15, 2017 and Jan. 16, 2018; the quarterly payroll and excise tax returns normally due on Oct. 31, 2017; and returns of tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2017).

For these Puerto Rico municipalities, the deposit delayed date was originally Sept. 20, 2017. However, because these same areas were struck by Hurricane Maria less than two weeks later (see below), the deposit delayed date was effectively extended to Oct. 2, 2017.

Puerto Rico: Following the President’s declaration that a major disaster exists in the Commonwealth of Puerto Rico, IRS announced that affected taxpayers in Puerto Rico (all 78 municipalities) will receive tax relief on account of Hurricane Maria, which took place beginning on Sept. 17, 2017.

For these Puerto Rico municipalities, the onset date of the disaster was Sept. 17, 2017, and the extended date is June 29, 2018 (which includes 2016 income tax returns for which taxpayers obtained a valid extension to file by Oct. 16, 2017; the quarterly estimated income tax payment originally due on Jan. 16, 2018; the quarterly payroll and excise tax returns normally due on Oct. 31, 2017; and returns of tax-exempt organizations that operate on a calendar- year basis and had an automatic extension due to run out on Nov. 15, 2017). The deposit delayed date was Oct. 2, 2017.

South Carolina: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Irma that took place beginning on Sept. 6, 2017: Abbeville, Allendale, Anderson, Bamberg, Barnwell, Beaufort, Berkeley, Charleston, Colleton, Dorchester, Edgefield, Georgetown, Hampton, Jasper, McCormick, Newberry, Oconee, Pickens, and Saluda counties.

For these South Carolina counties, the onset date of the disaster was Sept. 6, 2017, and the extended date was Jan. 31, 2018 (which includes 2016 income tax returns for which taxpayers obtained a valid extension to file by Oct. 16, 2017; the quarterly estimated income tax payments due on Sept. 15, 2017 and Jan. 16, 2018; and the quarterly payroll and excise tax returns normally due on Oct. 31, 2017). The deposit delayed date was Sept. 21, 2017.

Texas: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Harvey that took place beginning on Aug. 23, 2017: Aransas, Austin, Bastrop, Bee, Bexar, Brazoria, Burleson, Caldwell, Calhoun, Chambers, Colorado, Comal, Dallas, De Witt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Guadalupe, Hardin, Harris, Jackson, Jasper, Jefferson, Jim Wells, Karnes, Kleberg, Lavaca, Lee, Liberty, Madison, Matagorda, Milam, Montgomery, Newton, Nueces, Orange, Polk, Refugio,

55

Sabine, San Augustine, San Jacinto, San Patricio, Tarrant, Travis, Tyler, Victoria, Walker, Waller, Washington, and Wharton counties.

For these Texas counties, the onset date of the disaster was Aug. 23, 2017, and the extended date was Jan. 31, 2018 (including the Sept. 15, 2017 and Jan. 16, 2018 deadlines for making quarterly estimated tax payments, 2016 individual income tax returns for which taxpayers received a tax-filing extension until Oct. 16, 2017, the Oct. 31, 2017 deadline for quarterly payroll and excise tax returns, and returns of tax-exempt organizations with an original or extended filing deadline falling within the period beginning on Aug. 23, 2017, and ending on Jan. 31, 2018). The deposit delayed date was Sept. 7, 2017.

U.S. Virgin Islands: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Irma that took place beginning on Sept. 5, 2017: St. Croix, St. John, and St. Thomas islands.

For these islands of the U.S. Virgin Islands, the onset date of the disaster was Sept. 5, 2017, and the extended date was Jan. 31, 2018 (which includes 2016 income tax returns for which taxpayers obtained a valid extension to file by Oct. 16, 2017; the quarterly estimated income tax payments originally due on Sept. 15, 2017 and Jan. 16, 2018; the quarterly payroll and excise tax returns normally due on Oct. 31, 2017; and returns of tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2017).

For these islands of the U.S. Virgin Islands, the deposit delayed date was originally Sept. 20, 2017. However, because these same areas were struck by Hurricane Maria less than two weeks later (see below), the deposit delayed date was effectively extended to Oct. 2, 2017.

IRS’s website states that Hurricane Irma ‘‘took place beginning on Sept. 4’’ in Florida and ‘‘took place beginning on Sept. 5’’ in the U.S. Virgin Islands and Puerto Rico—when in fact the hurricane struck the Virgin Islands and Puerto Rico first. Presumably, this may be corrected in future guidance. In addition, on IRS’s website, the description of the news release in which IRS provided relief to Hurricane Irma victims in the Virgin Islands also refers to the storm as ‘‘beginning on Sept. 6,’’ but this is inconsistent with the news release itself and appears to be a typo.

U.S. Virgin Islands: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Maria that took place beginning on Sept. 16, 2017: St. Croix, St. John, and St. Thomas islands.

For these islands of the U.S. Virgin Islands, the onset date of the disaster was Sept. 16, 2017, and the extended date is June 29, 2018 (which includes 2016 income tax returns for which taxpayers obtained a valid extension to file by Oct. 16, 2017; the quarterly estimated income tax payment originally due on Jan. 16, 2018; the quarterly payroll and excise tax

returns normally due on Oct. 31, 2017; and returns of tax-exempt organizations that operate on a calendar- year basis and had an automatic extension due to run out on Nov. 15, 2017). The deposit delayed date was Oct. 2, 2017.

Disaster Victims in North Carolina Qualify for Tax Relief

IRS has announced on its website that victims of a tornado and severe storms in counties of North Carolina that are designated as federal disaster areas qualifying for individual assistance have more time to make tax payments and file returns. Certain other time-sensitive acts also are postponed. This article summarizes the relief that’s available and includes up-to-date disaster area designations and extended filing and deposit dates for all areas affected by storms, floods and other disasters in 2018 (and those in 2017, with extended dates going into 2018).

Who gets relief. Only taxpayers considered to be affected taxpayers are eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts. Affected taxpayers are those listed in Reg § 301.7508A-1(d)(1)and thus include:

... any individual whose principal residence, and anybusiness entity whose principal place of business, islocated in the counties designated as disaster areas;

... any individual who is a relief worker assisting in a covereddisaster area, regardless of whether he is affiliated withrecognized government or philanthropic organizations;

... any individual whose principal residence, and anybusiness entity whose principal place of business, is notlocated in a covered disaster area, but whose recordsnecessary to meet a filing or payment deadline aremaintained in a covered disaster area;

... any estate or trust that has tax records necessary to meeta filing or payment deadline in a covered disaster area; and

... any spouse of an affected taxpayer, solely with regard toa joint return of the husband and wife.

Under Code Sec. 7508A, IRS gives affected taxpayers until the extended date (specified by county, below) to file most tax returns (including individual, estate, trust, partnership, C corporation, and S corporation income tax returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date falling on or after the onset date of the disaster (specified by county, below), and on or before the extended date. IRS also gives affected taxpayers until the extended date to perform other time-sensitive actions described in Reg § 301.7508A-1(c)(1)and Rev Proc 2007-56, 2007-34 IRB 388, that are due to be performed on or after the onset date of the disaster, and on or before the extended date. This relief also includes the filing of Form 5500 series

56

they identify strategic areas of importance to IRS and can provide valuable insight as to how IRS examiners may audit a particular issue or transaction.

An S corporation shareholder takes into account, for the shareholder's tax year in which the corporation's tax year ends, his or her pro rata share of the corporation's items of income, loss, deduction, or credit, as well as the corporation's non-separately computed income or loss. (Code Sec. 1366(a)(1)) The character of the items passed through is preserved. (Code Sec. 1366(b))

However, the aggregate amount of losses and deductions taken into account by the shareholder is limited to the sum of the adjusted basis of the shareholder's stock in the S corporation and the shareholder's adjusted basis of any indebtedness of the S corporation to the shareholder. (Code Sec. 1366(d)(1)) Any losses or deductions disallowed for any tax year are suspended and carried forward indefinitely until the shareholder has adequate stock or debt basis. (Code Sec. 1366(d)(2))

When stock and debt basis is insufficient, and there is more than one type of loss or deduction item that reduces basis, the amounts allowed as losses or deductions are allocated on a pro rata basis. The suspended losses retain their character and are carried forward and treated as incurred in the first succeeding year. If the stock is sold or otherwise disposed of, then the suspended losses are no longer carried forward and are lost forever. (Code Sec. 1366(d), Reg. § 1.1366-2(a))

Stock basis can never be reduced below zero, and even if a loss is claimed in excess of basis, the stock basis at the beginning of the following year is zero. (Code Sec. 1367(a)(2)) IRS’s position is that if a shareholder claims losses in excess of basis in a year closed by statute, then the shareholder must suspend all future tax-free distributions and losses from the S corporation until the excess losses claimed, but not allowed, are recaptured. (PLR 200619021) If a taxpayer claims a loss in excess of basis in a closed statue year, then a suspense account is created, pursuant to Code Sec. 1366(d)(2), to track the excess losses. The balance in the suspense account must be reduced to zero before the taxpayer is allowed to take tax-free non-dividend distributions or report pass-through losses.

IPU guidance. The IPU provides a process for auditors to follow in determining whether a shareholder has sufficient basis to claim losses and deductions passed through from an S corporation.

The process applies when the shareholder: (i) is allocated a loss or deduction item on Schedule K-1, (ii) deducts all or a part of the loss or deduction items on Form 1040 or Form 1041, and (iii) does not have sufficient basis to deduct the claimed losses or deductions.

To determine if the loss or deduction items exceed basis, auditors are instructed to compare the estimated beginning stock and debt basis of the S corporation with its current year Schedule K losses and deductions. Once the auditor

returns, in the way described in Rev Proc 2007-56, Sec. 8. Additionally, the relief described in Rev Proc 2007-56, Sec. 17, relating to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after the onset date of the disaster, and on or before the deposit delayed date(specified by county, below), provided the taxpayer made these deposits bythe deposit delayed date.

Affected areas and dates for storms, floods and other disasters occurring in 2018 (or in 2017, with extended dates going into 2018) that are federal disaster areas qualifying for individual assistance, as published on IRS’s website, are carried below.

Effective for disasters declared in tax years beginning after Dec. 31, 2007, the term ‘‘federally declared disaster” replaced the previously used ‘presidential disaster area” term (see Code Sec. 1033(h)(3), as amended by Sec. 706(d)(1), Div. C, PL 110-343, 10/03/2008). The new term is substantially the same as the definition of ‘‘presidentially declared disaster” under former law. (TD 9443, 01/4/2009.

Wayne's World

Internal IRS Guidance Addresses Losses Claimed by S corp Shareholder in Excess of Basis

In an International Practice Unit (IPU), IRS has provided guidance to its auditors addressing whether a shareholder has sufficient basis to claim losses and deductions passed through from the S corporation.

IPUs are not official IRS pronouncements of law or directives and cannot be used, cited, or relied upon as such. Nonetheless,

57

determines that the requisite criteria have been satisfied, the auditor should determine whether to pursue the issue, with the IPU stating that the issue should be pursued if the shareholder claimed "material losses or deductions" on their Forms 1040 or 1041 in excess of the combined estimated basis. (No definition of "material" is provided for this purpose.)

To determine each shareholder's stock and debt basis, the IPU instructs auditors to:

1. Verify or recompute the shareholder's basis. Incompleting this step, auditors are reminded that S corporation shareholders are required to both maintain adequate booksand records to substantiate their basis and adjust thatbasis each year for the activities of the corporation, and toattach a basis computation to their return when claiming aloss or deduction, as stated in the Instructions for ScheduleE (Form 1040) and the Shareholder’s Instructions forSchedule K-1 (Form 1120S). Auditors should review theshareholders’ returns for the required basis computationsand request it if not attached, including basis computationfor all years since the S election or since the shareholderfirst acquired the stock. In reviewing the shareholder’s stockand debt basis computation, auditors should: (a) verifythe shareholder’s initial stock basis and any subsequentcontributions, and consider requesting documentationto support contributions, purchases, gifts or bequests ofstock; (b) obtain prior years Schedules K-1 information andreconcile the increases and decreases to the shareholder’sbasis computation; (c) inquire about changes in ownershipand consider the impact to basis; (d) verify that the properstock and basis ordering rules are followed; (e) verify thatany loans from a shareholder to the corporation are bonafide; and (f) verify that the shareholder had the necessaryfunds to lend or contribute to the S corporation. The IPUprovides additional steps to estimate initial stock basis forsituations where historical records are not available andsays that if an estimate "appears to be unreasonable basedon the facts and circumstances," consider using zero.

2. Ascertain whether any losses were claimed in excessof basis in a closed statute year. For this step, auditors areinstructed to review the basis computation schedule andidentify any years for which the losses and deductionsexceed the shareholder's basis, compare the basiscomputation to the shareholder's return to determine if thelosses claimed in closed statute years exceed basis, andestablish (or increase) the suspense account accordingly.

3. Determine whether losses were taken in excess of basis in an open statute year. If the shareholder has a suspenseaccount from step (2), above, then auditors should reducethe shareholder’s basis by the lesser of (a) the absolutevalue of the suspense account, or (b) the basis after thecurrent-year increases. Auditors are instructed to reviewthe basis computation schedule and identify open statuteyears for which the losses and deductions exceed theshareholder’s basis, then compare the basis computationto the shareholder’s return to determine if the lossesclaimed in open statute years exceed basis. Any losses or

deductions in excess of basis should be disallowed, after verifying that each loss or deduction item was properly limited on a pro rata basis.

Wayne

Letters to the Editor

Beanna,

I called Diann per your recommendation who was very pleasant to deal with. She recommended I complete form 14157.

I did work with another person at the IRS and we went through all of the returns under my PTIN and EFIN and concluded there were 12 fraudulent returns, (1040EZ's), that were filed under my preparer information. She recommended I look at my numbers periodically and also thought it should be mentioned at CPE classes, which I agree.

Bottom line is they recommended I change my EFIN which I did.

Defininately an eye opener on the security issues we are confronted with.

Thank you again for your assistance.

Sincerely,

Mark

Tax Jokes and Quotes

58

Sponsor of the Month

800-422-4661Fax: 608-661-9561

www.tasconline.comEmail Todd Kuehn - Todd.Kuehn@tasconline.com -

he will assist you and your client, and your client will thank YOU!

Save $5,000 A Year On Your Taxes!

We're always looking for ways to help small business owners keep more of their hard-earned dollars and recently came across an exciting program that does just that: BizPlanNOW. BizPlanNOW is a tax-advantaged benefit program that saves small business owners an average of more than $5,000 a year. We're offering this program through a partnership with TASC (Total Administrative Services Corporation), a national third-party benefits administrator.

Here are the highlights of BizPlanNOW:

You are able to deduct 100% of federal, state, and FICA taxes for family health insurance premiums and out-of-pocket medical, dental, and vision expenses.

All expenses are deducted through the use of an IRS Section 105 Health Reimbursement Arrangement (HRA). The key benefit is that you can declare family medical costs as business expenses, rather than personal deductions.

On average, clients save more than $5,000 a year.

BizPlanNOW comes with both a deduction and full audit guarantee.

Renew Your Membership OnlineIf Your Membership Dues

May and June

Next Edition Taxing TimesJuly 1st, 2018