Tuesday, July 28, 2015

Dot Dimo & Nina Marcniowski
In New Orleans @ NATP National Conference

Monday, July 20, 2015

Who May Not Sign a Personal Income Tax Return?

William Delaney, EA
Westwood, MA
Would you believe that your authorized representative may be ineligible?

In April, 2011, taxpayers Steven and Christina Levi hired an attorney to prepare their form 1040 for 2010.  On April 29, 2011, the taxpayers executed a form 2848 Power of Attorney so that their attorney could sign and file the 1040 return on their behalf.  The POA version in active use at that time was revised as of June 2008.  In box #5, Acts Authorized, it says (in part) “…the authority does not include…the power to sign certain returns…”

On the current version (Rev. July 2014), there is a place on line 5a to check a box and authorize the representative to “Sign a return.”  So, goodo, the problem has been fixed in the updated version.  Well, not so fast since it just looks as though it has been fixed.
Read on…

Back to the late-filed 2010 return.  It was processed in 2011 and then nothing happened until February 2013 (why are we not surprised at an almost two year delayed reaction) when the taxpayers were hit with a failure to timely file penalty of $4,024 and a $16,094 accuracy-related penalty for omitted income.  Ouch and ouch again!  Among other things, the Service also asserted that withholding was overclaimed in the amount of $69,970!  Triple ouch!

A Tax Court petition was timely filed (the case is silent as to what happened prior to the filing and why it was necessary to file).  See Steven N. and Christina Levi v. Comm., T.C. Memo 2015-118 (6/29/2015).  In response, the Service maintained that the taxpayers did not sign the return “in their names” and so they “failed to file” a tax return for that year.  The authority of the authorized representative to sign was refuted (the authority does not include…the power to sign certain returns).

Regulations under Sec. 1.6012-1 list circumstances under which an agent duly authorized may sign a return on behalf of a taxpayer.  These same circumstances are listed in the instructions to line 6a (Additional Acts Authorized) of the current form 2848.  They were also listed in the form 2848 instructions for the version in use during 2011.

So, it was not sufficient to execute a Form 2848 and authorize an agent or representative to sign on behalf of the taxpayers.  It was also necessary qualify under one of the specific circumstances; explain in writing to the IRS which particular circumstance applied (disease, injury, continuous absence from the U.S.); and obtain IRS approval to substitute another to sign on their behalf.
 This the taxpayers failed to do in 2011.  Failure to do so today would produce the same result, since checking a box on line 5a would not, in itself, be sufficient (see instructions to the form).  Advance IRS permission is still required.  You would think otherwise by looking at the current form, but it ain’t so!

Finally, to the issue of why the return did not “bounce” when filed, the Court said  “…an invalid return remains invalid even if the IRS accepts and processes it.”  Multiple Tax Court cases are cited as authority.  The IRS is holding all of the trump cards.

Your editor wonders if the attorney had decent E & O insurance.

Wednesday, July 15, 2015

2015 MA/RI NATP Annual Meeting & Educational Seminar - Three Months Away

Massachusetts / Rhode Island NATP Chapter Annual Meeting & Educational Seminar October 27th 2015

Join the Massachusetts / Rhode Island NATP Chapter on Tuesday, October 27th, 2015 for our Annual Meeting & Educational Seminar. This all day event will be held at the Holiday Inn in Mansfield, MA. Registration details are below, and is handled online by National. Take a look at the details on our speaker and topics provided in this great 8 CE Hour opportunity including continental breakfast, snacks, lunch, vendors and great networking opportunities. This seminar is limited to the First 100 Registrants!

  • For online registration with credit card, click here.
  • To register by phone, fax or mail, click for the registration form.
  • After October 26th, please print the form (see link above) and register at the door.

Speaker - Kathryn M. Morgan, EA, Fellow NTPI

Born and raised in the San Diego California area as a Navy “brat”, Kathy joined the US Air Force straight out of high school.  Serving for 13 years as a Military Police Officer in Washington DC, in the Presidential Security Squadron, in the United Kingdom as RAF Greenham Common, assisting in opening the first Ground Launched Cruise Missile base in the European Theater amid large protests, and at Barksdale AFB is NW Louisiana guarding our nations B52 fleet and participating in Desert Storm.

In 1993 Kathy took an early retirement from the military during the force reduction and went to work for the Bossier City Louisiana Police Department as a Police Communications Office and Dispatcher. She worked in this position for 13 years.

While working for the police department, Kathy decided to try something completely new and took a basic income tax class from H&R Block.  The rest, as they say, is history.  She just completed her 21st  year with H&R Block working in the Bossier City Premium office.  Kathy earned her Enrolled Agent license in 2002 and has completed the prestigious National Tax Practice Institute Fellowship (NTPI).  Kathy has also been the lead writer of the Louisiana State Manual for the H&R Block Income Tax Course for the last five years, assists with upper level courses, and teaches at every level for the company.  She proudly holds the titles of Enrolled Agent, Master Tax Advisor, Fellow NTPI, Speaker, Instructor, Representation Specialist and Consultant.

She has been published by several tax research companies, including Parker Tax Publishing and TaxConnections.com.  She is a accomplished speaker and instructor on a wide variety of tax issues. Through her company, Puzzled By Taxes?, she offers speaking, writing, and instruction.

Kathy lives and practices in the Shreveport Louisiana area and when not “talking tax” she enjoys spending time with her grandchildren and family, writing and reading.

Tax Research Tips & Techniques for Citations, Court Cases & Basis Reconstruction

Good research is necessary to keep up with the ever-changing tax laws and practical procedures. This course will include research methodology, tips and techniques.  Case studies will demonstrate research methods and locations as well as due diligence procedures for reconstructing basis in capital assets. Participants will learn the hierarchy of citation authority as well as the standards of reliance on opinions when working with tax positions. IRS #JSAQG-T-00016-15-I

Notice of Deficiency: It’s NOT The End Of The World!  Judicial Review, Collections Appeals and Collections Due Process

This presentation will discuss the actions that need to be taken when a client receives a Statutory Notice of Deficiency from the IRS. A thorough review of the timing aspects of appeals and Tax Court filings will be covered as well as case reviews of each option. (IRC §6212)  Participants will learn how to use the IRS Collections Appeal Program (CAP) or the Collection Due Process (CDP) program to their client’s benefit; the pros and cons of both programs; and Judicial Review procedures and restrictions.  We will also briefly review the integration of the collections and exams sides of this topic. IRS #JSAQG-T-00017-15-I 

Living Off The Grid:  Bringing Your Client Back Into Compliance

In this course, we will tackle the long term non-filer, (I.R.M. Sec. 4.19.17) taxpayers who live by working in an “under the table” environment.  We will learn the types of situations that make non-filers need to get compliant; what options for getting and remaining compliant the taxpayer has; how far back the taxpayer needs to go to get compliant; and review payment options for taxpayers who have large balances once the returns are filed.  IRS #JSAQG-T-00018-15-I

Identity Theft: Everyone Can Become A Victim!

Identity Theft: It’s a worldwide crime wave and it can affect every aspect of a taxpayer’s life.  We will discuss how to keep clients safe from this crime, what to do if they are a victim, steps the IRS is taking to help prevent identity theft, and ways to speed the process through the IRS Identity Protection Specialized Unit to get the clients back on track in a timely manner.  IRS #JSAQG-T-00019-15-I

Special Offer for the January 7, 2016 State Update Seminar
Sign up on October 27, 2015 and pay by November 9, 2015 for ½ Price 

Monday, July 13, 2015

Another Large Charitable Deduction Bites the Dust

William Delaney, EA
Westwood, MA
We have previously reviewed Thad Deshawn Smith v. Comm., T.C. Memo 2014-203, 10/2/14, which considered contributions of more than $250 and the substance of the required “contemporaneous written acknowledgement” required by IRC Sec. 710(f)(8)(A).  Because the receipts in the Smith case did not contain a description of the property (it was later attached as a spreadsheet not seen or otherwise made available to the charity); were not dated by the charity; were signed in blank and in advance by the charity---the Court determined that the receipts failed to meet the substantiation requirements in the Code.

Now comes yet another decision regarding lack of substantiation.  In Kenneth James Kunkel and Susan Kathryn Kunkel v. Comm., T.C. Memo 2015-71, 4/8/15, the taxpayers claimed $37,315 in noncash contributions.  The IRS disallowed the entire amount.  Serious stuff, this.

One of the deductions for items donated to a church annual flea market totaled $13,115, consisting of various household items, clothing, toys and jewelry.  No receipts were produced at the audit or at the subsequent court hearing.   Likewise, the taxpayers claimed $24,200 of household items, clothing and toys donated to four charities.  The only document produced was a self-created spreadsheet.

Taxpayers “…contend that they did not need to get written acknowledgements because they made all of their contributions in batches worth less than $250.”  The Court concluded that “…we did not find this testimony credible (contributions on 97 distinct occasions)…This assumption is implausible and has no support in the record.”

In addition to upholding the denial of any deduction for noncash charitable contributions, the Court upheld the imposition of the Sec. 6662(a) 20% accuracy-related (negligence) penalty.

Wednesday, July 8, 2015

Is Your Business Filing the Proper Cash Transaction Forms?

Has your business ever received a large cash payment and you weren’t quite sure what your reporting obligations were for that large payment? The general rule is that you must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if your business receives more than $10,000 in cash from one buyer as a result of a single transaction, or two or more related transactions.

The information provided by Form 8300 provides valuable information to the Internal Revenue Service and the Financial Crimes Enforcement Network (commonly called FinCEN) in their efforts to combat money laundering. This is an important effort because money laundering can be a tool that individuals use to hide the proceeds from their illegal activities, including various criminal activities ranging from tax evasion, terrorist financing or drug dealing.

Examples of businesses that may have to file Form 8300 include those that sell jewelry, furniture, boats, aircraft or automobiles, as well as those that are pawnbrokers, attorneys, real estate brokers, insurance companies and travel agencies.

Businesses, including individuals who are sole proprietors that receive more than $10,000 cash in a transaction or in two or more related transactions in any U.S. possession or territory, must also file Form 8300 with the IRS. Possessions and territories include: American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico and the U.S. Virgin Islands. This requirement is in addition to any filing obligation the business may also have with U.S. territory tax authorities under similar territory rules, including under a U.S. territorial mirror income tax code.

If you’re required to file Form 8300 for a transaction, you must do so by the 15th day after the date the cash transaction occurs. Meeting the proper filing requirements is important because there are potential civil and criminal penalties for failure to file Form 8300.

Make sure your business doesn’t fall victim to any of the false claims circulating in areas where an individual claims that they can exempt your business from the Form 8300 filing requirements. The law does not provide such an exemption.

The IRS developed the following educational products for your use in learning more about why, when and where to file Form 8300:

  • IRS Form 8300 Reference Guide is available on IRS.gov. Its purpose is to educate and assist U.S. persons who have the obligation to file Form 8300; and for tax professionals who prepare and file Form 8300 on behalf of their clients.
  • Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business), explains key issues and terms related to Form 8300. Publication 1544 and can be downloaded in English or Spanish.

If you have questions regarding Form 8300, call 866-270-0733 (toll-free within the U.S.) Monday - Friday, 8 a.m. to 4:30 p.m. or e-mail your questions to 8300QUESTIONS@irs.gov.

Monday, July 6, 2015

Maryland v. Wynne Decided By The US Supreme Court Result Continues to be Confusing

William Delaney, EA
Westwood, MA
In Comptroller of the Treasury of Maryland v. Brian Wynne, the issue boils down to whether or not a Maryland resident, who is subject to tax by another state on a portion of his income, may claim a credit on his resident (MD) return for tax paid to that other state when his resident state also taxes the out-of-state source income.  One would think that the answer is yes, it’s a slam dunk in a manner of speaking, because the Commerce Clause in our federal constitution protects taxpayers from being subject to tax by multiple states on the same income.  However, the State of Maryland thought otherwise, and it was supported in this appeal by the federal government!

The Maryland income tax scheme is unique (which is a cause for confusion in and of itself) in that there is a state income tax and also a county income tax.  “Despite the names that Maryland has assigned to these taxes, both are State taxes, and both are collected by the State’s Comptroller of the Treasury.”  (Opinion of the Court, para. I)
Prior to 1975, the state allowed full credit (subject to limitations) for tax paid on both assessments to residents whose income was also taxed (in whole or in part) by another state.  In 1975 that changed as a result of legislation which effectively set aside any credit for tax assessed via the county tax, leaving only the credit for tax assessed via the income tax portion of the state tax.

Now comes Brian and Karen Wynne, Maryland residents, who pay taxes to other states on much of their out-of-state income from a pass-through entity.  The entire pass-through income is taxed by MD on their resident return.  When calculating the credit for tax paid to another state, the Wynne’s sought to apply a credit to both the state income tax and the county income tax (since both were imposed on their total pass-through income).  MD allowed a credit against the state income tax but disallowed a credit against the county income tax.

Although the Wynne taxpayers lost their appeal, they prevailed both at the Circuit Court for Howard County and at the Court of Appeals of Maryland.  Both Courts reversed the State of Maryland on the ground that Maryland’s tax scheme violated the Commerce Clause.  The Court of Appeals also cited Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) which established a four part test for evaluating such tax situations.  The Court determined that the tax failed two parts of the test, which then rendered Maryland’s tax scheme unconstitutional to the extent that it “…denied the Wynnes a credit against the ‘county’ tax for income taxes they paid to other States.”  (Opinion of the Court para. I, page 4)

The appeal by the State of Maryland, supported by a U. S. Treasury Department amicus brief, argued that there was no justification for a dormant Commerce Clause concept, and that states should be free to tax as they see fit.  Were the Court to accept this premise, it would be unnecessary for any state to allow a credit for tax paid to another state on the same income.  Double taxation would be both allowed and allowable.  Multiple taxation on the same income would also be possible.  A disaster waiting to happen.

Fortunately, the disaster did not occur.  The Court cited Armco Inc. v. Hardesty, 467 U.S. 638, 642 (1984) and quoted:  A State “may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State.”  In the Opinion of the Court, Part II, B, the Court found that  “Our existing dormant Commerce Clause cases all but dictate the result reached in this case by Maryland’s highest court.”

According to some comments which your editor has seen, along with opinions expressed by tax preparers, this decision means that all local income taxes such as county and city income taxes, would be subject to a credit for income tax paid to another state on income also taxed by the county or city.

The Courts have ruled that the county tax is actually an additional state tax, a point which was conceded when the county tax statute came into being, since a credit for out-of-state tax was allowed against both the state income and the county income taxes.  In 1975, however, the county tax was decoupled by legislation and the out-of-state based credit was no longer allowed.  Thus, the reason why the Wynne taxpayers protested.

So, are the usual city and/or county based income taxes imposed elsewhere really part of a state income tax scheme which would cause them to be the type of tax to which an out-of-state credit must be applied?  New York City and Yonkers impose income tax on residents and tax all income, both in-state and out-of-state.  The tax is administratively collected through use of the New York State individual income tax return forms.  Your editor’s reading of the decision is that the Court viewed this as a state income tax issue and rejected the concept that the tax, labeled as a county tax, was anything other than a state income tax or a state tariff imposed on inter-state commerce.  Are the usual county and/or city taxes similar?  They are not, in your editor’s opinion.  However, are they imposed on out-of-state income reported by resident taxpayers.  They are, so does that bring them under the same dormant Commerce Clause concept?  In your editor’s opinion, they tax the same interstate commerce, so they probably violate the nondiscrimination part of the Complete Auto Transit, Inc. test.  This would make county and city taxes so imposed also subject to allowing a credit for tax paid to another state.

Stay tuned…  It ain’t over just yet!

Thursday, July 2, 2015

AFRs and 7520 Rates for July 2015

AFRs and 7520 Rates for July 2015

** AFRs – When a taxpayer makes a loan or sells something on installment, a minimum interest rate normally has to be charged.  The minimum rate depends on the month of the loan or sale.  The IRS releases the Applicable Federal Rates (AFRs) each month.  They are broken down into short-term (3 years or less), mid-term (more than 3 years, but not more than 9 years), and long-term (more than 9 years).  They are further broken down into Annual, Semi-Annual, Quarterly, or Monthly compounding periods.

The July 2015 applicable federal rates (AFRs) are (annual, semi-annual, quarterly, monthly):

** IRC 7520 Rates – These rates are normally used when determining life estate & remainder interests when property has been gifted with the giver retaining a life estate.  The rate for July is 2.2%.

Revenue Ruling 2015-15

Recent revenue rulings containing AFRs can be found by searching for “afr” on www.irs.gov.

Wednesday, July 1, 2015

HSA Amounts for 2016

The HSA amounts are indexed earlier in the year (normally in May) than other indexed items (normally in December).  Here are the indexed amounts for HSAs for 2016.

** The CONTRIBUTION limitations for 2016 are:

  • Single coverage is $3,350 (no change from $3,350 for 2015)
  • Family coverage is $6,750 (up from $6,650 for 2015)
    • (The catch up amount for taxpayers reaching age 55 or older by the end of the year remains at $1,000)

** A HIGH DEDUCTIBLE health plan is a plan that has an annual deductible that is not less than:

  • $1,300 for self-only coverage (no change from $1,300 for 2015)
  • $2,600 for family coverage (no change from $2,600 for 2015)

** The annual OUT-OF-POCKET expenses (deductibles, co-payments, and other amounts, but not premiums) cannot exceed:

  • $6,550 for self-only coverage (up from $6,450 for 2015)
  • $13,100 for family coverage (up from $12,900 for 2015)

A copy of the Revenue Procedure can be found at www.irs.gov/pub/ by clicking on irs-drop and then on rp-15-30.

This text has been shared with you courtesy of:  David & Mary Mellem, EAs and Ashwaubenon Tax Professionals, 920-496-1065 (fax 920-496-9111).

©2015 Ashwaubenon Tax Professionals.  No reproduction of this article is permitted without the express consent of Ashwaubenon Tax Professionals, 2140 Holmgren Way, Suite 1040 , Green Bay , WI  54304 .